There is nothing more empowering than the possession of knowledge. That is why we write Home Smart blogs every month so that potential homeowners can make the right choices when it comes to applying for a mortgage to buy or build their home.
We recommend that you get familiar with the 5 Steps to Financing so you can understand how the application process works. It is particularly crucial to be mindful of the qualification criteria as these directly affect the strength of your application. As we identified in our How to Calculate your Mortgage Amount blog, your income, age and current level of debt are the factors that are taken into consideration when assessing your ability to qualify for a mortgage and the amount you qualify for.
This month, we will look at ways you can prepare yourself:
1. Steady Income
Whether you are a permanent member of staff, work on a contractual basis or you run your own business, it is best to have demonstrable evidence (e.g. pay slips, bank statements) of a consistent source of income. This proves to the lender that you would be able to honour your debt obligations since your source of income is reliable. The longer you have been earning an income through a certain source, the more reliable it appears to be e.g. working for 3 consecutive years.
2. The Younger, the Better
The maximum mortgage term is 30 years or up to the age at which you retire which is often at age 60. Therefore, if you are approved for a mortgage at 30 years old, you will have up to 30 years to repay (longer time to repay = lower monthly instalments). That is why we encourage younger individuals to start thinking about homeownership as early as they can so they can benefit from the longer payment period.
3. Little or No Debt
Individuals who have very little or no current debt at the time of application are able to qualify for a higher mortgage amount because their Total Debt Service Ratio is low enough to accommodate a higher monthly mortgage instalment. Your mortgage instalment should not exceed 35% of your gross income while your Total Debt (i.e. the money you pay towards your mortgage, loans, hire purchase, credit cards etc.) should not exceed 45% of your gross income.
4. Good Credit History
Lenders are very interested in the potential borrower’s payment track record. Paying loan instalments, credit cards and bills on time on a consistent basis is irrefutable proof that that you are trustworthy and responsible. If you are regularly late or miss loan, credit card or bill payments, it will show up on your credit history and these remain on your record for seven years. While your income shows your ability to repay, your credit history reveals your willingness to repay (your character).
Although most of the funds needed to buy or build the home will come from the lender, you would still need to pay a downpayment (if required), legal fees and other closing costs with your money. Anticipating and savings for these out-of-pocket expenses before applying communicates your readiness to move ahead with your plans.
We’re Here to Help
If you believe that you have checked all these boxes, then you should consider getting pre-qualified so you can begin your homeownership journey. Use our online Mortgage Calculator to get an estimate of how much you qualify for and schedule an appointment to get pre-qualified.
If you don’t get pre-qualified first, then you won’t have a realistic idea of “how much house you can afford”. As a result, you may decide on a home that is not within your price range and you will not be approved for the amount of financing you need. We always recommend getting pre-qualified so you can search for property within your budget.
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