It is essential we collect the following information from you to start the mortgage process. This will allow us to determine what you qualify for the best mortgage strategy/product you should adopt for a successful mortgage plan. All information provided to us by you is held confidential.
Although there are many things considered when qualifying for a mortgage, the 4 main criteria the lenders will look at are:
Most people today are fine with just knowing whether or not they have ‘good credit’. However, just knowing what your credit score is, is only half the battle. Understanding how you are scored is just as important as knowing how to manage your monthly debt obligations.
What is a beacon (FICO) score?
Ideally, you should aim to have a credit score of at least 680 with Equifax. A higher score usually translates to a lower interest rate because that generally means that there is less risk for the lender.
Your credit worthiness is base on a mathematical reckoning of all parts of your credit history, condensed into a single number, ranging anywhere from 300 to 900–your beacon or FICO score. Credit history is generally composed of any activity in one’s life that effects his/her credit score.
What affects your score?
A high credit score doesn’t always mean that you have good credit. A person’s residence, place of employment, S.I.N. #, credit cards, loans, name aliases, and reported collections are all reported to the credit bureaus, and can affect your score positively or negatively.
Here is an example of how, sometimes, credit scores can be misunderstood:
An applicant has a high credit score of 710. He is new to Canada (only 6 months), but has always made his credit card payments on time, for the 6 months he has resided in Canada. Although his score is over 680, realistically, he would be deemed as a high risk applicant. The reason for this is because he simply has not had much activity reported to the credit bureau. Most lenders require at least 12 months of reported credit activity on at least two active trade lines. (A trade line is any credit card, loan, or student loan reported to the credit bureau) This is what tells the banks that you are able to manage more than one debt obligation simultaneously.
In all likelihood, this applicant in this example would require a bigger down payment (at least 10% of the purchase price). He also may have to provide an international credit bureau report, along with banking statements, and reference letters.
How to maintain your credit
Each credit inquiry from a bank, credit card company, car loan application, etc. could have a negative impact on your credit.
Here are some tips that will help you increase your score:
Limit the amount of times you change residencies–A person who constantly moves from one place to another, in a short period of time, looks suspicious in the eyes of the banks. It makes them ask the question “Are they running away from creditors, or law enforcement?” Remember, each activity in your life has an affect on your credit score.
Try to limit credit inquiries–Each time you apply for a credit card (even at hockey games at those booths who promoted team branded credit cards), that credit card company will look at your credit report. Each inquiry will deduct points off of your score. Multiple inquiries in a short period of time, is even more points knocked off your score. This tells the banks that you are constantly looking to borrow money. And usually those who borrow money (in form of credit), are usually those of a high risk to the banks. And high risk to a bank usually means high interest rate for the borrower.
Do not ‘job hop’–The banks don’t necessarily like to see that a person hops from one job to another in a short period of time. It is deemed as unstable, which usually goes hand-in-hand with high risk.
Always have at least two active trade lines–Again, a trade line is any loan, credit card, or student loan that is reported to the credit bureau. The banks wants you to prove that you able to manage multiple debt obligations on a monthly basis. Having just one credit card just won’t cut it. And make sure that those credit cards are major credit cards such as Visa, Mastercard, or AMEX.
Always maintain a balance on at least two trade lines–The general rule of thumb is to not exceed 35% of your limit, but also hold a balance on each one. The banks expect you to be able to make monthly payments for an extended period of time on your trade lines, usually 12 to 24 months. So using it for gas and paying of the full balance every month IS NOT what the banks want to see. They want to know that you are able to manage debt for an extended period of time. This somewhat replicates the ability to make long-term mortgage payments.
Always make your payments on or before the due date–But just as important of when you pay, what you pay will determine whether or not the credit bureau will add or deduct points off your score. Making the minimum payment is good, but accompanying that with paying down the principle balance would be ideal.
Close any unused loans or credit cards–Remember, all the banks want to see is two active trade lines. Anything more, could be seen as a need to always want to borrow money (in the form of credit).
You may, at times, feel that your employer is paying you ‘peanuts’ compared to the new guy. But don’t worry, you may have a better chance at qualifying for a mortgage than he does.
Every person who applies for a mortgage has a different story. For each story, not all rules may apply. This is why it is important to understand how your income can affect your application.
Whether you are an engineer, cashier, or telemarketer, your qualifying income may not always be what you think it is.
There are generally three types of employment income for the non-self-employed: hourly, salary, and commissioned.
As a full-time, hourly employee, the banks and lenders typically generally will accept any guaranteed weekly hours multiplied by your rate of pay, and then multiplied by 52 (weeks in a working year). If you work any non-guaranteed overtime, or receive any non-guaranteed bonuses or commissions, you MAY NOT base your annual income on averaging that extra income on an estimated monthly basis for 12 months. All and any non-guaranteed overtime, bonuses, or commissions can only be used by averaging the past two years of total income reported on line 150 of your Notice of Assessments (NOA’s) or T4 slips.
