The Mortgage Qualifying Process - Top 5 Factors Mortgage Lenders Consider
Over the past 6 months since Covid-19, lenders have tightened their mortgage qualifying process. They are looking at applications more closely before deciding on approval. There are many factors in the qualifying process, knowing these factors can help you increase your chances of getting approved. Below are the top five factors that mortgage lenders often consider in the qualifying process.
1. Your Credit History
Your credit score and credit history gives lenders an idea of how you manage money and the likelihood of you paying back your mortgage loan. Mortgage lenders often look at FICO credit scores and they typically like to see borrowers with a minimum credit score of 650. A lower credit score generally means the borrower is more of a risk and may be less capable of making mortgage payments on time. Before you set up an appointment to discuss your mortgage options, you should review your credit report in advance. You can do a self-pulled report through Equifax.ca
2. The Size of Your Down Payment
When you consider buying a property, the more money you put down (the down payment) - the less you will have to borrow from a mortgage lender. Industry standards recommend that homebuyers applying for a mortgage should put down at least 20% of the purchase price. However, there are Government Programs - such as the First-Time Homebuyers incentive that allows qualifying buyers to have a lower down payment (5% is the minimum amount). Making a larger down payment will allow you to be considered as a low-risk borrower and will improve your chances of getting approved for a mortgage.
3. Your Work History
Lenders often review and consider the applicants’ employment history. They use this information to see that the borrower can afford to make regular mortgage payments. You will need to prove that you have a steady source of income. A letter of employment is required by all lenders + pay stubs + possibly bank statements to show for income deposits. Therefore, it’s usually best to avoid quitting your job or switching careers before you apply for a mortgage.
4. Your Debt-to-Income Ratio
As mortgage loans are usually hundreds of thousands of dollars, a lender must review/underwrite based on your debt-to-income ratio; this ratio includes current debt levels and your ability to keep up with the repayments. All debts will be taken into account including student loan, car loan, line of credit and credit card(s). The debt-to-income ratio is the size of your monthly debt payments relative to your monthly gross income. When it comes to the debt-to-income (DTI) ratio, there can be some minor variations between the lenders based on other factors and overall file of the applicant(s). Lenders tend to avoid lending money to applicants where the DTI is above 42%.
5. The Type of Loan You’re Interested In
When working with a lender, be prepared to discuss different loan options. You might not be able to get the conventional loan you were looking at if you can’t meet certain criteria and even if you can qualify, your lender might not approve you for the loan amount that you’re interested in receiving. Different kinds of loans come with different rules and requirements. Before you contact a lender, it’s important to look at the qualifications for multiple kinds of loans.
Remember, every lender is different. That’s why it’s a good idea to find out in advance what different lenders are looking for so you can put your best foot forward. You need to be honest with your lender if you want to get approved for a mortgage, disclosure of details such as missed payments, filed for a consumer proposal or bankruptcy are very important for the ledner to know upfront. Misleading or hiding information will not make your situation any better - it could come back to hurt you if you get a mortgage that you cannot afford to pay.
My advice, as always when it comes to getting a mortgage is to talk to a mortgage agent/broker - a good agent will give you their time and patience (and of course their knowledge needless to say...) to go through the details with you. This way, you are prepped before the process officially begins. An agent should not submit your application until all your details are discussed and documents to follow for further and complete review + credit pull.
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