Frequently asked questions when buying a home

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By Jorge and Alisa Aragon

What do lenders look at when qualifying me for a mortgage?

Most lenders look at the following factors when determining whether you qualify for a mortgage:

• Income
• Debts
• Employment History
• Credit history
• Value and marketability of the property you wish to purchase.

HOW MUCH CAN I QUALIFY FOR WHEN BUYING A HOME?

In order to determine the amount for which you will qualify, there are two calculations that are used. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and strata/ condo fees, if applicable). Generally speaking, this amount should not be more than 35% – 39% of your gross monthly income. For example, if your gross monthly income is $4,400, you should not be spending more than $1,716 in monthly housing expenses. Second, your Total Debt Service (TDS) ratio is calculated. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 42% – 44% of your gross monthly income. The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get pre-qualified by a Mortgage Expert. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

HOW MUCH MONEY DO I NEED FOR A DOWN PAYMENT?

The minimum down payment required is 5% of the purchase price of the home when you are an employee. When you are self-employed it will depend if you are qualifying based on what you are declaring on your income tax then it will be 5% and at least 10% down payment when you are self-employed and qualifying with an “estimated” gross income instead of the incoming showing on your income tax return. In order to avoid paying mortgage default insurance, you need to have at least a 20% down payment.

IF I DON’T HAVE THE FULL DOWN PAYMENT AMOUNT, WHAT CAN I DO?

There are programs available that enable you to use other forms of down payment, such as from your RRSPs, or a gift from a parent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, in order to qualify you still have to be within the TDS ratios as mentioned above.

WHAT ELSE DO I HAVE TO PAY TO PURCHASE A HOME?

You will have to pay for the closing costs. The lenders require you to have in your bank account at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs. You must have this amount but it doesn’t mean you are going to spend it. The following are some of the closing costs:

• Legal costs
• Property tax adjustments
• Strata/ condo fee adjustments (if applicable)
• Cost to register property in land title office, etc.

WHAT WOULD BE MY MORTGAGE PAYMENTS?

Monthly mortgage payments vary based on several factors, including: the size of your mortgage; whether you are paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.

WHAT IS BETTER A FIXED OR VARIABLE RATE MORTGAGE?

The answer to this question depends on your personal risk tolerance. For instance, you are a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If your financial situation can handle the fluctuations of a variable rate mortgage, this may save you some money over the long run.

WHAT IS THE BEST INTEREST RATE THAT I CAN GET?

Your credit score plays a big part in the interest rate for which you will qualify, as the riskier you appear as a borrower, the higher your rate will be. Rate is definitely not the most important aspect of a mortgage, however, as many rock-bottom rates often come from no frills mortgage products. In other words, even if you qualify for the lowest rate, you often have to give up other things such as pre-payments and portability privileges when opting for the lowest-rate product. Remember not to focus on the lowest interest rate but on finding the best mortgage with the most favorable terms and rate. While you might end up having a lower rate, it can end up costing you thousands of dollars of unnecessary costs in the long run.

WHAT CREDIT SCORE DO I NEED TO QUALIFY?

Generally speaking, you are a prime candidate for a mortgage if your credit score is 680 and above. The higher you score the better, as you will have more options and advantages. These days almost anyone can obtain a mortgage, but the key for those with lower credit scores their options will be more limited and interest rates could be higher. But don’t worry consult a Mortgage Expert to see how they can help you in obtaining a mortgage.

WHAT HAPPENS IF MY CREDIT SCORE ISN’T GREAT?

There are several things you can do to boost your credit fairly quickly. Following are five steps you can use to help attain a speedy credit score boost:
1. Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they are below 50% of your limits.
2. Limit the use of credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score.
3. Check credit limits. If your creditor is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your application.
4. Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off.
5. Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.
To get more details about these and other questions you might have, talk to a Mortgage Expert and we will be able to analyze your personal situation and provide you with more information so you can make an informed decision on buying your home.
Jorge and Allisa Aragon – are Mortgage Experts with Dominion Lending Centres Mountain View. They are active members of the Greater Vancouver Home Builders Association. Jorge and Alisa focus on the overall needs and plans of their clients and then find the best mortgage to suit their needs. For more information visit YourMortgageSolutionsGroup.ca or contact them at aaragon@dominionlending.ca.
Original Source: NEW HOME  GUIDE May 15 – May 29, 2015