You’re excited about finally turning your home ownership dream into a reality. But you’re slightly concerned about taking out a mortgage.
The reality is, research shows that the average home loan amount among Canadians is upwards of $350,000 — a record amount compared with past years. So, before you take the plunge into home ownership, it’s critical that you are prepared for the massive financial responsibility associated with it.
Here’s a rundown of six factors to consider before taking out a mortgage this year.
Let’s jump in!
1. A Mortgage Should Fit Your Household Budget
Perhaps you dream of having a home with a backyard swimming pool or plenty of acreage for doing outdoor activities. Do some research to see if your dream house fits within your budget.
If you can’t find your dream home in your budget, then you’ll likely need to adjust your expectations for your future home. As a general rule, you shouldn’t be spending 40% or more of your household’s gross income on your house payment.
2. Getting a Mortgage Requires Paperwork
If you’re about to embark on the process of getting a mortgage, be prepared to do an extensive amount of paperwork.
To speed up the paperwork process, collect your financial documents as soon as possible. The majority of lenders will want to see your latest pay stubs along with tax filings from the past couple of years. You may also have to submit bank statements from the past 2-3 months.
If you have made any major withdrawals or deposits, be prepared to provide supporting documents regarding these transactions.
Your prospective mortgage lender will review all of your paperwork to determine if you are a good fit for a home loan based on your financial situation. In addition, if you plan to have a co-signer on your loan, they will need to submit the same types of documents.
3. A Higher Credit Score and Job Stability Will Help You
One of the first things lenders will look at to determine your eligibility for a home loan is your credit score.
Your lender will let you know what credit score they require to give you a loan. However, credit scores that are close to the 700 mark will usually get you the best loan interest rates.
To increase your credit score, you can pay down outstanding debts. These include personal loans and credit card debt.
Also, try to avoid opening a new credit card account, as this can lower your score as well. You may also want to avoid activities that will require you to undergo credit checks, as these checks can impact your credit score, too. Examples include switching your cell phone carrier.
Also, try to maintain stable employment during the mortgage application process. Even simply changing your employer might make your lender nervous, so don’t switch jobs or careers until after you’re in your new home.
4. Don’t Make Financial Changes While the Bank Is Finalizing Your Mortgage
Let’s say that your lender is working on finalizing your home mortgage. Avoid the temptation to start financing items like furniture for the new abode.
During the mortgage finalizing process, your lender will be keeping an eye on your credit situation, and taking out a new loan may cause your credit score to dip. This may end up jeopardizing your chance of receiving a mortgage.
Also, avoid making hefty deposits or withdrawals during the mortgage finalizing stage. Lenders generally want their clients’ bank accounts to remain stable. Only after you’ve closed and secured your new home’s keys should you begin to make any major financial changes.
5. You Need to Pay 20% Down to Save on Your Monthly Payment
If you’re able to save a minimum of 20% of your new home cost, this will help you in a couple of ways.
First, this size of down payment will lead to a smaller mortgage, which translates to a smaller monthly payment long term. It also means you’ll pay less in interest over your loan’s life.
Second, when you don’t pay 20% down, you will have to pay what’s called private mortgage insurance, or PMI. PMI is usually a very small percentage of your home loan.
This insurance is designed to cover your lender in the event that you quit making your payments and thus default on the loan. Your PMI is added to your monthly mortgage payment.
However, you may ask for the insurance to be removed once you have paid off the majority of your mortgage. Speak with your lender about when you can do this.
6. Mortgage Preapproval Is Different from Mortgage Prequalification
If your potential lender tells you that you are prequalified for a mortgage, they will let you know what you’re able to borrow.
Meanwhile, if you are preapproved for a mortgage, this means that the lender has assessed your financial situation carefully. As a result, they’ll give you a more accurate picture of what you can borrow. They’ll also be able to tell you how much you’ll likely pay in interest.
Mortgage prequalification generally comes before mortgage preapproval. However, both processes may take place before you pinpoint the home you wish to buy.
Keep in mind that preapproval does not guarantee that you will receive a mortgage. However, if you maintain the same financial situation during your house buying journey, you’ll likely have no problem with getting one.
How We Can Help
Taking out a mortgage can be an exciting experience, as it means you’re on the path to owning your own home. However, it’s critical that you consider factors like your credit score, your budget, and your down payment goal before going through the process of pursuing a loan.
If you need extra cash while planning for home ownership, we at Kingcash can help. We offer speedy cash loans that are easy to qualify for in a pinch. Contact us to find out more about our simple loan process and get funded today!