Economy & Mood

Recently I encountered a stark reality in the mortgage business.  I reviewed in June 2011, the profile of a couple who came to me for a mortgage.  Their situation was quite financially weak, which made them unable to get a mortgage approval at that time.  There was a gifted downpayment, a serious past credit issue, and generally limited credit scores. 

I suggested that they wait at least a few months before buying.  This advice was based on the advice of the lenders and the insurers who make the ultimate decision if a person can qualify or not.  Again, they first came to me in June, and this September they returned.  What they didn’t know was that the industry has changed.

The lenders and insurers moods have changed due to the economy:  Greece is near bankruptcy and unemployment has not improved in North America.  Those same lenders who were encouraging in June changed their minds and became discouraging in September.  The emotional part for me is, I based my advice on June’s predictions, when I encouraged the couple their deal might work.  Guess who is the bad guy now?

 I feel for people whose deals fall through, but thankfully, that doesn’t happen very often.  However, the mortgage industry is forever changing, and seems to be changing more rapidly every day.  This is not a good thing for people with poor credit and weak finances.

How to Qualify for a Mortgage

-A Three Part Tutorial

While getting a mortgage can seem like an overwhelming task, there are a few simple factors to aid in qualifying that if you practice now, will ensure smooth sailing once you decide to purchase your home.  Three main factors are required to qualify for a mortgage:

1. Credit

2. Income to Debt Ratios

3. Net Worth

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Part One: CREDIT  

No active credit means no credit score, which means no normal mortgage.  There are some basic credit requirements to get a mortgage:  First, establish credit (minimum of one year) and prove sound payment history.  Second, seek a credit limit of $2000.00 or more.  If you start with a $500.00 limit, after 6-12 months request to increase the limit.  The lender wants to see if you can handle the temptation of a larger limit; however, the best practice is to stay below 80% of limit and make payments prior to the monthly due date. 

Note: All lenders have individual credit requirements.  Some require three sources of credit to get a mortgage.

In the following days this week I will discuss parts 2 and 3: Income to Debt Ratios and Net Worth. 

Happy house hunting!

Update on Tuesday, November 2, 2010 at 1:02PM by Bryan Slaney

Part Two: INCOME & DEBT RATIOS

There are two different sections within Part Two, Employment Income and Income to Debt Ratios.

Employment Income:

A person must have a steady and reliable income.  Employment and “pension” type income is fine.  The basic rule is that current employment must be a minimum of 1 year (but can be less if a person remains in the same occupation and has passed the employment probation period with current employment.)  Pension is a little different. It is an approved source of income, if it is considered permanent. 

Income to Debt Ratio:

Based on employment income, the amount a person can qualify for depends on income verses current debt, plus what the new mortgage, property taxes and heating will cost.  Ratios must be within a certain balance in order to qualify.  For more explanation, please feel free to contact me. 

Update on Thursday, November 4, 2010 at 8:52AM by Bryan Slaney

Part Three: NET WORTH

The Net Worth factor is where a lender has an opportunity to evaluate a person(s) profile.  Of course, net worth is positive if your possessions (assets) are greater than your debts (liabilities).  The opposite is considered a negative net worth.   Obviously, the lender is more likely to approve those with a positive profile. 

In many ways the best strategy is always to buy when you appear in control.  For example, you may have an excellent income but you posses four credit cards, an auto loan, a personal line of credit and a student loan.  You may be making all payments, but you “look” out of control.  The debts may also incur a negative net worth because employment income is not considered an asset.  

When trying to qualify for a mortgage, my advice is to seek out a professional mortgage broker, such as myself, to discuss your situation before buying.  A bank will not be so helpful, and do not provide options if initially rejected.   However, I have multiple lender options, so if you do have a lower credit score, we can still try several options to get you a mortgage. 

After doing an application, I will be able to tell you your credit score, if your ratios work, and if your net worth is high enough to qualify for the maximum mortgage to get the home you desire.  You can fill out an application online today! (See above: “Apply Now!”).

I hope this information in three parts has become a helpful tool and a reminder to keep a solid credit score by always making payments on time, and keeping debt to a minimum.