To get a mortgage you basically need 3 things. Those are down payment, income and credit. Here is how this breaks down:
1 Down payment – at present you are required to have and prove at least 5% of the purchase price for a down payment (you are also required to show at least 1.5% for closing costs). The down payment can from own savings, RRSP, gifted (most lenders require a gift from an immediate family member), investments, sale of an asset and if credit is great you can actually borrow the down payment.
2 Income – you need to be generating an income of some sort. How you generate this income will determine what documents are required and what income we can use. For example a client who is subject to overtime/bonuses would require 2 years worth of Notice of Assessments and then we can average the 2 years. (income can include self-employed, salary, hourly, disability, pensions to name a few)
3 Credit – you need to have some sort of credit and it has too be good. While the minimum score is 600 most lenders are looking for a score of at least 620.
The income lets us know what we are working with and the debts lets us know what payments we have to use to qualify you for a mortgage. Once we have the income we can determine what (if anything) you can qualify for. This way if you qualify for a 200k home you are not out looking at 250k homes.
So how do we determine what you qualify for?
Lets do an example scenario and show you how we go about this process. I must first note a few things on what we have to use in regards to rates and payments based on the new Government Guidelines. For any revolving credit (credit cards, lines of credit etc) we use 3% of the outstanding balance if unsecured. We also have to use the banks 5 year posted rate. (at the time of this writing that equates to 4.64%). We also use an estimate for property tax and a heating allowance (each lender is different but $125/mth seems to be the norm)
Client A has a salaried income of 50k (no bonuses or overtime). Client B is paid an hourly rate of $20 and is guaranteed 40 hours each week. (no bonuses or overtime). This equates to a yearly income of $41600 for Client B. As an added note in this scenario we are using gross incomes and not net.
Clients have a car loan with a payment of $400 per month. They have 2 credit cards with a total balance of $5000. They also have another loan that has a payment of $200 per month. So in this scenario these clients have $750 worth of payments we have to use.
Now we have to use an estimate for property taxes and a heating cost in the equation. In this situation I would use a yearly property tax amount of around $4000 and a monthly heating cost in the $125 range. When we plug in the numbers the client would qualify for a purchase of around 350k with a 5% down payment.
Both clients have hourly paying jobs and both earn $15/hour based on a 40 hour week. They currently have a car loan for 350/mth. Both have student loans that totals 20k combined. (they are not on repayment as of yet so we will use 1%). They have a credit card each with a combined balance of 3k. So here the clients have $640 in monthly payments.
We will use 3k for property taxes and $125/mth for heat. In this scenario this client will can look for homes in the 200k and below range with a 5% down payment.
Now lets take Scenario 2 one step further. Let’s say the client does not have the down payment and they have to borrow the funds. Based on a 200k purchase they would need to borrow 10k. Now let’s say they have the funds available on a line of credit they have. We would need to add another $300 to their debts making their monthly obligations $940. This means they now only qualify for a purchase price of around 145k.
As you can see as long as we have the questions regarding credit, income and down payment figured out we can offer a solid pre-qualification to our clients.
When I do an application I ask my clients what they owe and what type of debt it is. (student loan, loan, credit card etc). I then get proof of income and from there I can determine what they qualify for. If, based on debt and income, they do not qualify for much then there is no need to pull a credit bureau. If they do qualify then we pull the credit check and if this is in order I can comfortably advise my clients on the purchase price of homes they should be looking at. This now becomes a pre-qualified client.
I have never like the word pre-approved due to the fact that until we send in a live deal (ie you have an accepted offer on a home) we never know if it will be 100% approved. Even though the lender may like and pre-qualify the deal does not mean the insurer will approve the deal. (any purchases that have less than 20% down payment require an insurer approval – the 3 insurers are CMHC, Canada Guarantee and Genworth).
Basically a pre-approval is really just a rate hold. Getting a rate hold is not a bad thing though as at least you are guaranteed a certain rate for a specific amount of time. I will advise that rate holds usually carry a little higher rate than what the current lowest rates are.
In order to be comfortable with what the lender is asking then you need to know that they have checked your credit, verified how you generate your income and also verified where your down payment is coming from. If they have not then you may be in for some sad news once you find a home. Trust me I have seen it.
If you get a decline from the bank lenders then there really is nothing more they can do for you. It is now up too you to find another lender too do the deal. As a broker we have access to some of the major banks along with a variety of other lenders as well. This gives you the best chance for an approval. So even though I may get a decline from one lender I am able to shop the deal to other lenders to try and get you approved. This is all with only 1 hit on your credit bureau.
Be informed and ensure you are getting the correct information. Ensure you get pre-qualified before looking for homes. There is no use looking at 200k homes when you only qualify for 150k homes. Don’t assume because you are paying 1k a month in rent that you will have no issue getting a mortgage. Bottom line is do not ASSUME anything. Get the facts and then go on your way to look for your home. If it is not going to happen today then I will provide you with a road map on how too get to where you want to be.
Looking to get pre-qualified then go to here and hit the APPLY NOW button. Or simply email or call me at the numbers below. There is no cost for my services and remember I work for YOU and not the lender.
Eric Gall is the owner of Avanti Mortgages (operating as a mortgage broker for TMG – The Mortgage Group Atlantic). If you are purchasing, refinancing or renewing your mortgage contact Eric or check out his website and apply online. If you are a First Time Homebuyer then get your free report here. If selling/refinancing a home get your free report here to avoid some common mistakes