Posted by John Doe
If you are planning on purchasing a home, you will likely need to obtain a mortgage, as it can be next to impossible to buy a home without one. As such, it makes sound financial sense to try and do everything in your power to qualify for a mortgage. However, in order to qualify for a mortgage, you will need to be a viable candidate, meaning you must be considered as low risk. Here, we discuss some of the things you should avoid before you apply for a mortgage in order to improve your chances of qualifying for a home loan.
Avoid Accumulating Too Much Debt
It is wise to avoid taking on more debt before you apply for a mortgage. As such, your debt-to-income ratio is something that you should pay close attention to. Your debt-to-income ratio refers to the debt amount that you pay off each month compared to the income that you’re generating per month. The reason why your debt-to-income ratio is so important is because lenders will assess the ratio in order to determine if you are a good candidate for the loan. Hence, if your number breaches a certain threshold, which is generally between 40% and 45%, then you will be classified as a high-risk borrower, which will reduce your chances of qualifying for the mortgage.
Do Not Forget to Check Your Credit Score
Many Canadians do not pay close attention to their credit score, or aren’t even aware of what their credit score is before they apply for a mortgage. In reality, your credit score will tell your prospective lender quite a bit about your financial background. For instance, a good credit score will indicate that you will likely pay off your debts on time, given your solid credit history. It will also tell your prospective lender that you are a fiscally responsible person, which will increase the chances that they will accept your loan application. As such, check your credit score before you apply for a home loan, and if it is poor, take the necessary steps to help bring your credit score up to increase your chances of qualifying.
Do Not Fall Behind on Your Bill Payments
As mentioned, your credit score is something that lenders will assess carefully before they decide to accept or reject your loan application. Thus, you should work hard to improve your credit score if it is poor, or protect it if it is good. Avoid falling behind on any of your monthly bill payments, as doing so will negatively impact your credit score. In fact, even submitting a single check past the deadline by a few days will remove a few points from your credit score. Hence, if a prospective lender discovers that you have failed to pay off some of your bills on time, then they may worry that you will also fail to pay your mortgage payments on time as well. The solution, then, is to make all of your bill payments on time in order to continue boosting your credit score.
Avoid Maxing Out Your Credit Cards
If you swipe your credit cards too often or go beyond your allotted credit card limit, then your credit score will be negatively impacted as well. One of the factors that will affect your credit score is the credit utilization ratio, which is essentially your debt-to-credit ratio. In other words, your credit card utilization ratio refers to the credit amount that you’ve utilized vis-a-vis your credit line.
To illustrate, if you were to charge $5,000 on one of your cards in order to purchase a 4K HDTV, and your card has a limit of $8,000, then your credit utilization ratio would be 62.5%. The goal, however, should be to try and keep that percentage below 30% if possible. Hence, if you are thinking of buying a home, then you should avoid relying on your credit cards too much to make purchases, and, if you do use your credit cards, you should avoid maxing them out. At the very least, try and keep your debt-to-credit ratio from rising above the 30% mark by placing smaller amounts on your credit cards or by using cash or debit as frequently as possible to make purchases.
Avoid Closing Your Credit Card Accounts
If you have read this far you may be concerned about your credit card debts. However, please note that you are not alone, as many Canadians worry about taking on too much credit card debt, and many look to quick and easy solutions that will get them out of debt. For instance, some Canadians who feel overwhelmed by their credit card debts may believe that simply cutting up their cards and shutting down their credit card accounts will improve their credit score.
However, those who are hoping to qualify for a mortgage may be surprised to know that closing a credit card account will not help them qualify for a home loan. For instance, if you opt to close a credit card account, your level of available credit will also likely take a significant hit. Your debt-to-credit ratio would then rise exponentially, which would subsequently cause your credit score to plummet.
Did you know that you may qualify for mortgages with cashback in Canada? If you would like to learn more about how you may be eligible for such mortgages, then Mortgages, Mortgages can help. As Canada’s mortgage authority, we offer over a dozen different mortgage types, including mortgages with cashback. To learn more, please visit our website or call us at 866-307-0747.