Mortgage Qualification

Mortgage qualification is not an exact science, which is why it is so important to deal with a Mortgage Planner that understands the intricacies of the process.  Each lender can have different qualification processes based on their guidelines as well as your unique situation. In most cases the lender will do everything they can to get you approved, however they must protect their investment by analyzing over-all risk.  Typically we see 4 major areas of a file that are scrutinized, each of these areas will be supported by documentation provided to the lender.  Not every client is asked for the same documentation and not every lender treats the details the same.

Understanding your credit bureau

This 3 digit number may be the most important number in your life.  Your credit score ranges from 300 to 900 and may be the single largest risk factor the lender will evaluate.  Your credit bureau tells the lender what your payment history looks like, including past delinquencies, and derogatory behavior. It will also indicate how much credit you need to carry on day-to-day life, any current credit conditions that need to be repaired, in addition to many other factors.  Put simply, this 3 digit number can determine if you get approved, what your rate is, and who your lender is.  Your Axis Mortgage planner will analyze your credit score and indicate what it means for your qualification.

Poor credit is not something to hide from, it is something to tackle head on and try to repair.  The fact is poor credit does not go away, or at least not quickly. Most credit (good or bad) will remain visible on your bureau for up to seven years.  The fact that you may have past or current credit issues does not mean that you can’t be approved.  In today’s competitive mortgage landscape there are many lenders who specialize in products for credit challenged customers. It is important to understand the restrictions that may be placed on you as a result of credit risk.  It is also very important for you to be willing to work with your Axis Mortgage Planner to help repair your credit. A key step is to have the repair reported to the proper credit bureau agencies.

We know that customers may have credit issues for short time frames in life. Whether because of school, emergency, job loss, divorce, or other factors we will make the necessary arguments to the lender to convince them it was an isolated case and it will not be repeated.  The bottom line is, if you have had a short time frame in life where credit issues occurred don’t give up, we are likely to get you approved.

Ideally we like to see your credit score in the 630-650 as a minimum, 680 would be considered excellent credit.  If less than 630, remember we will have options.

Employment

The type of employment, length and position you hold will be a factor in determining your approval.  If you are paid salary and have worked consistently with the same employer or at least in the same industry the lender may look more favorably on your employment than if you are paid hourly, work inconsistent hours, and have moved from company to company or industry to industry. 

Similarly you may be restricted if you are self employed or commissioned.  Most self employed or commissioned employees are aggressive with their Revenue Canada tax deductions.  As a result their taxable income is often much lower than they actually make.  This taxable income is what lenders normally use to qualify you.  If you can prepare for this by starting to show more income you may end up with a better product and rate.

On the other hand, based on a larger down payment and good credit (680 beacon score) you may be rewarded for being self-employed.  In this scenario your Axis Mortgage planner may be able to attain an approval from a lender that allows you to “state” your income in order to qualify.  This will eliminate the problem of taxable income.  Most lenders require that you be self-employed for a minimum of 2 years in order to be eligible for this type of package.

Debt Service Ratios

We have already determined that your beacon score may be the most important number in the qualification process, however once we have determined you are credit worthy the debt service ratios become the most important thing in determining how much you can qualify for.  Debt service ratios are determined by your combined household (including cosigners or guarantors) income, and your combined household debt, which includes projected house related expenses.  Your credit score will determine what debt ratio guidelines we are able to use for your qualification.  A general rule of thumb is that your monthly housing expenses, which include the mortgage payment, property taxes, and heating costs can’t exceed 35% of your gross monthly income. In addition to these housing costs the lender will also add your monthly commitments to other debts such as car payments, credit card payments, or personal loans and that total amount can’t exceed 42% of your household income.

If you visit your bank they will look at your “potential” debt and use the estimated monthly payment on that potential debt to calculate your debt ratios.  At Axis Mortgage we look at your “actual” debt only, not the potential, this gives you a significant qualification advantage.  Example:  A $10 000 credit card at your bank will carry a $300/month payment regardless of what you owe.  If you only owe $4000 we will use a monthly payment of $120 to determine what you qualify for.  

Down Payment/Equity

Your ability to borrow may be directly influenced by how much down payment you have if you are purchasing a home or how much equity in the home if you are refinancing.  Less than 20% down/equity means that you are subject to default mortgage insurance.   This form of insurance is provided by CMHC, Genworth or Canada Guaranty and carries an expense to you. It is an insurance protection for lenders and is key to them being able to offer product with less than the 20% down payment threshold. There have been significant changes to insurer’s guidelines within the past months, making qualification for mortgages more difficult for some clients.  It is very important to contact us for up to date information.  It literally is changing monthly, what you believe to be true from a past experience is likely not the case any longer.

Down payment can come from many sources such as savings, RRSP, TFSA, and other investments, sale of goods, sale of home or gift from a family member.  At Axis Mortgage we are also able to offer unique forms of down payment such as borrowed funds and cash backs from lenders.  If you are concerned that you may not have the required down payment contact our office for clarification.