Get Pre-Approved For Your Mortgage Today and Stop Making Your Landlord Rich.
If you are currently renting, then you are making your landlord rich! Yes, very rich!
Is there a reason why you want to do this? Perhaps your landlord is a really nice guy (or gal). Perhaps you want to help him pay for his new car. Or perhaps you don't want the responsibility of home ownership. But wouldn't it be nice to live in a home that is yours? A place you can truly call home. It is possible...
When I lived in my first rental place, I kept the place clean. I fixed stuff. I made things better and the landlord benefited! In fact, after living there for 6 months, the place was so nice when he did his walk through, I received a notice of increased rent! As soon as I received that, I was determined to own my own place as soon as I could.
I met a client the other day who was being forced to move. Her landlord was selling her place and the new owners didn't want any tenants. The landlord was nice, he hadn't raised the rent for years. She was paying $1,100 per month, a great deal for the size of place she was in. When she started to look around at comparable homes, they were renting for $1,500 or more.
She had saved some money, about $15,000 for a down payment. We reviewed her information and she thought that $1,600 per month was about the maximum she wanted to spend. At today's interest rates that would work out to a purchase price of around $300,000 with 5% down.
Not only could she afford this (approx $1,525/month for the mortgage payment and property taxes), almost $670 of this payment would be going toward the principle of the mortgage. After 5 years, her mortgage would have a balance of under $250,000.
A homeowner can save thousands in just 5 years!
So, if my client had moved into another rental property she would pay about $1,500/mth to the landlord. After 5 years, she would have nothing to show for this rent. If, however, she invested $15,000 of her own cash (which she can get from her RRSP) and made a monthly payment of $1,525, then after 5 years she would have at least $50,000 of equity in her own home. (That's assuming that the home she purchased didn't increase in value at all over 5 years! If it did, then she would have even more.)
Concerned you won't qualify for a mortgage?
The most difficult step to take for a renter is to apply for a mortgage. I hear it all the time... "What if I don't qualify for a mortgage?"
"Don't worry", I say. If you don't qualify right now, then we can build a plan to help you qualify in just 3 to 6 months from now. You will be surprised just how quickly you can be a homeowner if you have this goal in mind.
If you don't try it now, then in 3 to 6 months you will be in the same position as you are now except you are 3 to 6 months older.
Pre-Qualification vs Pre-Approval, Understand the Difference
Many bank reps and mortgage specialists will tell you how much you qualify for without getting much detail from you. They don’t check your credit, don’t ask for any documentation to support the details you tell them. They tell you to go and shop for a home. This is a mortgage pre-qualification.
A mortgage pre-qualification does not guarantee a mortgage amount or a mortgage rate
It starts the discussion to hone in on the monthly payment that you can afford. In many cases, checking your documents and your credit will reflect and validate the pre-qualification. In some cases, it won’t.
Pre-approval guarantees an amount at a specific rate
Don’t stop at the pre-qualification step. To obtain pre-approval for your mortgage you must complete an application, provide documentation to confirm your income and credit record. All of these documents are reviewed by a lender who then provides a certificate to you. The certificate confirms that they have reviewed your information, checked your credit and would approve you for this mortgage amount provided you don’t make any changes to your financial situation while you are house hunting.
Obtain a pre-approval so you know exactly how much you can afford to pay for a home
Getting pre-approved should be the first step in your process to purchase a home. By going through the pre-approval process you will know much your monthly payments will be and how that translates to a mortgage and purchase price. You will also learn how much the lender thinks you can afford.
Sometimes these numbers are very different. You might think that you can afford $2,000 per month but the lender might determine that you could afford a payment of $3,000 per month. It might be the reverse. You think that you can afford $2,000 per month but a lender would only consider $1,000 per month an affordable payment for you.
The starting point is to determine the monthly payment you can afford
When you meet with a Verico iMortgage Solutions advisor they will determine the monthly payment that you can afford as the starting point to calculate the total mortgage that you then qualify for. They will review your income documents.
You may think this calculation is made based on your net income (your take home pay), however lenders use your gross income to calculate how much you qualify for (your annual salary). If your monthly or yearly income varies, then the lender will want to use an average based on the last 2 years you’ve been employed.
1. The First Step: Qualification Application
You will need to provide your personal information such as:
- your birthday
- SIN number
- details about where you have lived for the last 3 years
- your employment history for the last 3 years
- details about what you own (your assets) and,
- what you owe (your liabilities)
This application will form the basis of the discussion with your mortgage broker.
2. The Second Step: Credit Check
The next step is to sign an authorization for your mortgage broker to check your credit. The credit bureau reporting agencies will send a report that summarizes your credit history with all the credit card companies and lenders that you have dealt with. The credit bureau agencies will also give a beacon score. Lenders use the beacon score to determine how they will qualify you for a home purchase.
