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There is no real mystery when it comes to mortgage qualification,
although your banker may infer that the process of mortgage approval is
a rather grueling one. Lenders consider a few factors prior to granting
any mortgage approval. The deciding factors are the applicants income
and job stability, credit history, net worth, source of the down
payment, and the loan to value (mortgage divided by the price of the
property).
You will have to fill out an application which will cover basic
personal information, an asset and liability statement and the lender
will run a credit check on you. You will have to supply written
confirmation verifying your income, and the source of the down payment
to show that the funds have not been "borrowed". A family member may
grant you a gift, however. If you are putting less than 20% down
against the purchase, you will be asked to show that you have an
additional 1.5% of the purchase price available in cash to cover any
potential closing costs, even though these costs may not apply to your
situation. This 1.5% can be covered through credit lines if need be,
however, the carrying cost will be added to your Total Debt Service
Ratio (TDS) for qualification.
Although there are general guidelines that all lenders follow, each
lender may look at the application differently. It is important to note
that each underwriter uses his or her judgment when considering a deal.
What one underwriter considers risky another underwriter may not. Your
mortgage broker can submit your deal to the lender that fits best with
your application.
The following is a description of general policies in the mortgage lending industry.
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Job Stability
Lenders will want to know your employment history for the past 3 years.
The minimum time on the job that is acceptable is 1 year unless you
have transferred from one company to another in the same field. If this
is the case, it is important to show that your employment does not have
any probationary period attached to it. As mentioned above, every
application is looked at on a case by case basis. Should your current
employment be less than one year, please contact your mortgage broker
to discuss its implication to your application.
Income Confirmation
You will have to provide written confirmation to the lender of your
income. If you are salaried you will have to provide a job letter
indicating your position, length of time on the job and salary earned.
If you are a commissioned employee you will have to show a 2 year
average to the lender. This can be shown through the last 2 years T4
slips. If you are self employed a 2 year average is also required, you
will have to supply the front page of your tax return along with your
companies financial statements.
Credit History
Your credit history tells the lenders a story of how you pay your
bills. Any information stays on your credit bureau for a period of 7
years. This may be one of the most important areas considered when
looking at a mortgage approval. Each piece of credit is given a rating
of 0-9. Zero refers to the fact that the account is inactive and 9
refers to an item that has gone to collection or has been written off.
The best rating is a "1". If you have questions about what is on your
bureau you can contact the credit bureau at 1-800-465-7166.
Should you
have a discrepancy on your bureau you may request that the credit
bureau prove that the information reported is correct or you may
present written verification of the debt being paid and they will
correct the bureau.
Should you have any past slowness in credit it is advisable to discuss this matter with your mortgage broker.
Net Worth
Your net worth is your value of your assets less any debts that you
have. Lenders look at your net worth to determine your spending habits.
Those applicants with a low or negative net worth may be turned down
for mortgage financing even though their debt service ratios are in
line.
Lending Ratios
Your mortgage application will be subject to the Gross Debt Service
Ratio or GDS and the Total Debt Service Ratio or TDS. The GDS ratio
takes into account the mortgage payments of the potential purchase, net
monthly property taxes, 1/2 of any maintenance payments (applicable
for condos and town homes) and monthly heating costs. The maximum GDS
ratio is 32% of your gross income. The TDS ratio accounts for the above
as well as any other fixed payments that you have ie: loan payments,
minimum payment for credit card debt (5%). Your maximum TDS ratio is
44%.
Some lenders will accept a GDS ratio as high as 44%
if you have a good beacon score on your credit bureau.
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Pre Approval
Pre-Qualification
Pre- qualification allows you to determine how much mortgage financing
you can qualify for based upon income and other fixed debt payments.
You can be pre-qualified by phone by calling your mortgage broker. He
or she can make some quick calculations and determine your maximum
mortgage amount, mortgage payments and price range.
Pre-Approval
Pre-approval takes you to the next step. By being pre-approved you go
through the entire mortgage qualification procedure. The lender will
check your employment, verify the source of your down payment and
conduct a credit check. They will also lock in a rate for you so that
you are protected from market fluctuations for a period of 90 -120
days. Once you are pre-approved you will receive a pre-approval
certificate outlining the parameters of your mortgage approval so that
you may feel comfortable in making your offer to purchase.
It is extremely important to go through this process, especially in a
hot real estate market. Not only will you know what price range you
should focus on when looking for your new home, but you will be able to
write a tighter offer to purchase. Being able to write a tighter offer
may be what you need to beat out your competition.
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