Four Pillars of a mortgage application
There are four main pillars of any mortgage application, they are as follows;
- Clean Credit
- Income
- Equity (Down payment amount)
- Subject property (the quality of)
I have listed these in order of easiest to control, to more difficult. Although all are key items, within the first three listed superior strength in two areas can compensate for a deficit in one of the others. #4 – The property itself is more of a stand-alone item.
A brief synopsis on each;
1.Clean Credit
This is arguably the one pillar that you yourself have the most direct control over, you do not need to work 80 hour workweeks to push the score higher, you do not need to focus on saving every penny, it is 100% within your control to have strong and stellar credit, here is how;
- Keep at least 3 active trade lines with limits (not balances) greater than $2,500.00
- Never ever miss a minimum payment
- Do not run the balance past 75% of the total available credit and NEVER exceed the credit limit.
Very simple stuff. Keep it that way, do not apply for every card you see, keep the same cards for decades, and think long and hard about co-signing anything for anybody ever. I see siblings ruining the others credit standing over cell phone bills, children ruining their Mothers credit with bad car loans, etc. Avoid co-signing whenever possible.
Remember that ICBC reports on your credit bureau, as do municipalities. Pay your traffic tickets, bylaw infractions, etc.
Log in to www.equifax.ca and check your credit score annually at the least, twice a year is better. Is there an outstanding collection? Deal with it immediately, and by that I mean pay it and then argue to get your money back. Do not leave on your bureau for 6 months dragging your credit score down. Once fixed it will still take months to recover.
Is there an R9 on there? Once it is 6 years old it can be removed from the credit report. Request that this be done if possible.
Got a credit card that you have had ten years and hardly use? Keep it. It takes 12 years history with the same specific card in good standing to crack 800 and enter that top 2% tier of quality credit.
2. Income
In this case we are talking about your income as indicated on line 150 of your CRA Notice of Assessment (NOA). The bank likes to see the most recent two years CRA NOA’s and they will typically use the average of the two most recent years as your definitive income.
Often as a salaried or hourly employee all that is required is a current job letter and you most recent paystub, however if you are relying on Overtime income we need those NOA’s to support it for the past two years.
If your sole source of income is pension or rental property income, this is another story altogether.
If you own your own company, we still want the NOA’s as we need to show that there are no taxes owing to CRA, however in your case the actual line 150 income can be compensated for by #3 – Equity…Actually this is no longer the case. As a ‘self-employed’ individual your personal line 150 income and what it specifically is composed of has never been under such scrutiny as it is now. Be prepared to supply account prepared T1 General Tax returns. (Do not ever file your own taxes – huge mistake) Read more on the changes regarding being the Boss here; https://dustanwoodhouse.ca/a-good-read-for-self-employed-andor-real-estate-investors-andor-accountants
3. Equity
Equity is your cash for down payment, or the remaining value in your home when we subtract the target mortgage amount from the value. Although you can technically still purchase with Zero down, if you are not able to show documented income to support the mortgage request then the Equity requirement jumps to 20%, 25%, 35%, or 50% depending on the lender, your credit score, and the overall scenario.
20% is always a good target as this keeps you out of the Mortgage Insurers world, i.e. CMHC, CG, & Genworth. Their premiums can be excessive to say the least.
Equity is a key pillar when either #1 or #2 is weak. Although it plays far less of a role as of late. Documented income has never been so important.
4. Subject Property
The appearance and condition of your property on the day the appraiser arrives matter. Go the distance for your refinance, as if you are having your new partners Mother over to dine for the very first time.
Do not order your own appraisal, most lenders choose a specific appraiser and will not use the report you just paid several hundred dollars for…besides I am covering the cost of your appraisal anyways. This is another area where there are a few different ways to make things happen. Several lenders use automated online valuation tools and your Mortgage Broker will know how best to navigate this process for you.
In the case of an investment property a live appraiser is sent to the property 100% of the time. In a province with an estimated 40,000 indoor ‘farms’ this is not hard to understand.
On this note, this is specifically the sort of thing that a lender will have a major issue with, perhaps as a surprise to you. One more reason every purchase transaction should contact a subject relating to obtaining a satisfactory appraisal.
In Conclusion;
With a strong 2 our of the first 3 we can almost always make the financing work, there is always a way …so I used to say, prior to the Spring of 2012. As of the Fall of 2012, it is in fact far more difficult if you are struggling in any one of the first three areas. Credit standards have increased, Down payment conditions have become more stringent, and the focus on documented income is bordering on extreme as compared to what it once was.
Retired folks have arguably been hit the hardest by the demise of Equity based lending, and the rise of income focused lending. OAS and CPP do not count, and often pension income is a challenge to get signed off. Gone are the days of quality credit and significant equity in a property guaranteeing an approval. Accessing the equity contained in a retired individuals home has become significantly more expensive to access, and far more difficult.
Things are always changing, currently the trend is not your friend. You need to be squeaky clean so polish up that credit score, work those extra shifts, do not get aggressive with the expense claims, avoid dividend income, and save every penny you can towards the down payment.
Most importantly; talk to your broker about your scenario and make sure you know where you stand in this brave new world the Government has created for us.
Thanks for your time.