Mortgage lenders view six factors when evaluating applications

Does applying for a mortgage seem too complicated? Knowing how your application will be evaluated will better equip you to evaluate your financial strengths and weaknesses. Having all your documentations ready will make the approval process much quicker and easier.

Lenders look at six factors when evaluating an application your identity, your income, debts, employment history, credit history, and the value of the property.

YOUR IDENTITY

In order to protect against mortgage fraud, the lender or their lawyer will require picture identification to ensure you are the individual you represent yourself to be. In addition, you may be asked questions regarding your credit history to verify information on record at the credit bureaus.

YOUR INCOME

The lender will measure your income level against the amount of the mortgage payments, property taxes and condo fees, to decide whether you can comfortably afford a home. Your lender will compare your current housing expenses to the expenses you’ll have if you buy a home. The smaller the increase, the stronger your application looks. Usually a guideline of 30 per cent of your pre tax income is used to determine your maximum payment level.

YOUR DEBTS

The lender will look at your debts, including your anticipated house payments, as well as all loans, credit cards, child support and any other payments that you make each month. The ratio of the payments on these debts to your gross monthly income results in a total debt service ratio. The generally accepted total debt service ratio for all housing and other obligations is 42 per cent of your pre tax income.

YOUR EMPLOYMENT HISTORY

Mortgage lenders are more likely to lend money readily to people who have a history of steady employment. You will need to provide a letter or pay stub from your employer and the lender may further verify your employment by contacting your employer. If you are self employed or have been at your job less than two years, they may ask for other documentation, such as business financial statements or federal income tax returns.

YOUR CREDIT HISTORY

Good credit is very important in qualifying for a loan. A mortgage lender will look at your credit record to see how well you’ve paid your loans and other debts in the past. If you’ve never had a loan or credit card, you can still demonstrate a good record by showing timely payments of utility bills and rent. It’s a smart idea to review your own credit report and score before applying for a loan. For a small fee, a credit bureau will provide an instantaneous, complete online credit report and credit score that details your current debts and payment history. They also detail what your score level means, how you compare to others, and provide tips to improve your score. You also may receive tour credit report (without the credit score) by mail for free by contacting the credit bureau.

THE PROPERTY’S VALUE

When purchasing a property, you should be comfortable that the price you are paying is reasonable and will be acceptable to the lender. You can usually confirm the value is reasonable by obtaining an appraisal from an accredited appraisal professional or from the Realtor who is representing you in the purchase. Some purchasers may also obtain a property inspection to confirm the property’s condition and identify any items that may require repairs.

Lenders also tend to evaluate your application against the following guideline:

• A housing expense ratio no greater that 35 per cent (the lower the ratio, the better)
• A debt-to-income ratio for all debts no greater than 42 per cent (the lower the ratio, the better)
• The home buyer has steady income ideally, the same job for two years or longer
• The home buyer had good credit (bills have been paid on time)
• The house is worth the price the buyer is paying

Always be an informed client.

For more information contact your Toronto Mortgage Broker at 416-920-9931