When it comes to applying for a mortgage loan, you need to do some careful planning ahead of time. There are many factors involved in taking out a loan and you want to make sure you have the best credit possible before doing so. Our expert Alberta mortgage broker team is here to explain the 3 most important things that you need to know before you apply for a mortgage.
Your Credit Score
The most important thing, when it comes to mortgage approval, is your credit score. If you don't have a good credit score, it will be harder to qualify for a loan. Your credit score and credit history are the first things that a lender will look at in order to determine your creditworthiness and how much of a credit risk you may be. It's also what is used to determine the interest rate you will get, how much they will approve yours for, and how much your monthly repayments will be. The higher your score is, the better the rates you will be given recommends our Alberta mortgage broker team.
If your credit score isn't that great, there are things that you can do to try and raise it. Getting your credit report and cleaning up those weak areas can go a long way in raising your score. You should review your credit report several months before you try to apply for a mortgage because it will give you the time needed to make changes and fix any errors. Cleaning up your credit, by paying off any high-interest debts, can also boost your credit score.
So, what is considered to be a good credit score in Canada? Credit scores run between 300 to 900. A good credit score, and one that is typically required to qualify for a mortgage, is 680 and over. A score of 780 and over is considered to be an excellent score, and a score of 900 is seen as perfect. On average, borrowers have a credit score of between 620 and 679
Down Payments
It is widely believed that you need to make a 20% down payment when applying for a mortgage loan. That can be a big chunk out of your funds and not everyone can save up that much. It can take years to save up for a 20% down payment.
However, the 20% down payment isn't set in stone. You are able to make a lower down payment, however, you will be required to take out private mortgage insurance. PMI can add a few hundred dollars to your monthly payments, but it helps people who can't come up with a 20% down payment get a home of their own according to our Alberta mortgage broker team. Keep in mind that the higher the down payment amount, the better the interest rates that you will get.
Your Debt-to-Income Ratio
Anyone thinking about taking out a mortgage should get familiar with their debt-to-income ratio (DTI). Lenders use this figure to help determine how well you are handling your current debts. They take the amount of debt that you have and divide it by your income. For example, if your income is $6,000 each month and your debts are $500 a month, you would have a DTI of 8.3%.
If you add monthly mortgage repayments in, let's say for $1,000, it would raise your DTI to 25%.
Lenders look for DTI ratios of 36% or less. If you usually max out your credit accounts each month and are only paying the minimum each month, it will be a red flag to lenders that you aren't handling your debts well and they see you as a higher credit risk.
If you are considering a mortgage in the near future, you should review your credit and look at those three key areas first. Then you can take any steps needed to help raise your credit score. If you would like some advice, or want to see what mortgage options are available to you, give our expert Alberta mortgage broker team a call today!