Renewal Financing Considerations
Aside from considering the different options when renewing you mortgage, you as a homeowner need to understand how lenders look at your "financial situation" when deciding whether to grant mortgage financing. By understanding what lenders look for, you will be better prepared to work with your mortgage consultant and make the whole renewal process as smooth and efficient as possible.
There are two main areas to examine:
1. Understanding credit. What factors about applicants do financial institutions consider? Lenders look at the 5 C's of Credit: Capacity, Capital, Collateral, Character and Credit.
2. What type of borrower are you? Common borrower profiles are risk averse, risk tolerant, and those with flexible borrowing requirements. In this section, we offer some guidance to help you determine what type of borrower you are. We look at some key questions for prospective borrowers to ask themselves.
1. Understanding Credit
Remember, lenders run a business to make money, not lose it. Those with good/better credit receive lower rates, and those with spotty credit receive slightly higher rates - the higher the risk, the higher the return for the financial institution. As part of the application process, lenders examine prospective borrowers according to varying requirements, however central to all decisions are the 5 C's of credit: Capacity, Capital, Collateral, Character and Credit.
Capacity
Capacity to repay the loan is the most critical of the 5 C's. Is
your income sufficient to support the repayment of the requested loan
amount? This is where lenders look at your Gross and Total Debt Service
Ratios. Do the monthly carrying costs of the loan represent less than
or equal to 32% of your total monthly income? Including other loans
outstanding, do your loan obligations and carrying costs represent less than or
equal to 40% of your total monthly income? Prospective lenders will also
want to know about any other sources of income you may have to repay the loan,
in case your steady income stream is interrupted.
Capital
Capital is the money you have personally invested in the property, typically
equity in the home or, in the case of home buyers, a down payment. The
amount of your own money put into the home portrays a message of confidence and
trust. The more money you contribute, the less risk for the lender of losing
money if default occurs, and the more likely it is that you will do all you can
to maintain your payment obligations. Capital also reflects your ability
and willingness to save money and accumulate assets, confirming that you can
manage your financial affairs adequately within your income. The higher
your net worth, the more you have as a cushion for repayment in the event you
run into a financial setback.
Collateral
Collateral is additional security you can provide the lender should you for
some reason not be able to provide repayment. In real estate
transactions, collateral is generally the property, and the lender will want to
ensure that the property for which they are providing mortgage financing is
marketable real estate. An appraisal will determine whether the subject
property has sufficient value to support the requested mortgage amount, taking
into consideration any deficiencies that may affect the ability to
resell. Collateral may also include such things as investments, other
real estate, stocks, etc.
Character
Character is your reputation and reliability - the general impression you
make on the potential lender. Are you trustworthy enough to repay the
loan? Factors associated with your character can include your educational
background, business experience, length of time at your current employment and
current residence.
Credit
Credit is the evaluation of your habits in meeting credit obligations.
Information about your credit history is stored at the credit agency, or
"credit bureau," and indicates how well you have paid your bills
over the last six years. All major credit cards, auto loans, leases, etc.
are reported to the credit bureau. A lender will evaluate your ability to
maintain your obligations and try and determine how well you live within your
means. Some individuals make the mistake of not paying the minimum
monthly obligations on loans and credit cards with the expectation of making a
larger payment the following month. These missed payments appear on their
credit report, branding them as chronic "late-payers" for the next
six years. If there are any problems with your credit bureau, you will
need to provide a full and satisfactory explanation to the lender.
2. What Type of Borrower Are You?
Your mortgage consultant will guide you through the myriad of options that are available and get you the mortgage product that best suits your individual needs. In order to get the ball rolling, it is helpful to begin thinking about what mortgage product options you would feel comfortable with. By having an understanding of who you are, the mortgage process becomes more efficient and your satisfaction over the term of your mortgage increases.
Here are some questions that you should mull over and speak about with any of your fellow purchasers. Although this is not an exhaustive list, it provides a good start.
Consideration #1:
Is some fluctuation and change in payments acceptable?
Consideration #2:
Do I want the comfort of knowing what my payment is every month and of knowing
it will not change for the whole term?
Consideration #3:
Do I want the lowest payment possible?
Consideration #4:
Do I want to pay down my mortgage as soon as possible?
Consideration #5:
How much down payment am I comfortable with, while not putting myself and my
family into financial difficulty?
Consideration #6:
Are there any credit issues about which I will need to provide documentation?
There are numerous other considerations that your mortgage consultant will cover with you, however this will be on a case by case basis and will depend on your own personal situation.
Other issues that may also have to be addressed and require special consideration are:
3. Nature of income - self-employed, commission based, or salary, for example.
4. Status of applicant - new immigrant, foreign investor, etc.