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As a homebuyer pursuing a mortgage from prospective lenders, how do the professionals determine what you are pre-approved for?

You Need a Pre-Approval

When it comes to affording and purchasing a home, individuals require a pre-approval from a bank or other credible financial institution. Lenders determine how much they deem you can reasonably pay based on a number of factors. While it may be mysterious to some, the general principles of income and assets play an important and obvious role. So how do the calculations actually work?

The Mortgage Paperwork

Someone applying for a mortgage pre-approval must provide a range of documents, including paystubs and T4s, employment and financial account information, proof of assets and liabilities, and from where you can take money for your down payment. A financial institution or other lender will also research your credit score. Once approved, experts recommend for prospective buyers to purchase a home below the maximum amount with which they are presented.

Lenders are Risk Averse

The figures you receive during and after a pre-approval meeting consider various parts of your financial past and present. In addition to your income and assets, lenders take into account your current debts and credit, not to mention the costs you will be paying for and at your new home. That includes the purchase itself, but also heating costs, condo fees (if applicable), and property tax.

Make Yourself Attractive to Lenders

Essentially, the more you earn and the better your credit, the more stable of a position your lenders will perceive you to be. The fewer debts and liabilities you have, the better. Everything is taken into account for such a significant purchase like a home. In Toronto, the average detached property is valued at over one million dollars, after all.

If you are wondering how you may be able to boost your rate, simply maintain your good financial health and avoid frivolous spending. Find a better paying job, pay your credit cards on time, pay off your student loans, and ensure a spouse or partner you will be purchasing the home with has a solid financial reputation, as well.

When your finances do not measure up to the standard requirements of being pre-approved for a mortgage, some people may not know where to turn. Acquiring bad credit can be detrimental to various aspects of your life, but especially when striving to obtain a home equity loan.

Although individuals with bad credit may not qualify to go the traditional route with a large bank, there are mortgage brokers, financial institutions and private lenders who work with people in these specific circumstances. They offer enhanced flexibility and freedom, in fact.

It is recommended to check your credit score before seeking a mortgage or home equity loan if you are worried that yours may be low; this can be done free of charge in Canada through TransUnion and Equifax, as well as some newer service companies like Mogo Mortgage and Borrowell. Someone with bad credit typically has a credit score below 600 out of a possible 900 (the lowest is 300).

While technically considered average, a score between 600 and 700 can be eligible for a bad credit mortgage if an individual has solid income sources—which is more difficult for those who work on commission or work for themselves, but still possible to determine a projection of how much you will make based on your averages.

A reputable lender can provide a bad credit mortgage or home equity loan despite their client having a lower credit score. However, it is equally important for that individual not to look far beyond one’s means for a home to avoid being unable to make mortgage or home equity loan payments moving forward.

Someone with bad credit must have solid approval of their property to assure it is in average to good condition. Although individuals can still obtain a bad credit mortgage, they may be sanctioned with greater interest rates and extra fees from lenders and mortgage brokers as a result. Whether good or bad, a person’s credit is considered a direct reflection of how risky they are considered to loan money to.

Before applying for a second mortgage, there are different factors you should consider to understand the amount of funds that could be made available. Many individuals do not receive a clear explanation as to how the amounts they are able to borrow are actually calculated. Here is some insight into those figures.

Home Equity

First, the equity of your home plays an important role in their determination. This translates to the variance between its value and what you still owe. It goes without saying, but the smaller the amount you have left to pay on your primary mortgage and the greater the value your home is, the better.

Mortgage Terms

Second, the length of the mortgage term you choose will influence the amount you will be required to pay your lender each month. A longer term is often more manageable because that means smaller payments, but it will take significantly more time to pay off; if you choose to move beforehand, your equity will be less than if you paid higher monthly amounts.

Lender Fees

Mortgage lenders often charge their clients a lending fee, loan origination fees, appraisal costs, as well as a fee to reduce the loan’s interest rate. Since these amounts can all vary from lender to lender, it is important to check with at least a few different institutions to ensure you obtain the best rates and lowest fees. No matter what you decide, experts suggest also getting the amount in writing.

Rates

Like with a primary mortgage, your rate will remain the same throughout the term of your mortgage if you choose a fixed rate. A variable rate will change based on the market and can either work to a borrower’s benefit or detriment. While the fixed rate may seem more secure, you may be able to save significantly if rates decline.

It may be particularly helpful to speak with a financial advisor who can offer some insight based on industry projections. Contact us to learn more about second mortgages and how to determine the amount you may be able to borrow from lenders.

An integral part of buying a home is planning. There are many things to plan for, the physical activity of moving to a new home such as packing and transferring your worldly goods. There’s planning what to do with your new home, how to bring your own touches to the decoration and the fittings and there’s planning what mortgage is going to be appropriate to support your purchase. Open or Closed?

Open or Closed Mortgages offer different advantages to borrowers, dependent on their situation now and what they have planned for the future.

The Open Mortgage

In the most straightforward terms, an open mortgage is one that is eligible for early repayment and has a shorter term than a closed mortgage. The reason for pairing shorter terms with early repayment options is that open mortgages are designed to be a transitionary type of loan. 

For example, Claire and Robert have decided to buy a home and move in together. The sale of their current, individual, properties will garner enough cash to pay off most, if not all, of the mortgage on their new home. This means they have some cushioning between buying their new home and selling the old ones.

As a rule of thumb, lenders in this situation will overtest the means of borrowers. While the open mortgage they apply for might have a 3% interest rate, the lender will test Claire and Robert’s finances to see if they could tolerate a 6% interest on their loan. Not because they will want to increase the rate, but because the risk involved in waiting for Claire and Robert to sell their properties means there might be an impact on their ability to pay.

It is worth noting that if you plan to get an open mortgage, this comes with a greater degree of financial testing scrutiny, and this should form part of your planning, particularly in what documentation you prepare for a potential lender regarding your financial history. 

A Closed Mortgage

As you may already have anticipated, a closed mortgage does not offer the same kind of flexibility, so why would anyone choose a closed mortgage? 

Most people are not in Claire and Robert’s situation, where they can anticipate a windfall within the term of the mortgage. For those people, a fixed-rate closed mortgage with a defined payment schedule works better because it matches their income. Regular, predictable, income feeding defined scheduled payments. 

If you do think you might get a windfall during the payment scheme, an increase in salary, a return on an investment, or perhaps an inheritance, discuss with your lender what overpayment policy might potentially be included in a closed mortgage product. This will reduce monthly payments, but lenders will almost certainly penalise you for early repayment of the principal debt. This penalty is usually based around the remaining interest on the term as this is what a lender is expecting to get from you in exchange for the loan over the full schedule. Make sure you understand how this penalty is calculated before you commit to a loan.

Needless to say that with a closed mortgage there are also planning considerations to make in advance both around what is predictable for your circumstances and what might be unexpected.

Making the Choice

Predicting the future is best left to futurologists and precognitive psychics. If you want to get the most out of your future and out of an open or closed mortgage, the path to success is laid with advance planning. But even if you make your plans, predict your budgets, and outline your five-year-future, you still have to go to multiple lenders, one-by-one to try and find a lender whose products meet the goals of your plan.

At Canadalend.com all of our experts are independent. They aren’t beholden to us or any of the hundreds of lenders they have access to through us. They can use their expertise to help you really refine your planning and use that plan to find the right mortgage product for you, whether open or closed.

To find out more, contact Canadalend.com today and start planning for a better financial future.