I’ve worked as a Hamilton mortgage broker for many years and I know that most people won’t have the cash on hand to buy a home flat out. This means having to take out a mortgage, and taking out a mortgage needs careful planning if you want to qualify. Today, I am sharing with you the 3 most important things you should know before you start your mortgage application process.
You Need a Good Credit Score
This is the top of the list because, without a good credit score, your chances of qualifying for a mortgage starts to dwindle the lower it goes. It’s the first thing lenders will look at and is what determines how much you can borrow and what your interest rate will be. So, the higher your credit score is, the better your chances of not only being approved but of also getting great rates.
There are things you can do if your credit score isn’t that good. Cleaning up your credit, checking your credit report for errors, and taking steps to eliminate debt can go a long way when it comes to getting approved for a mortgage. This is something you should start at least several months before you start a mortgage application.
You’re probably asking “What do lenders consider a good credit score to be?” In Canada, credit scores range from 300 to 900. A good credit score is considered to be 680 and above. 780 and above are considered to be excellent scores, and 900 is a perfect score. The average borrower’s credit score ranges between 620 to 679,
The rule of thumb is that you should put 20% down on your home, or more if you have the cash. The problem is, that can equate to $80,000 for your average home price. Not everyone has that laying around or in their savings.
Thankfully, this isn’t set in stone and you can make a down payment of less than 20%. The downside is that you will have to pay mortgage insurance if you do. This could tack on a couple of hundred dollars to your monthly repayments, but it gives those who are struggling to come up with a 20% down payment a chance to get a mortgage and buy a home.
Just bear in mind that a 20% or more down payment will save you over the long run.
Something else you should become familiar with is your Debt-to-income Ratio or Debt to Servicing Ratios. There are two different ratios that lenders look at , your Total Debt Service Ratio (TDS) and your Gross Debt Service Ratio.
The GDS is the percentage of your monthly before tax income that would be required to service the proposed mortgage payment, property tax, and heat bill. As a rule of thumb lenders want to see no more that 39% of your before tax income going towards this.
The TDS is the percentage of your monthly before tax income that would be required to service not only the mortgage payment, property tax and heat, but also any other payments that you have such as car loans, lines of credit or credit card payments. This should not exceed 44%..
So, you should look at these three areas before you apply for a mortgage and try to clean up any areas that could keep you from qualifying for a mortgage. If you need some help or advice, give our Hamilton mortgage broker team a call today!