It’s no secret that taking on a mortgage is a major financial commitment, probably the biggest one of your life. There are lots of ways to make mistakes with that mortgage, mistakes you’ll have to live with for a long time. Here are some ways to get it right.
Avoid qualifying on a “maxed allowance”
When pre-qualifying for a mortgage, avoid a lender’s offer to give you the maximum amount of money for which you are qualified, an amount known as a “maxed allowance.” Here’s why.
Mortgage qualifying takes into account mortgage payments, property taxes, heat, current debts (for example, a car loan), and Canada Mortgage and Housing Corporation fees (if applicable). What it doesn’t include are your lifestyle, home maintenance costs, emergencies, and other expenses. That’s why I want all clients to have a budget already planned out before approaching a lender.
For example, if you want to head to the ski hill every weekend, you’re going to have to budget so you also have enough in an emergency fund for unexpected expenses like a new hot water tank or furnace repair.
Falling in love with a home based on a “max allowance” gets old really quickly if you become house poor and have to change your whole life. Plus, keep in mind that, despite the recent bump, interest rates are still at historic lows and will eventually climb higher.
My advice to clients is to approach a payment schedule based on worst-case scenarios. For example, what happens if your income does not increase during your first mortgage term but interest rates climb one, two or three per cent?
As they say, hope for the best but prepare for the worst.
Check your credit rating
Borrowell.ca provides your credit score for free, but the Equifax credit scores that lenders look at in some circumstances are usually less generous. You want to be above 680 at Equifax to get the best interest rate. If you are under 680, your mortgage professional should be able to outline a plan to get you above.
If you score lower than expected, there could be debt collections you might not know about, or maybe your credit card was not cancelled correctly and there is still money owing on it. All things you need to know before you find the home of your dreams!
Prepare documentation early
This is one of my main suggestions. You need to forward all employment and down payment documentation to your mortgage professional before you find your home. Let them ensure the lender will accept the documents and figure out what your options are if lenders won’t accept the documents. Rules are always changing for those home buyers who are still on job probation, are self-employed, or work part time or on commission.
Related: Six steps to survive rising mortgage rates.
Mortgage brokers deal with 15-30 different lenders, and they all have different payment structures. Make sure your mortgage professional is not just placing you with a product that lines their own pocket book. And don’t forget to look at all the options including shorter mortgage terms and variable versus fixed-rate plans.
Rely on professionals
Do your research to find professionals you can trust and USE THEM! These professionals (lawyer, mortgage professionals and Realtors) are there to help. They shouldn’t make you feel pressured or be too busy to answer questions. Relying on Google or “Uncle Joe” can leave your head spinning, which is why you need to rely on professionals who have the experience and the passion to guide you through the mortgage and home buying process.
These five tips won’t prevent every mortgage problem, but they can make the process go much more smoothly at a stressful time in your life.
Originally published July 14, 2017