If you would like more information about credit scores or being pre-qualifying for a mortgage, please call 250-862 1806 or email [email protected]
Ever wondered how the financial institution or mortgage broker determines if you qualify for a mortgage? There are five key elements that most lenders use. These are often called the five c’s of credit to make it easier to remember.
Here are the five different factors that are examined before you get an approval for the mortgage on the home you would like to buy. They are listed in the order generally verified by the lender.
This is a look at the borrower to determine if they are of good character. The lender looks at thing such as assets and liabilities which will show the borrower’s ability to save money, and whether they rely too heavily on credit.
Length of employment is used to determine whether the applicant is able to hold a job for a reasonable period of time and stability.
Time at residence will show stability, and the current rent will also be a factor in affordability.
This involves looking at the sources of income and nature of the borrower’s payments to determine their debt servicing. There are two ratios that the lender calculates.
Gross Debt Service (GDS) looks at monthly mortgage payment + property taxes + heating costs divided by the monthly income. This ratio is generally less than 32%.
The second ratio is Total Debt Service (TDS) which adds to the GDS and total monthly payments of the borrower. This should be close to 40%. Rent is looked at to determine if the mortgage payment is reasonable in comparison to the rent the applicant is accustomed to paying.
Does the borrower have enough money for a downpayment? The ability to show that a mortgagor can save over the required 5% minimum downpayment will greatly strengthen the deal. Sometimes First Time Buyers will get a gift from family for the downpayment, and this will only work if the other c’s are good to excellent.
The lender or mortgage broker will often pull a credit bureau report from either Transunion or, more commonly in BC, Equifax.
The credit bureau gives a snapshot in time of the borrower’s ability to handle credit. It will show the outstanding balances, limits, payments, and the past repayment record of the borrower. The credit report will also show whether the applicant has ever had any collections or bills they refused to pay.
Many factors are used by the credit bureau to give the applicant a credit score. Many lenders use a minimum score of 620-650 for mortgages.
The collateral is usually the last to be confirmed. This refers to the property. In general, the lender wants to lend on a property that is in good condition, in a good location, and something that would appeal to other buyers should the lender ever have to foreclose and sell the property to recover the mortgage.
The application process is like a puzzle that the lender or broker tries to fit together to approve the loan. If one area of the client's application is weak, than it is important to point out and emphasize the strengths so that they compensate for the weaknesses. For example, if the borrower has no downpayment and it will come in the form of a gift, their strengths may be longevity in their employment (capacity) and very few loans (credit).
Are you a divorced retiree?
Financial settlements from a divorce can have a big impact on your security. The concern doubles when a marriage comes to an end later in life.
If divorce in retirement is happening to you, you’re not alone. The so-called 'grey divorce' has been identified as a growing 21st century trend.
You can tap into your house for extra income
Although divorcing later in life poses many challenges, you may have access to financial tools not readily available to people in their 30s and 40s.
For instance, if the house is settled on your side of the ledger, you may be able to shore up your finances and enhance cash flow by tapping into the equity of your home.
This is done by arranging a reverse mortgage.
“Instead of selling your house and downsizing or even renting, why not stay in it and receive payments based on its real estate value?” says Arthur Krzycki, a director with HomEquity Bank. “Accessing the equity in your home with a reverse mortgage like a CHIP Home Income Plan is a simple and sensible way to reduce the financial burden normally associated with divorce.”
How CHIP works
• If you’re aged 55 and over, you can convert up to 50 per-cent of your home equity into tax-free cash.
• Unlike other loans on the market, you are not required to service the interest, or repay the principal until you choose to move or sell.
• You have the option to take a lump sum to pay off your debts or for home repairs and modifications.
• Or you can schedule monthly advances to enhance your cash flow on a regular basis. Some homeowners do both.
“It’s never too late to bolster your finances by taking money out from your house while continuing to live there. For example, using a reverse mortgage to provide additional cash income could save homeowners from having to sell non-registered investments, or prevent the need to withdraw money from a RRIF above the annual minimum. Both of these strategies will likely have tax implications, so be sure to work with a financial advisor for solutions that fit your needs,” adds Kryzcki.
Additional information on this option is available at CHIP
What will I need to get a mortgage?
I often get asked what to bring to a mortgage appointment, and I usually tell my clients to bring a list of assets, liabilities, payments, and maybe grab a pay stub.
That’s a good start, but what if you are self-employed? It would be helpful to know what your net declared income is, which you can find on your Notice of Assessment (NOA) that you get back from Canada Revenue Agency (CRA) after they have reviewed your tax return.
Most lenders will require an employment letter and pay stub dated within 30 days, so I recommend holding off until you are ready to make an offer.
If you are hourly or have recently started your job, it is a good idea to pull out your previous year’s T4s and/or your NOA from CRA for the previous year.
For self-employed borrowers, the documentation varies between lenders, but if you have two years of T1 Generals (income tax returns) and NOAs, it is a good start.
Once you have submitted an offer on a property, ask your realtor for a copy of the MLS (multiple listing system) which provides details about the property for the lender. You will also need a copy of the accepted offer to purchase and the Property Disclosure Statement (PDS).
The PDS is a checklist filled out by the seller of the property detailing the condition of the property, as well as any know deficiencies. It also describes the type of building materials used in construction.
If the property is a condo, it is helpful to have a copy of the Form B, which will state any outstanding fees for the unit and any pending repairs on the building.
Another confirmation which is required for financing is for the downpayment and closing costs.
Most lenders require that you show the downpayment and 1.5% of the purchase price for closing costs. Closing costs include legal fees, property transfer tax, property taxes due and title insurance costs.
There are several forms of downpayment, such as savings, a gift from family, or proceeds from a sale. For savings, the lender usually requires a 90 day history of the money in your account to show it is not borrowed. If the downpayment is a gift, then a gift letter is needed stating the amount, that it is an outright gift, and the relationship of the donor.
If the downpayment is from the sale of a property or something else, then a copy of the offer to purchase or sales agreement should be included, as well as a mortgage statement (in the case of real estate sale), to show the equity.
Prompt submission of all the paperwork will greatly speed up the time for approval, and ensure that you receive a non-conditional approval for financing.
Questions or comments, email [email protected]
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- Reverse mortgages Feb 29
- Don't renew that mortgage! Feb 15
- Broker commissions Feb 1
- Do new rules affect you? Jan 11
- Money 2016: Taking control Dec 28
- No-stress celebration ahead Dec 14
- First-time home buyer? Nov 30
- Fixed or variable-rate? Nov 16
- The reverse mortgage Nov 2
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