Preparing For Your First Mortgage
Keeping our credit reports healthy is something we have to work at every day. It’s learning new habits and sticking to them. However, it’s very rewarding because it means we can buy things like homes and vehicles. And it’s achievable for all people with a stable job.
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Please note: The following information are guidelines only. Each mortgage application is different because each person’s situation is different. Therefore, the following guidelines might not apply to everyone. Always speak to a financial advisor or a mortgage broker to understand more about your specific situation.
A common dream of many people is to own our own homes. As long as you have a stable paycheque, owning your own home can become a reality for you. Qualifying for a mortgage is based on two things: your income and your credit.
When looking at income, lenders want to see that you’ve had the same job for at least 6 months. If you want to buy a home, be sure you don’t change jobs too often. Also, do the best you can at your job because this increases your job stability. Of course, the more money you earn, the larger mortgage you could afford.
However, credit is also an important part of your mortgage application. Credit means “how much debt you can borrow.” Debt means “the amount of money you do borrow.” Credit is often confusing to people, and most people don’t understand how important it is to their mortgage application. It’s the area that causes people the most challenges when applying for a mortgage. Banks measure your credit with a “credit score” and a “credit report”. Below are several things you’ll want to do to make sure you have a good credit score and credit report.
TIPS TO HELP YOU QUALIFY FOR A MORTGAGE
- Check your free credit report at Equifax (www.equifax.ca).
Your credit report is like your report card on how you use credit. It shows who lent money to you, how much they’ve lent to you, what your monthly payments are and how good you are at paying them back. Your credit score is a 3 digit number between 400 and 900. Your credit score is calculated from your credit report. If you pay your bills on time, you will have a high credit score. If you don’t pay your bills on time, you will have a low credit score. You need a credit score of 650 to get a mortgage.
Your credit report also shows how many places have checked your credit report. This is very important because the more people who check your credit report, the lower your credit score will be. Checking your credit score too many times can ruin your credit. Why does checking your credit negatively affect your credit score? Because it looks like you are a credit seeker. A credit seeker is a person who is desperate for credit. When we are too desperate for credit, lenders think maybe we can’t pay our debts.
You can check your credit report up to once a year without it negatively affecting your credit report. Reading your credit report can be complicated and long, so be sure to ask a financial advisor or a banker to help you understand what your credit report means.
- Pay all of your debts on time.
Late payments are recorded in your credit report and decrease your credit score. Late payments affect your credit score for up to 7 years, therefore it’s important not to miss payments or be late on payments.
- Apply for a credit card.
Use your credit card each month, and make at least the minimum payment each month. Ideally, you should pay your credit card in full each month. Be sure to pay your credit card on time every month. This shows that you are responsible with your debts.
Also, try not to owe more than 70% of your limit, even for a day. For example, if the limit on your credit card is $1000, don’t go over $700, even for a day. Why? A person who maxes out their credit card is thought to be irresponsible with credit. Going over 70% of the limit won’t cause you to have bad credit, but it can make it hard for you to improve your credit score.
- Don’t apply for credit often.
Every time you apply for a credit card, a loan, a mortgage or overdraft on your bank account, your credit score is being checked. Each time it’s checked, your credit score goes down. When applying for a loan, be sure the lender or salesperson you are speaking to doesn’t check your credit score without your consent. Applying for credit too often makes you look like a credit seeker, and lenders won’t want to lend money to you, or they will want you to borrow at a high-interest rate.
- Keep your debt-servicing ratio low.
Your debt-servicing ratio means the dollar amount of monthly payments you have compared to the amount of money you make. For example, if your gross income is $4000 per month, about $3300 would be deposited into your account. However, the bank will say you can borrow up to about 40% of your gross income. 40% of $4000 is $1600. Therefore, all of your debt payments, plus your heat, mortgage payment and property taxes can’t be more than $1600 per month.