Sometimes there are items reporting on your credit that aren’t correct. Checking early will give you time to get some of these incorrect items fixed before you make the offer to purchase your home.
If your credit is good, but not excellent (beacon score between 600 & 679), then the lender many want to allow a lower percentage of your gross income toward your housing payments.
If you have really good credit, they will allow more of your income to be used toward your housing payments (beacon score higher than 680).
One of the advantages of working with iMortgage Solutions for your approval is that we only complete one credit check and therefore your credit doesn’t get affected by multiple credit inquiries. If you decided to shop around for the best rate with different banks yourself, then each bank, credit union, lender etc. will complete their own credit check.
If for example, you approached five different lenders to get an approval for your mortgage, and each checked your credit, then your credit would show these five separate inquiries by five different lenders. These inquires could reduce your beacon score anywhere from 15 to 30 points. If you credit score is already close to 600 points, then these extra inquiries could mean the difference between qualifying for a mortgage and not qualifying.
3. The Third Step: Documentation
- You will need to provide confirmation of your income.
- An employment letter and recent paystub is sufficient if you work in a salaried position or an hourly employee.
- If you receive bonuses or work overtime, then you can also provide additional historical information to support this extra income.
- Generally a lender will ask for a 2-year history. You would be asked to provide your notice of assessments and T1Generals for the last 2 years.
With all this information the lender has a much better picture of how much you can afford and will provide you with a pre-approved mortgage.
How do I calculate how much payment I qualify for?
The best way to calculate the payment you can afford is to use the same method the banks and lenders will use. To calculate the total mortgage payment you can afford, you must calculate 35% of your gross monthly income and 42% of your gross monthly income.
The first calculation is called the TDS or total debt servicing number, which represents the total payments you can afford including minimum credit card payments, loan and line of credit payments as well as the total house payments (calculated as the GDS or gross debt servicing number).
The second calculation is the GDS (gross debt servicing number), which represents the total amount of your house payment including the principle & interest payment of the mortgage, the property tax payment, half the monthly condo fee payment and monthly cost of heat (typically $100). When you calculate the GDS, then you can subtract the tax payment, condo fees and heat to determine the actual mortgage payment.
Let’s look at an example:
Sam earns $60,000 per year or in other words $5,000 per month, he has a car loan with payments of $300 per month and has little credit card debt (under $1000). He plans to purchase a home, no condo fees and the property taxes are estimated to be $2,100/year ($175/month)
Step 1: Calculate the TDS is $2,100 ($5,000 x 0.35) and the GDS is $1,750 ($5,000 x 0.42)
Step 2: Calculate minimum payments: car loan $300/mth, credit cards $30 ($1000 balance x 3%). Total payments of $330/mth
Step 3: Calculate TDS minus debt payments: $2,100 minus $330. Result $1,770
Step 4: Compare the GDS calculation ($1,750) to the above calculation ($1,770). Use the lower number in the next calculations
Step 5: Determine cost of property taxes ($175/mth), the cost of condo fees ($0) and the cost to heat the home ($100)
Step 6: Calculate that Principle & Interest Payment (P&I): Subtract the above costs (step 5) from the number calculated in step 4: $1750 minus $175 (tax) minus $100 (heat) results in a Principle & Interest payment of $1,475 for an individual who earns $60,000 annually. Therefore Sam would qualify for a principle and interest mortgage payment of $1,475/month. This payment, at an interest rate of 3.09%, would mean a mortgage of approximately $347,000.
Why is credit important?
Your credit and your credit history is very important to determine if you can even qualify for a mortgage. Many lenders will not provide financing if your credit score is below 600 and these same lenders will use a larger percentage of your income in the calculations if your credit score is above 680.
What are the different types of income confirmation?
For a salaried employee or hourly employee that doesn’t work much overtime, the easiest form of income confirmation is an employment letter and recent pay stub. For an employee that receives bonuses or overtime then additional documents can help to confirm this additional income. These types of income are not often the same each year, therefore most lenders like to use a two year average for this. You can provide your most recent tax returns to confirm your total income for the last two years. Your T1General and Notice of Assessments are used by lenders to calculate the last 2-year average income. If you are self-employed, again, lenders would use the last two years to calculate your average income. The lender will request copies of your T1Generals and Notice of Assessments for the most recent two years to determine your average income.
Let Verico iMortgage Solutions help you.
My name is Steven Crews, your Verico iMortgage Solutions advisor. I have over 15 years experience helping clients get their mortgages pre-approved. I can help you too. Call/text me at (403) 870-2669 or fill out the form on this page.