Many of us dream of becoming home owners, but there’s a lot that goes into making that dream come true. Being prepared before you head out to get your mortgage makes it more likely that you’ll get approved. Here are some key things to consider and prepare for when you are looking at getting a mortgage.
How much of a mortgage payment can you comfortably afford? There are differing thoughts on this but the bottom line is you should spend no more than 36-40 percent of your gross monthly income on your entire monthly debt load. That is home expenses, mortgage payments – principal & interest – property taxes and heating costs, plus all other debt payments (credit payments, car leases or loans, etc.). With a solid credit (over 680) you can spend 44% on total debt load, and 39% on housing costs (mortgage, property taxes, heating).
Have you got enough money for the down payment and closing costs? The down payment works out to somewhere between 5-20 percent of the price of the home. How much you put down directly affects your interest rate and mortgage insurance. The higher the down payment, the lower the interest rate and the less expensive the mortgage insurance. As for closing costs, be prepared to raid your savings. It comes from your own money, not the mortgage loan, and you still need to prove you have 5% before getting approved.
How healthy is your savings account? If lenders can see savings covering 3-5 months of mortgage payments, they look at you in a much more favourable light. They also like to see you have money put aside to cover a year’s worth of taxes and insurance payments, and enough financial reserves in case you lose your job, or the furnace needs replacing.
Have you been spending a lot over the past year? If you’ve recently purchased a vehicle or run up your credit cards before you buy that home, it will adversely affect the amount you can qualify for.
How good is your credit rating? Get a copy of your credit report and check it out. The higher the score, the lower your payments. You’ll get the best rates with 750 and over. 700 gets you a pretty good deal. If you’re around or below 680 be prepared to pay a high down payment or big fees. In some cases, you won’t even qualify.
How stable is your job situation? If you’ve been at your current job one or two years or more you’ll be looked at more favourably than if you’ve changed jobs within the past 6 to 8 months. If you’re self-employed, you’ll have more to prove. You won’t qualify for a mortgage for at least 2 years of employment, unless you’re a professional like an engineer or a doctor. Self-employed people also write off enough expenses on their taxes for their adjusted gross income to become much lower than their actual income – and that lower number is the one the lender considers.
Have you got copies of pertinent documents? We’re not only talking about months of bank statements and several years of tax returns. Your lender will want proof of income and information about your debts. If you’ve received any big deposits, they’ll want to know exactly where that money came from. For example, if your parents gave you money for that down payment, you’ll need to produce a letter from them specifying that.
What type of mortgage is best for you? There are ‘open’ and ‘closed’ mortgages and both serve different needs. You can pay off an open mortgage in part or completely at any time without penalties. You can also renegotiate it without penalty. But it has a higher interest rate than a closed mortgage. If you want your home for a short period of time, this is a good choice. A closed mortgage isn’t as flexible as an open mortgage but offers a lower interest rate. This is the most commonly chosen mortgage.
As you can see, there are many important things to bear in mind when you’re looking into getting a mortgage: how big a mortgage payment you can afford, down payment and closing costs, your savings account, your spending habits over the past year, your credit rating, your employment situation, making sure you have all the documents your lender will ask for, and deciding which type of mortgage is best suited to you. It may seem a bit overwhelming to consider all at once, but just take it one step at a time. Handling all this before you step into the lender’s office will make things go smoother, quicker and bring you the result you want and require!