Full-time, salaried employees’ qualifying income is more/less any guaranteed annual income as stated in the letter of employment. If there is any non-guaranteed overtime or bonuses, the same rules apply as they do for hourly employees.
For commissioned employees, unless any income is guaranteed, only a two year average of net income reported on line 150 of your Notice of Assessments or T4 slips can be used to qualify. If you have been at your place of employment for less than two years, only the two year average may be used if you have been in the same line of work, same industry. For example, if you have worked as a car salesman at your current job for only 6 months, but have worked at different car dealerships prior to that, you may use the two year average of the past two years to qualify with. Keep in mind that you may have to prove your previous employment with your Record of Employment(s).
Depending on the type of business you own and how you are paid, qualifying income is not always easy to prove. These are just some of the income streams that are acceptable:
– Two year average of net income on line 150 from your Notice of Assessments. Any outstanding taxes owed to the fed’s, as stated on your current NOA will have to paid in full prior to the closing date. This income may be grossed up by 15% in lieu of business expenses.
– Declaring or ‘stating’ a reasonable annual income amount for the type of business it is. Predictive models as an indicator of the reasonableness of this type of income is generally used by the lender. Supporting documents to verify income reasonableness are required. Click here for a list of those supporting documents.
Other acceptable income streams
In certain circumstances, you may may need a boost in your income to qualify. Here are some other streams of income that may be acceptable to your lender:
While on mat leave, so long as you are guaranteed your last position, and salary, and confirm that you will be returning to work after your leave, you are allowed to use your full-time employment salary.
Some lenders will allow you to use Canadian Child Tax Benefits, and Universal Child Tax Benefits as well.
Rental income from your income generating property (rental) may be used. Most lenders, however, will only allow either 50% to 80% of the total monthly rent.
If you are on contract with your employer, some lenders will allow you to use your two year average, verified with your NOA’s.
We all do, at some point, incur some or a even a lot of debt. Whether it’s credit cards, student loans, or car loans, your ability and capacity to manage those debts will ultimately be one of the most, if not, thee most critical component of your mortgage application.
You will often hear the term Debt Service Ratio when applying for a mortgage. This is what the banks and mortgage insurers (CMHC, Genworth Financial, and Canada Guaranty) use as a guideline to determine how much debt you can manage in relation to your household income.
Again, the debt service ratios are based on your debt-to-income capacity, whereby maximum ratios are set based on credit score/worthiness.
For example, an applicant with a credit score of 680 or higher typically can not exceed a Total Debt Service Ratio (TDSR or TDS) of 44% and 39% Gross Debt Service Ratio (GDSR or GDS) with most lenders today. Any score below 680 cannot exceed a TDS of 42% and a GDS of 35%. This means that the applicant with the lower credit score would not qualify for a purchase price as much as the applicant with a score of at least 680 and higher.
Saving thousands of dollars for a down payment on your first home isn’t always the easiest thing to do. In fact, it can be one of the most stressful things about buying a home. These are some of the most common ways to come up with your 5% down.
You can use your own savings and other investments for your down payment. The banks, however, will require that you prove that you have saved each dollar on your own. It is a common practice by banks to ask for 90 days of banking/investment statements for verification.
Cash in a regular saving/chequings account are acceptable. Investments such as mutual funds, dividends, stocks, GIC’s, and bonds can be used towards your down payment. RRSP’s are great for your down payment, as the fed’s will allow you to use up to $25,000 completely tax free (only for first-time buyers). Keep in mind that most RRSP’s that are contributed to your down payment, must be paid back within 15 years. Be careful–if you fail to repay 1/15 of the RRSP amount each year, that amount will be considered taxable income. Speak to professional tax expert before you cash any amount.
Gifted down payment
In some cases, the banks will allow you to use money gifted to you from an immediate family member towards your down payment. It must be a complete gift–meaning that it will never have to be paid back–and it must come from nobody else but an immediate family member (father, mother, brother, and sister). There may some exceptions for relatives such as uncle’s, aunties, depending on the situation.
A gift letter, stating these and other terms, must be signed, and dated by all parties involved. Also, a deposit(s) must be be made into your account, and banking statements to verify those deposits. Typically, large gifted sums of $50,000.00 and over must be verified with 90 days of banking/investment statements from the donor’s account(s).
In October of 2009, the Canadian Government announced that they will no longer allow for any ‘zero down’ mortgages. Although this was the official announcement, it still does exist.
There are not many lenders out there who still offer this product, but an experienced mortgage broker will have access to these lenders.”