Mortgages can be pretty daunting – your mortgage is probably one of the most important financial decisions you’ll make – yet the whole world of mortgages is confusing and full of complicated jargon. Even the word ‘mortgage’ itself is jargon when you think about it – why not use the phrase ‘home loan’ instead!
So whether you’re applying for your first mortgage, renewing your mortgage or refinancing – we thought we’d write a simple guide to what the ‘perfect’ mortgage application looks like.
THE 4 MAIN THINGS LENDERS LOOKING FOR
This is the starting point when setting out on a new mortgage application. There are many variables that will decide what kind of mortgage you get and these vary from lender to lender. However, we thought we’d present the 5 main things that almost every single lender considers on almost every single mortgage application – whether for a purchase, renewal or refinance.
- 1. Stable Income – The key word here is stable in particular. For this reason, they do tend to prefer employees over those who are self-employed. However, if you can provide evidence of stable income from self employment this will work too. Other things lenders are looking for include the experience and time in the industry you work in and how long you’ve worked for your employer. Potential issues with this can include proving that over-time or bonus or commissions – or any income like this – is ‘stable’. The easiest way to prove stability of income is 2 years of tax returns (your ‘notice of assessment’ from the CRA) – so most lenders will request this as a first check on how stable your income is.
- 2. Down-Payment/Home Equity – Home equity is how much of your home you own. For example, if your home is worth $500,000 and you have a $400,000 mortgage then you have $100,000 in home equity, as this is how much of your home you ‘effectively’ own. In terms of down-payment, the strongest types of down payment/equity is where you’ve earned it yourself – as this shows you are a financially sound person. However, this doesn’t necessarily mean that you need this and in today’s housing market, gifted down-payments are now very common. There are other methods to get a down-payment too – sale of existing assets, for example.
- 3. Credit Score And Credit Mix – It goes without saying that the higher your credit score the better. However, there is a magic number when it comes to credit scores and that is 680. Lenders would prefer that your credit score be above this and even 720+ is preferred with some. But it isn’t just about the score – they want to see that you’ve held and paid accounts over time and you have differing types of credit. A good rule is that you want to have 2 years of credit, with over 2 lenders (eg. loans, car loans, credit cards). Of course, too high a balance can also be a negative thing as lenders will look at affordability ratios – we covered these in another article – LINK
- 4. Property Type – Again, in today’s age this is starting to change with the growth of condos in Toronto and across Canada. However, the idea property type is still a single family home and condos should also be zoned as such, otherwise the lender is going to scrutinise further.
WHAT DOES THE ‘PERFECT’ MORTGAGE CLIENT LOOK LIKE TO A LENDER?
Another way of showing these 4 things is to give you an example, in this case the ‘perfect’ mortgage client and what they look like:
Of course this is the ‘perfect’ client – and we do have clients who fit into this description – but if you don’t match this exactly there is no need to worry.
However, you should be aware of what a lender is looking for as this will help you throughout the process. You’ll also understand some of the paperwork and questions a little better, so that you can be better prepared…