Home Financing Made Easy – Part 3

Buying a home –  finding it, financing it, insuring it, and all the other steps involved – isn’t a simple process.

Helping you understand that process is part of my job as a mortgage broker, and this blog brings you info you need in bite-size pieces.  So my last few blogs have been in a series format, detailing the professionals you’ll work with through the process.  The next series describes how the home financing process works, again in smaller chunks to make it a clear, easy-to-understand process.

The third in this seven-part series looks at improving your odds of getting a mortgage.

Warning: it is longer than my usual blog, but the importance of this advice can’t be minimized.

Improving your ability to get a mortgage

Preparation is often the key to maximizing your leverage when seeking mortgage financing. Lenders focus on three main criteria when evaluating an application: credit, collateral and cash flow. We share some of the secrets that will help you when dealing with lenders.

Credit

Your personal credit score will determine your ability to obtain the best rates in the marketplace. Your higher credit score lowers your interest rate. Your score is determined by a number of factors, including your payment history, amount of your credit balances compared to the limits, length of credit history, number of inquiries on your report, and types of credit in use.

Payment history

The best strategy to improve your payment history is to pay all credit facilities on time every month. Each time you are late or miss a payment it is noted in your report and is detrimental to your score. Better to make even a token payment if you do not have the funds to pay off the balance or make the minimum payment due. If you are current in your accounts, your report will reflect a R1 or I1 rating. R9 or I9 indicates you are in severe arrears, probably in collection and/or approaching bankruptcy. Although a prior bankruptcy noted in your report or other negative information, such as judgments or liens, will not necessarily preclude you from future mortgage financing, a subsequent history of slow payments makes obtaining a mortgage more difficult. The last two years of your credit history will be given greater consideration.

Amount of your credit balances compared to the limits

If you are planning on shopping for a mortgage, your best strategy is to pay off all outstanding credit balances and not use your credit for about 45 days prior to your search. This will provide enough time for your balances to clear the system. All outstanding credit is counted against your ability to service a new mortgage. The logic is that if you need the money to pay off current debt, you won’t have these same funds available to pay off a mortgage. If you cannot pay off the outstanding balances your next best strategy is to pay them down to at least 60% of the credit limit. Lenders are nervous when they see credit facilities at the maximum. For example, if you have for example two equal credit cards, one which you use frequently and one that you rarely use, transfer half of your outstanding balance to the unused card, so both balances are at approximately 50 percent of the credit limit.

Length of your credit history

The longer you have demonstrated the ability to manage your credit, the higher your score.

Number of inquiries on your report

Frequent requests for credit are often an indication of problems in terms of need or in terms of being turned down by previous lenders. One of the advantages of using a mortgage broker to assist in financing, beyond superior rates, is that a broker will only pull your credit report once. They have the ability to shop the market without the extra ‘hits’ to your credit score, which you would incur if you shopped bank to bank.

Types of credit in use

Credit lines that are unused are of no value. The more you demonstrate the ability to manage your debt the better your score. We recommend establishing a minimum of three credit lines, consisting of credit cards, lines of credit, or term loans, such as auto payments. Any or all are acceptable.

Credit scoring is handled in Canada by two credit reporting agencies. To obtain a free copy of your credit history by mail, contact the credit bureaus below by phone or online. If you wish to download your credit report online a $15 to $25 fee will apply.

Equifax – 1-800-465-7166, www.equifax.ca

Trans Union – 1-866-525-0262, www.transunion.ca

I’d be happy to answer questions you may have regarding the purchase of a home or on how best to finance the purchase: 519-649-2502 Ext 3 or bruce_smith@centum.ca.