Getting Pre-Approved
This is the second blog in our First-Time Home Buyer Blog Series, about one of the most important steps in purchasing a home.
Getting pre-approved for a mortgage is essential before looking for a home. It can save you time and the heartache of falling in love with a house out of your range. A pre-approval lets you know how much you can afford, what your rough interest rate will be and what your monthly or biweekly mortgage payments may look like. In addition, getting pre-approved can help you narrow your search to a specific home type, size or neighbourhood. However, remember that it is not a guarantee of final approval for a mortgage. Once you find the home you want to buy, the property still has to be evaluated to ensure the price and condition of the house are acceptable to your lender.
Two Main Factors Considered in a Mortgage Approval
Credit score - Your credit score is a snapshot of your financial health at a specific time. It shows how consistently you pay off your bills and debts. A good credit score is invaluable. The two most essential factors in a credit score include making all payments on time (even if it is a minimum payment to a credit card) and credit utilization. This means for any revolving debt (credit cards and lines of credit), if they are typically kept close to their limit, this could cause you to have a low credit score. The rule of thumb is to keep your balance about 50% of the limit. Before you apply, getting a copy of your credit report is a good idea to ensure there aren’t any mistakes or surprises.
Debt ratios - Besides credit, the other main contributing factor when a mortgage application is a debt-to-income ratio. We look at two numbers, one is called the Gross Debt Ratio (GDS), and the other is the Total Debt ratio (TDS). The GDS includes your housing costs in relation to your before-tax income. The housing costs include mortgage payments, property taxes, heating expenses, and 50% of strata fees. This percentage cannot exceed 39%. Your TDS includes the housing costs plus any loan payments and credit card/line of credit payments in relation to your before-tax income. In this calculation, we use 3% of any line of credit/credit card debt as a monthly payment.
Stay tuned for our third blog in this series…. Mortgage Terms & Tips.