The decision to purchase a new home can be an extremely exciting time; however, without proper education and a proper team in place it can quickly turn into a huge headache. The first thing to do once you have made the decision to purchase a home is to become pre-approved for a mortgage loan. This can be done through your local bank or a mortgage broker. As Scott Trainor with The Mortgage Group explains, "Being pre-approved is such a crucial step. During the pre-approval meeting you will learn what the maximum dollar amount you can spend on a home will be. Knowing this allows you to not waste any time looking at homes out of your price range."
The pre-approval stage is where your banker or broker will look at all the pieces of the puzzle to determine how much they can approve you for. The things they take into consideration are: credit bureau reports, your income, debt and the amount you will be paying as a down payment. The higher your down payment, the more credit your lending institution will extend you towards the purchase of a home.
In Canada there are two sources that your broker can check to view your credit history: Trans Union and Equifax. The most commonly used is Equifax, who rates your credit on a scale called a Beacon score. Your Beacon score is determined by many variables. Firstly, it reports about your past history on bill payments. Missed payments will affect your Beacon score. Don't worry though, a missed cellphone or cable bill will not prevent you from obtaining a mortgage. Another thing your Beacon score will report to a lender is how much of your credit you are using. On revolving credit accounts, such as a line of credit or credit card, it is always beneficial to maintain the balance below half of the maximum allowed. If your credit cards are maxed out, your Beacon score will go down as banks begin to question whether you can to be living the lifestyle you are at your current income level.
If your Beacon score is above 680, you are permitted to use up to 39% of your gross income as home debt. This includes your mortgage, property taxes, insurance and heating costs. You are also permitted to have up to 44% of your income as total debt which includes any lines of credit, credit cards, mortgages and car payments. If your Beacon score is between 620 and 680, you are permitted 32% of your gross income as home debt and up to 42% as total debt.
As you can tell, it is very important to pay your bills on time and to ensure you don't carry too much debt as these factors will hurt you when it comes time to be approved for a mortgage. Don't be scared away by the process though, the worst thing that can happen to you is that they tell you you're not quite ready and can help advise you on how to improve your credit. At the same time, you don't need a perfect score to be qualified either, most people with a job and a reasonable credit history can be approved for a mortgage of some amount.
The proper banker or mortgage broker will walk you through all of the steps during pre-approval, explain terminology and help you understand your mortgage. This is a fun time, so do the proper ground work with professionals to ensure that when it comes time to writing an offer on the home of your dreams, you will be approved.
Scott Trainor has been a mortgage broker for two years. He was the recipient of the Saskatchewan Rookie of the Year award in 2012. He specializes in helping first-time homebuyers learn the ins and outs of mortgages. Visit him online at www.scott-trainor.com.