Before you go house shopping, it is important to get an idea of your budget first. Knowing how much you can spend will help your agent determine what houses and areas to show you. As well, having documentation of your financial resources will help you get a letter giving you a pre-approved mortgage rate. In order to get this pre-approval, contact your agent, or mortgage broker.
Here are the factors that determine if the lender will grant you a loan:
1. Your income
2. Your credit score based on your credit history
3. Your assets
4. Your liabilities (i.e., your debts)
5. Your employment history
6. The size of the down payment you intend to make and the source of those funds
1. Your Income
In order to get a loan, your income will help the lender determine if you are qualified for a mortgage. Mortgage lenders need to know your annual income because the information that you provide them with can assess whether you can afford the home you want given your financial circumstances. (situation)
Mortgage lenders' first task is to look at your income as it relates to your liabilities (i.e., debts). If you have sufficient income to pay all of your financial obligations, then mortgage lenders will grant you a loan. If lenders determine that you cannot afford the home because of lack of funds, they will decline your application .
2. Your Credit Score and Credit History
A credit score is a snapshot of your overall financial health. There are five categories: excellent, very good, good, fair and poor. The score ranges from 300 to 900. Mortgage Lenders will use your credit score to see if you are eligible for a loan.
A credit history provides the overall picture to lenders. They use your credit history to determine how likely you are to make your mortgage payments on time. This is where a credit report comes into the equation. The report will show if you had late or missed payments in your credit history.
You can order a copy of your credit report from either Equifax or TransUnion. Having a credit report will help you know where you stand financially and give you time to determine what lenders best suit your needs.
When taking your income into consideration, lenders will want to know if you have any additional asset. Assets include money in your bank account, RRSP's, vehicles, rental property, other investments like stocks and bonds. Such assets will be considered in offsetting debts.
4. Your Liabilities (Your debts)
Mortgage lenders will assess all of your liabilities, including car loans, student loans, credit card debt, monthly child support payments, and any other form of liability.
5. Employment history
Mortgage lenders ask you to provide your employment history to verify where you have been working for the past two years and what your income is. Lenders will feel more confident if you have worked at the same place for a number of years rather than if you have gaps and inconsistencies in your employment. If you do not have several years of steady income, you need to find a realtor who specializes in mortgage. As a realtor and mortgage agent, I can help you to get approved for a great rate as long as, you have been earning a steady income for the past year.
There are number of ways that lenders can verify your employment including asking you to provide an employment letter that confirms your occupation, the length of time you have worked at your place of employment and your salary. If you are self-employed, own your own business, or you have been working at your current company for less than 2 years, you may be asked to provide your tax documents and other documentation.
6. Down payment
You want to make sure you can provide a substantial down payment on a home. The larger the down payment you can make, the less you will have to borrow and, therefore, the smaller your monthly mortgage payment will be. If you make a down payment of less than 20% of the value of the home, then you may have to purchase mortgage insurance, which can increase your monthly costs.
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