Renting to Owning
Ready to Make the Leap From Renting to Owning? Consider this very important first step!
The two most important words to remember when deciding to become a homeowner are “Mortgage Pre-approval”. We cannot stress the importance of the first step in the home-buying process: getting pre-approved. Completing this important first step will enable you to determine what your maximum purchase amount is to help steer you towards the best home for you.
The key factors in determining your eligibility are: credit score, employment stability, debt-to-income ratios, and net worth. Let’s break these down to better understand how they relate to your mortgage pre-approval.
Credit Score. This score is provided by one of Canada’s two credit reporting agencies:TransUnion or Equifax. Your credit score is a direct reflection of your credit behaviour and will ideally be compiled from a minimum of two years of credit history. A score of 680 or higher is considered a strong credit rating. Even if you don’t have this high a rating, there are many lenders who are willing to assist you with your mortgage based on other criteria such as your work history, assets, and more.
Employment Stability. This refers to how long you have been with your current employer and your industry tenure. Even if you are self-employed, the length of time that you have been in your industry is an important factor in determining your employment stability and can go a long way to increasing your pre-approval rating.
Debt-to-Income Ratios. How much you earn and how much you spend are important factors in your ability to qualify for a certain mortgage level. There are two qualification ratios used to calculate the amount of mortgage financing you qualify for. These ratios are referred to as Total Debt Service Ratio (TDSR) and Gross Debt Service Ratio (GDSR). The TDSR will take into account your current monthly debt obligation and the amount of mortgage financing you are requesting. Ideally, this ratio should be no more than 42 per cent of your gross income. The GDSR will calculate the amount of mortgage financing you can comfortably carry in relation to your gross income. This ratio should be no more than of 35 per cent of your gross income and will include only Mortgage Principal, interest, property tax, utilities and condo fees if applicable. (Special lending programs may allow for higher ratio limits).
Net Worth. This number reflects the current value of your personal assets less your total amount of debt. It reflects your personal financial value on a given date. This number is important in determining your financial character. It’s a snapshot of your past financial behavior in relation to savings and debt accumulation. It will help to determine if you have the required 5 per cent down payment as well as the amount of liquid assets available should you encounter a financial setback. (There may be flexible down payment options available if you do not have the required 5 per cent down payment, subject to qualification).
The pre-approval process is quick and easy and will allow you to search for your ideal home with confidence. Even if many of your eligibility factors are not ideal, working with a mortgage broker who has access to a wide-range of lending options can be helpful at this stage in your home-ownership plans.