Buying a home today is much different than it was decades ago. Over the past few years, the Canadian real estate market has seen significant growth. The price of an average single-family home in Canada today hovers around $504,000. Despite any financial hurdles, many Canadians have a goal of owning their own homes. They’re striving to save enough for a downpayment and working toward passing the financial tests set up by lenders. Here are some things you should be mindful of when looking for a mortgage:
Have an established credit history
If your first foray into the world of credit is wanting to buy a house, you might be in for a wake-up call. If you have just started to use credit — like credit cards — lenders won’t have a credit history to reference when qualifying you for a mortgage. You will need to wait and establish that history.
When you use your credit wisely, it will pay off in the long run. A long and healthy credit history tells lenders you’re low risk for handling mortgage payments. Healthy credit history shows lenders that you will be able to handle a mortgage. Healthy credit scores can help you gain favorable mortgage conditions and a lower rate. If you don’t know what your credit score looks like, there are a few online companies that can show you your credit score for free.
Have a good credit mix on your credit report
Credit diversity is an indicator of financial responsibility that lenders use to evaluate borrowers. By properly managing different types of credit, you are telling lenders that you are experienced with credit and will likely be low risk. If you don’t have any forms of credit, consider starting to build your credit mix and credit history with a secured credit card.
Minimize your credit utilization ratio
Your credit utilization ratio is the total amount of credit you have to use versus how much you’ve actually used. This is often displayed as a percentage. Lenders would like to see the ratio at around 30% or less. The smaller your credit utilization ratio, the better you look through the eyes of a lender. Maxed out credit cards don’t look good on a credit report.
Reduce your debt to income ratio
Your take-home income each month versus what you pay against your debt is known as your debt to income ratio. For example, if your take-home pay is $6,000 each month and the minimum payments for all your debt every month is $3,000, your debt to income ratio is 50%. Getting that number as low as possible will show lenders you’ll be able to handle additional payments for your mortgage.
Keep inquiries on your credit report down
If you apply for credit cards, loans, and other credit products all at once in a short time span, lenders will be able to see that on your credit report. These credit inquiries have the potential to lower your credit score and can also indicate to lenders that you’re in desperate need of cash. If you need credit – like a loan – it’s best to spread out credit inquiries to avoid hurting your credit score.
Aim for a high credit score
For lenders to even consider you for a competitive mortgage, your credit score should be at least 630. The higher your score, the better chance you have of getting a mortgage with an attractive interest rate and terms. Do everything you can to bring your score up.
Prove where your down payment is coming from
If you haven’t had your mortgage down payment saved for more than three months, you may need to be able to prove where the funds came from. Typically, lenders want to make sure you’re not borrowing the money for your down payment. If you have been working to save your down payment on your own, they want to see proof of that. If the down payment was a gift from a family member, it must be accompanied by a gift letter signed by them saying you will not have to pay that money back.
Gain a steady and decent source of income
A lender will want to know that you have the income to make your mortgage payments and that you’ve been at your job for some time. If you’re self-employed, they will want to see bank statements.
Show a credit report without negatives
Lenders do not want to see things like bankruptcies or consumer proposals on your credit report. They also don’t want to see late payments, missed payments, or payments that didn’t meet the minimum. These things will make getting mortgage approval more difficult.
Meeting these 9 criteria can help you qualify for the mortgage that you’re looking for.