Mortgage Basics

Mortgage Basics

A mortgage is a home loan secured by real property, commonly referred to as real estate. It is basically a contract that includes rights and obligations of both parties. A mortgage is often one of the most important financial transactions in one’s life. Here are a few things you should know about mortgages.

 

What Happens If I don’t Pay the mortgage?

 

Unfortunately no one really wants to ask this question, but I’ll address this elephant in the room. If you don’t pay your mortgage in Canada the lender will generally start a power of sale process. This is a legal process that requires the lender to take control of the property through the court system. It is very important to note that the lender does not take ownership of the property.

 

How much does the bank calculate how much I can afford?

 

Lenders all use two different type of ratios, the first is called GDS. GDS (Gross Debt Service) is a calculation that uses the total of you property cost, interest, taxes, and heating and condo fees (if any). According to CMHC this amount may go up to 39% of your monthly income. TDS or total debt service is GDS plus other obligations (such as line of credits, car loans, etc). According to CMHC this amount can go as high as 44% of your total monthly income.

 

Mortgage Rate Hold and what it means

 

To put it simply, it is when you call a lender or mortgage broker and they hold the rate for you. It is important to note that this is not a pre-approval. This is just a simple rate hold and there are no documents required. A pre-approval for a mortgage consists of a mortgage application and a credit check, as well as some supporting documents. Once the mortgage lender is satisfied they will give you a written confirmation of your rate and possibly your price range.

 

I have an approval, what are the next steps?

 

Your main job is to keep everything the same once you have that approval. Make sure you keep your credit cards close to paid off as possible, as the lender can check your credit. The lender may even check your employment, just to double check that you haven’t been let go recently.

How Your Credit Score Can Affect Your Mortgage Rates

A strong credit score and a reasonable debt ratio are equally important when it comes to getting the best mortgage rate and terms.

 

Your credit score is a number between 300 and 900. A credit score above 700 means you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A strong credit profile and reasonable debt to equity ratio are both important factors if you want the best mortgage rate and terms.

 

People tend to focus on their credit score, as it is an important factor, however lenders do not stop there. lenders look at many factors when they consider an application for approval. They review your credit scores, the property that you are looking to purchase and your source of down payment just to name a few. It is not necessarily whether one is more important than the other, as it is dependent on all factors considered.

 

The lender wants to know that you make enough money each month to cover your bills and expenses.  Of course, the above ratios and limits are only guidelines. Still, to keep your credit score in a healthy place, consider the following four factors:  

  1. Pay your bills on time
  2. Keep your credit utilization under 60%
  3. Have a mix of loans and credit cards if possible
  4. Limit the amount of credit inquires you have. If you don’t need it, don’t apply for it!

A great credit score will be beneficial  when it comes to mortgage rates.  So great credit utilization is a key Let’s use an example. Say you have a credit card with a limit of $10,000 on it. You want to keep what you borrow to less than 60% of that limit or no more than $6,000 at any one time.

 

The key here is to use two to three credit vehicles (credit cards or loans). These help build your credit history, which is something most lenders want to see. When using these credit vehicles, make sure to not extend your credit utilization over 60% on each line of credit or loan.

 

Some helpful tips to help improve your credit score:

  • Establish a long credit history. Try not to cancel your oldest credit card, even if you rarely use it. The longer the credit history you have, the better
  • Always pay your bills on time and always pay at least the minimum payment as requested.
  • Note that checking your own credit score will not affect your credit