How Do I Get The Best Mortgage?
The process of getting a great mortgage can seem as complicated as summiting a mountain. However, like trying to achieve that mountain goal, it can seem less daunting if we break it down into smaller pieces and take it one step at a time.
How Do I Get The Best Mortgage?
Let’s break it down into 8 steps:
Step 1: Know Your Credit Score and Credit Reporting
The value of this first step can’t be under appreciated. While it is not the be all and end all of obtaining a great mortgage, lenders can be pretty black and white when it comes to your credit.
A good score can be the difference between a prime (better rates and terms) and subprime mortgage (higher rates). Having a score higher than 670 is usually a good place to start. Some banks now offer the ability to check your credit score regularly without affecting it. This is an excellent tool to use.
Keep in mind debt is not the only thing that can affect your credit score, lack of credit history can also lower your score. Try to put a recurring bill on a credit card which you can pay off monthly so there is always activity.
In order to improve your credit you can pay off any outstanding bills and ensure that you are not missing any payments. If you can, pay off or make large payments on any big outstanding bills (think – car loan) and keep outstanding balances low.
Know your reporting and keep it clean. Missing a bill once in a blue moon is likely not going to have an effect but if you are constantly missing payments this will have an impact, especially so if it goes to collections.
Step 2: Have Provable Income Records
Tax documents and/or employer pay stubs are usually required to prove your total income, along with a history of bonuses, commissions, or part-time work. Two years or longer depending on your employment type is what you should have ready. Self-employed individuals tend to be assessed on a longer timeline.
Step 3: Decrease Debt-To-Income Ratio
How much of your income is used to pay down debt? Lenders will calculate this as a percentage and use this value to assess risk in loaning you money and your ability to repay it. Canada Mortgage and Housing Corporation restricts debt service ratios to 39% (GDS) and 44% (TDS). GDS (Gross Debt Service) ratio, is how much of your annual income your housing expenses cost . TDS (Total Debt Service) ratio, is how much of your annual income all of your payment obligations cost (including housing).
To decrease this, maintain a spending budget and don’t purchase things that you can’t afford without using credit. Like with your credit score, paying off debts or greatly decreasing them will improve this value. Another solution is to find additional income if possible (think – side hustle).
Step 4: Have Your Employment History
Gathering your employment history is essential before meeting with a lender. Mortgages are large loans and lenders want to ensure you are a low risk of defaulting on your payments and are serious about paying them back. You can demonstrate to the lender that you have been gainfully employed and not likely to become unemployed in the near future by compiling your employment history.
It may not be possible for you to qualify for a loan if you just started your job. A minimum one-year employment history is usually required by lenders if you are on a salary. You may need to provide more information about your income if you’re not salaried or are self-employed. Even then, your borrowing limit may be lower.
Step 5: Grow Your Accessible Savings
In the event of a job loss, lenders will look at your savings to determine whether you have sufficient accessible cash to cover your mortgage. Ideally, your bank account should have a few months’ mortgage payments set aside. You are also demonstrating fiscal responsibility and suitability to lenders by doing this. This becomes even more important if you are self-employed, not salaried or have a short/irregular employment record. You may be able to get a better rate by saving up three to four months’ worth of mortgage payments.
Step 6: Increase Your Down Payment
Save for your down payment. The larger this is, the smaller your mortgage will be, and the interest rate will also be more favourable. In general, if you put down more than 20%, you can get a better rate than if you put down only 5%.
Mortgage loan insurance is required if you plan to buy a home with less than 20 percent down payment. In the event that you default on your loan, this adds another layer of security for the lender. This additional insurance fee can be paid in advance or incorporated into your monthly payments. It is possible to eliminate this cost by saving at least 20% for your down payment.
Step 7: Try To Time Your Purchase
Buying your home when rates are lower can reduce your monthly payments and the total amount of interest you pay over the loan’s life.
Step 8: Research & Shop Around
There are different types of mortgages, it is essential to shop around. Some lenders offer a better borrowing rate than others. Before making one of the most significant investments you’ll ever make, it’s vital to understand all the options you have available to you. During this process, contact different lenders and research them also, as each offers different mortgage terms that may affect your payments.
A mortgage broker is another option to consider. They are third-party intermediaries who serve as a link between lenders and borrowers. They will take all of your information and do the shopping around for you within the pool of lenders at their disposal at no cost to you.
Ultimately, it’s all about knowledge.
Knowledge of yourself and where you stand. Even if you are not looking to obtain a mortgage currently, getting your ducks in a row and being informed on the process and how a lender may see you is essential to getting that great mortgage quickly and efficiently when you need it.