Purchasing a home is an exciting life decision. For most Canadians their home is their largest asset. There is more to a home than just a mortgage payment, and being pre-approved will ensure that you’ve taken into account all of the extras that home ownership entails.
Often times people get caught up in the excitement of purchasing a home that they forget to determine what they qualify for. Qualifying for a mortgage is an easy and essential step to ensure that you are looking in the right direction. Over extending your finances will leave you mortgage poor and unable to accommodate life’s unforeseen expenses.
Determining if you are eligible for a mortgage is the first step to being pre-approved. Before you rush out the door ask yourself these few questions:
- Do you have a minimum of 2 tradelines (ie: credit card and line of credit), each with a minimum limit of $2000?
- Do you make regular, timely, payments to your debts?
- Do you have a savings for a down payment? (if not you will need to have excellent credit)
- Is your income stable? Have you been in the same job position for at least 2 years?
If you’ve answered yes to the above questions, then being pre-approved is your next step. Lenders are looking for stability. If your income is decreasing year after year, lenders will be more cautious about lending money. If you’re on probation at work, lenders require you complete that period before purchasing. Alternatively, if you have been with your employer (or in the same job position but with different employers) for two years or longer, lenders view your application more favourably.
During the pre-approval process your broker will advise you on what purchase price point you should be considering. When determining this value your broker will consider:
- Your minimum payments on your consumer debts
- The estimated property taxes for your new home
- An average heating expense for your new home
- Your approximate mortgage payment
- Your available down payment
- Your credit score
In most cases lenders will allow you to utilize up to 44% of your annual income to cover your debts (including consumer debts, your proposed mortgage payment, property taxes and heat). This figures is based off of your gross income.
Let’s assume you’ve done the math, you know your maximum purchase price (thank you online mortgage calculator), you’ve checked your own credit score (Equifax tells you that your score is good)… fairly safe to assume you’ll be approved, right?! Here’s why you don’t want to skip the pre-approval process with your mortgage broker:
- Remember that collection from a few years back when you moved from one rental to another and your cable company “didn’t receive” their box back? You likely paid the collection… and the cable company likely forgot to update Equifax (this happens all the time). It’s best to have your broker deal with this before you put an offer in.
- Remember that sunny afternoon when you were feeling especially helpful and you co-signed for a family member’s loan? That shows up on your credit bureau… and guess what? That affects your purchasing power. If you were generous enough to co-sign for a mortgage, this could make a drastic difference to the house you purchase.
- Let’s assume you’ve got excellent credit and stable employment. While house hunting you find two similar properties on opposite ends of town – both at the same price point. Your online calculator gave you a purchase price and this house falls within that… sufficed to say you should be able to purchase either property, correct? Well… possibly. Property taxes change from neighbourhood to neighbourhood and an increase in the property taxes might be enough to disqualify a property. Your broker will advise you on what amount they’ve used in your pre-qualification process, so that you can ensure the purchasing process goes smoothly.
Buying a home is a milestone achievement… comfortably affording it, is essential. Call today, go house hunting with confidence tomorrow.