Posted by John Doe
With mortgages rates slowly but surely rising over the last few years, many prospective homebuyers who are on the fence will need to react quickly or risk paying more each month for their new home. Moreover, purchasing a home is not as simple as picking one out of a line and closing a deal with the seller. That is, you will also need to secure a mortgage; and while it is not rocket science, it can prove to be challenging for homebuyers who are unaware of what securing a mortgage entails.
Here, we will discuss some of the things you should do before applying for a mortgage. While increasing your income can prove difficult to near impossible, and improving your credit score can also be a challenge, there are certain steps you can take to facilitate the process.
Understand What You Need Before You Apply
You can expect most prospective lenders to ask you for a set package of documents before you even begin considering a mortgage. For instance, any and all lenders who are listed on the loan application will be required to provide their prospective lender with a month’s worth of their recent pay stubs. Your most recent two years of tax filings will need to be sent to them, and many will also ask that you provide them with a minimum of three months of bank account statements.
Moreover, most will request that you provide them with the proper documentation for any unusually large withdrawals or deposits on your account, most of which tend to be non-payroll related.
Be Aware of How Much You Can Feasibly Spend
Many lenders will use what is referred to in the financial industry as the 28/36 rule. That is, the monthly payment that you plan on making on your new home must not exceed 28% of your gross monthly income, while your total revolving debt payments—which may include any car, student, and credit card loans, as well as your monthly mortgage—must not exceed 36% of your gross monthly income.
By following the aforementioned rule, you will have a better understanding of your borrowing limits. However, please note that not all lending institutions will follow the 28/36 rule to a fault, as some may be more lenient, while others may be more strict regarding their borrowing terms.
Comprehend the Market and How it Works
It is important to note that, in some instances, the loans that you can qualify for will be largely contingent on the type of property you wish to purchase and/or the market that you wish to enter. For instance, if you live in a city or province where many condominium projects have gone bankrupt, then you may have more trouble procuring a mortgage on a condo, as lenders in the area will have stricter standards.
Many such lenders will likely not only meticulously assess your financial history, but will also carefully assess the finances of the building itself. Some may even require that you place a downpayment on the condo of at least 25%, or even higher in some cases. Hence, you need to understand the market that you are entering, as well as determine what type of property is best for your unique financial and personal needs.
The ideal way to get the help you need is to work closely with a real estate expert, as they can help you steer away from properties that can cause you and your family financial harm in the future, as well as help you better comprehend the local lending policies and standards of your neighbourhood or city.
Try and Improve Your Credit Score
Arguably, one of the most important factors that will help determine whether or not you qualify for a mortgage, as well as the actual rate that you will receive, is your credit history. To learn what your credit score is, you can turn to free credit score websites, such as creditkarma.ca, or you can request that your credit card company can supply that information. Many credit card companies in Canada will provide you with your credit score if you simply request it. Next, once you have obtained your credit score, the next step is to try and find ways to improve it.
First and foremost, you will need to perform a comprehensive analysis of all of your credit reports to ensure that there are no errors. Any mistakes or anomalies should be disputed as soon as possible to avoid problems in the future. Next, if you find that you have a balance owing, and are able to pay it off, then do so promptly, as it will likely increase your credit score.
Moreover, you should refrain from opening any new accounts while you are working on improving your credit score, and it is highly recommended that you avoid doing anything that will require a credit check (for example, switching to a new wireless carrier or satellite TV provider). You should also avoid taking on any additional loans until all of your existing loans are paid off in full.
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