Mortgage is a dreaded word for most people. For some, it might sound like a pair of shackles brattling. However, mortgage is a modern invention that makes buying a house affordable to almost anyone. Back in the 20th century only the wealthiest was able to buy a house because they were the only ones who were able to pay greater amounts upfront in cash. Not many people have the means to do that these days, either; and that is why mortgages were invented. But how can you know whether you qualify for a mortgage? Let’s see where you will have to start.
What Is a Mortgage?
In a nutshell, a mortgage is a loan that you usually receive from the bank to buy a home. Naturally, there is an interest on this loan that is added to your monthly repayment (the principal). There are fixed rate mortgages and variable rate mortgages. It’s up to you which one you choose; with a fixed rate mortgage you will be paying the same interest rate during your term of payment. A variable rate mortgage can go up and down. If you don’t mind paying sometimes more, sometimes less toward your real estate mortgage, choose this option.
How Can You Qualify for a Mortgage?
What are the conditions to get a mortgage? You must be financially stable by having a steady employment history. Depending on your income and the chosen home’s property value; you must be able to afford the house on the long run. The lenders will also look at your credit history and the amount of down payment you have.
Having a steady, reasonable income is one of the most important factors when qualifying for a mortgage. Lenders usually require a confirmation letter from your company along with a paystub showing your base salary and commissions or bonuses. They will also require the last two year’s Notice of Assessment forms from the CRA. These are the notices that you receive each year after filing your taxes.
The greater down payment you can put down, the better your chances are to qualify for a mortgage. The minimum down payment is 5% in Canada. However, if you are able to show at least 20%, then you will be able to avoid having to pay mortgage insurance premiums. There are options today for mortgages without down payments; however you will still have to put some cash down for your real estate purchase deposit and for closing costs. The usual is 1.5% of the purchase price.
Those people who have been good with their money and never applied for credit cards may have a hard time showing an acceptable credit history. If you do not have a credit history, and you want to buy a house and qualify for a mortgage in the near future, it’s advisable to have at least two credit cards. Keep the balances under your limits and make the minimum payments each month.
Your credit report will be issued by credit bureaus. It will contain information about your credit grantors and how long it takes you to pay this money back. If you are applying for an insured mortgage, then the minimum credit score requirement is 600+.
Another important factor in qualifying for a mortgage can be your overall debt obligations. The total amount cannot exceed 42%. Debt servicing includes all credit cards, car payments, credit lines and other mortgage payments. As long as you still have these obligations, you will only qualify for lower mortgages.
Naturally, the lenders want to know that the property you are buying is worth the money. In case you fail to make your payments, they want to be sure that they will be able to sell the house fast and easy. A property appraisal will have to be conducted which will involve a physical inspection of the home, as well. The better condition it is in and the better the location is, the better your chances will be to qualify for a mortgage.