Improve your Credit Score
One of the important factors in home ownership is understanding things like your credit score. Some people don’t pay much attention to this metric until they begin the mortgage discussion. However, you will find that your credit score is one of the most important factors when it comes to qualifying for a mortgage at the best rate – and with the most purchasing power.
Whether you qualify for a mortgage through a bank, credit union or other financial institution, you should be aiming for a credit score of 680 for at least one borrower (or guarantor).
What If I Don’t Meet the Minimum Credit Score?
If your credit score is accurate, but does not meet the minimum requirements, you will want to look at your current debt. Home ownership is an incredible investment, but it is also costly.
Fortunately, there are a number of things you can do to improve your credit score as well as your future financial success, including:
● Paying your bills in full and on time. If you cannot afford the full amount, try paying at least the minimum required as shown on your monthly statement.
● Pay off your debts (such as loans, credit cards, lines of credit, etc.) as quickly as possible. Work on paying the ones with the smallest amount owing first and work your way towards the larger amounts.
● Stay within the limit on your credit cards and try to keep them at 70% of the limit. Pay all debts to under 70% of the monthly limit before applying.
● Reduce the number of credit card or loan applications you submit.
Determine Your Budget
Now that we have talked credit, it’s time to consider budget. We know, we know… but we promise, you’re almost there!
When talking budget, it is important to consider the purchase price budget, as well as your cash flow budget. Being house rich and cash poor makes for a no-fun home! The home price based on your cash flow budget may be dramatically different than the budget home price you qualify for.
The benefit of a budget is two-fold. Not only does it help you to understand your purchase price range and help you to find an affordable home, but it can also help you to see any gaps in your budget or opportunities for future savings. This will be instrumental when you become responsible for mortgage payments.
To help determine your budget, we suggest checking out the My Mortgage Toolbox app on Google Play and the iStore. This handy, consumer-friendly tool will help you determine your mortgage payments, affordability, income required to qualify and even the closing costs.
Secure Your Down Payment
Your down payment is the amount of money you need to put down on your new home. Once you have determined your budget, you will have an accurate idea of the final cost of the home you can afford and what you will be intending to spend. This will allow you to estimate your down payment and start saving.
The ideal down payment for purchasing a home is 20%. However, we understand in today’s market that is not always possible. Therefore, it is important to note that any potential home buyer with less than a 20% down payment MUST purchase default insurance on the mortgage, and they must have a minimum down payment of 5%. For example: If your budget for purchasing a home is $500,000 then you would be looking to produce a down payment of $100,000 ideally or $25,000 minimum with insurance.
If your budget is over $500,000, keep in mind the minimum down payment will be 5% for the first $500,000 and 10% for the remaining portion. If you end up purchasing a home that is over $1 million, you will be required to put 20% down.
Sources of Down Payment
The down payment on your home could come from your own savings such as a savings account or RRSPs. Thanks to the federal government’s Home Buyers’ Plan, potential home owners are able to leverage up to $35,000 of your RRSP savings ($70,000 for a couple) to help finance the down payment.
A gift of a down payment from an immediate relative is also acceptable.
Quick Tip: If your down payment comes from TFSA or RRSP, the bank will want 90 days of statements to ensure the funds are accounted for. Gifted funds rarely require 90 days of proof.
It is always a good idea to check with a mortgage professional for qualifying criteria and availability to ensure your source of down payment is eligible.
Understand Your Mortgage Options
When it comes to mortgages, there can be a lot to know! Do you go with a fixed-rate mortgage or a variable-rate? What are the terms? What are the penalties? Which is the best payment frequency? With so many questions and so many lender options, it can be hard to find the best solution for you. That is where a mortgage professional can help.
Unlike banks, mortgage agents are a third-party service focused on YOUR needs. This means that you can get the best rates and unbiased advice all for free from someone whose only goal is helping you achieve your dream of homeownership.
Have Your Paperwork in Order
When you apply for a mortgage you will typically need to provide a standard package of materials, which almost always includes:
● Your personal identification
● One month of recent pay stubs from any buyers who will be listed on the loan
● Your most recent two years’ worth of personal CRA tax filings and financials (if incorporated)
● Three months of bank account statements
● Your down payment (minimum 5%)
● Documentation to explain any unusual (generally non-payroll) large deposits or withdrawals
To have the best success with your mortgage, it is recommended that you get pre-approved.
While getting pre-approved might sound boring (and you might be asking ‘why can’t I just get approved instead!?’) there are actually a host of benefits which will make searching for your perfect home that much easier.
● Pre-approval helps verify your budget and allows your real estate agent to find the best home in your price range. (Quick Tip: Don’t forget about the closing costs! These range from 1 to 4% of the purchase price and should be factored into your budget.)
● Pre-approval guarantees the rate offered and locks it in for up to 120 days. This protects you from any increases in interest rates while you are shopping (phew!). Make sure to ask exactly how long your pre-approval is good for!
● Pre-approval lets the seller know that securing financing should not be an issue, which is beneficial in competitive markets!
Protecting Your Pre-Approval
While nothing is fully approved until the property is presented to the lender and signed off, there are ways to help protect your pre-approval and ensure the rates and terms are guaranteed upon final financing. In order to do this, we suggest you:
● Refrain from having additional credit reports pulled once you have been pre-approved
● Refrain from applying for new credit, closing off credit accounts or making large purchases until after the sale is complete
● Be prepared to show a paper trail – any unusual deposits in your bank account may require an explanation.
Start Your Home Shopping
You made it!! Once you have your down payment and have qualified for a pre-approved mortgage (your credit score is in order and all documentation has been provided), you are ready to start searching for your perfect home. Your mortgage professional can give you recommendations for a realtor, if you don’t have one already. Contact me!
Final Preparing for a Mortgage Tips:
● Clean up your debt and credit score. These two things will carry you through your financial life, so it is important to learn the right habits and put the work in now.
● Get pre-approved! It’s always worth it.
● Stick to your budget. You went through a lot of effort to prepare it, so don’t look at anything over your budget
● Don’t forget about closing costs and additional fees! Leave room in your purchase price for these things.
● Ask questions! Anything you are unfamiliar with or are uncomfortable with, ASK! That is what your mortgage professional and realtor are here for.