November 18, 2011
Be Ready With Pre-Approval
Are you about to approach your bank for a mortgage? Here are some helpful tips so you can be prepared.
BY KEVIN LUTZ
A pre-approved mortgage puts incredible power in your hands. You’ll know how much home you can afford and how much your payments will be so you won’t waste time looking at homes that are out of your reach. You will also lock in your interest rate for a minimum of 120 days, protecting yourself in case of a rise in rates, and if rates go down, you get the lower rate. You will be ready to make an offer when you find the home you want and when you do make an offer, the seller and realtor will take it seriously, knowing you have solid financial backing.
1. TAKE THE FIRST STEP… GET PRE-APPROVED:
You are under no obligation when getting pre-approved for a mortgage. It is important, however, that you are prepared before meeting with your mortgage specialist, as you will discuss your financial strategy and needs, mortgage amount, down payment, purchase price, etc. You will learn about the various mortgage options (fixed vs. variable rate, interest terms, payment options, amortization, etc.) and receive advice as to which of the options best suit your needs. You will need to provide details and documents for items such as employment, income, assets, down payment and liabilities. As well, you will give permission to obtain a credit bureau report. The amount of your mortgage primarily depends on two things – your income and your down payment. Starting with income, lenders qualify you using two standard ratios:
2. CRUNCH YOUR OWN MORTGAGE NUMBERS:
Gross Debt Service Ratio (GDS). Generally, no more than 32 per cent of your gross annual income should go to “mortgage expenses” such as principal, interest, property taxes and heating costs (plus maintenance fees for condo mortgages). Total Debt Service Ratio (TDS). TDS evaluates the gross annual income needed for all debt payments including mortgage, credit cards, personal loans, car loans, etc. TDS payments should not exceed 40 per cent of your gross annual income. The combined incomes for you and your spouse are usually considered when determining this ratio. Armed with this information, you can crunch your own numbers before applying for a mortgage or your lender can do it for you when you get pre-approved. However, assessing your income can be tricky sometimes, so consult with your mortgage specialist to be certain.
3. CRUNCH YOUR OWNMORTGAGE NUMBERS:
The down payment is that portion of the purchase price you furnish yourself and is a minimum of five per cent. The balance you need to buy your home is obtained from a financial institution in the form of a mortgage. The amount of the down payment which represents your financial stake or the equity in your new home should be determined well before you start house hunting. If your down payment is 20 per cent or more of the home’s purchase price, you can apply for a conventional mortgage. With an insured mortgage (i.e., your down payment is less than 20 per cent), you require mortgage default insurance from a provider, which your bank will arrange. These premiums can be paid up front or added to the mortgage. No matter what the size of your down payment, reserve some funds to cover your home inspection, closing costs, moving and other potential expenses.