30 Mar
Buying a home for the first time can be an exciting as well as nerve-wracking experience because borrowers have to find the right place to purchase a house and also have to find an appropriate mortgage. With the low supply of houses in the current housing market and the rising prices of houses, searching for an affordable house can be become a challenge.
Many home-buyers are under perception that if they have been approved for a mortgage, then they are good to go. However, before finalizing the mortgage application of the borrower, lenders, in majority of the cases, will run a final credit report check to ensure that nothing has changed. Changes to the credit score and its usage can impact the type of mortgage they qualify for and whether they would obtain a mortgage or not. Here are some tips to avoid these common mistakes.
Not Keeping Tabs on Your Credit
Before applying for a mortgage, it is imperative that you keep tabs on your credit history and the overall credit score. Having a history of late payments, debt collection actions, or having significant debts can considerably affect your credit history. This results in mortgage lenders providing an offer that is less-than-ideal that has higher interest rates and less favorable terms. Furthermore, in some cases, they might simply deny the application from the beginning.
In order to tackle such an issue, it is recommended to check your credit report each year, which you can do directly with Equiax or TransUnions without negatively impacting your credit score. You can also take measures to ensure to keep your credit score high so that it does not affect your credit history.
Searching for Homes Before Getting Pre-Approved
Before searching for the perfect home, it is highly recommended to obtain mortgage pre-qualification and mortgage pre-approval. This is because in hot markets, such as the current housing situation of Canada, youâll be up against multiple bids and stiff competition. Those buyers who do not have a pre-approval letter or a mortgage pre-qualification have less chances of purchasing their perfect home. By having a pre-approval letter from a lender, it depicts to the seller that the lender has done its due diligence in ensuring that you have the means and motivation to repay your bills.
In competitive markets, sellers will not consider the offer of buyers who do not have a mortgage pre-approval letter due to the fact that the said document lists the amount of loan that you have been qualified for, the interest rate and the loan program, and the estimated down payment amount.
Not Saving for Down Payment
When purchasing home for the first-time, buyers should make significant efforts to ensure that they have ample funds for a down payment. This is because down payment is a critical part of homeownership and a useful financial tool that should be utilised by the purchaser when purchasing a home. The benefit of having funds for a down payment is that it reduces the overall amount you require and increases the amount of equity right from the start.
Down payments also indicate that you are serious for purchasing a house and in Canada, the minimum down payment is 5% (with mortgage insurance), however, the recommended value is having 20% down payment.
Opening (or Closing) Lines of Credit
It is imperative to note that you can still be denied mortgage even after being approved for one. This is because mortgage lenders check your credit during pre-approval and then again after closing, before they give the borrower the final green light. It is recommended for you to maintain your status quo within your credit and finances. This means that you should not open a new line of credit or close out an existing one because this will lower your credit score and will increase the debt-to-income ratio, and both are important reasons for the lender to deny your final approval.
