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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 25% 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.
Job Stability
Lenders will want to know your employment history for the past 5 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 3 year average to the lender. This can be shown through the last 3 years T4 slips. If you are self employed a 3 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 1-877---------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 40%.
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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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