Wednesday 26 February 2020

How to Qualify for a Good Mortgage Rate in 7 Quick Steps

Vancouver-Realtor-Carmen-Leal

If you don't know the details to getting a better mortgage rate, this article is for you.

Getting the best mortgage rate on your home makes a huge difference in affordability and financial comfort. It can save you hundreds or cost you thousands, depending on what you receive as a rate. There are things you can start doing now that will help qualify you for a reasonable mortgage rate when the time comes to buy your home.

Although rates change frequently, you can check out current Mortgage Rates in Canada here and BC's rates here.

1. Know What Your Credit Score is

Everyone has heard of credit. The good, bad and the ugly truths. But without a good credit score, you may be in for not only not getting approval, but if you do, you may be left with a high-interest rate, making your home just out of reach for you.

What is a good credit score anyway? In Canada, “credit scores range anywhere from 300-900. It is recommended that borrowers have a minimum credit score of 700 at the time of approval, in order to qualify for a mortgage under $1,000,000.”

Don't despair if your credit score isn't quite up to snuff! There are things you can do to improve your number. Things like paying down or paying off other loans, making sure all past-due collection accounts are payed-off and staying up to date on all monthly payments. Another often overlooked area is your credit report. Sometimes there are errors or things not recorded properly that are hindering your score. Request a report and clean up any errors you discover. Increasing your score can be as easy as correcting those errors.

2. Gather your tax return from the last two years

Lenders prefer those clients who can prove they have a steady income and employment for at least two years. Being able to show income statements or income tax returns for the past two to three years is ideal. Long periods with no income or just newly acquired jobs do not reflect stability from a lenders' point of view.

There are other things you need to consider if you are self-employed or a small business owner. But in a nutshell, you should have a job letter, stubs, T4 for the latest 2 years for salaried, and T1 from the last 2 years for BFS i.e. self-employed.

3. The Higher the Down Payment the Better

Technically, you only need a down payment of five per cent for mortgage amounts up to $500,000 and 10 per cent for the amount that exceeds $500,000. However, the more down payment you can provide, the better the mortgage rate you might get. Mortgages tend to be allocated based on risk factors. The less money you put down, the more significant the risk.

Keep in mind, if you have a down payment of more than 20 per cent you won't have to purchase mortgage insurance. Just another tip to save money!

4. Debt to Income Ratio

Okay. Your credit score is good. Your income is stable. You have a mountain of debt. Oops. This situation could affect your interest rate. Heck, it may affect you getting approval at all. Even if you have the income, if you have too much debt, then your ability to pay your new mortgage loan comes into question. Debt-to-Income Ratio or DTI comes in two forms. One, it measures the total of all your monthly debt payments, plus your new mortgage payment, divided by your stable monthly gross income. Traditionally, lenders tend to want this ratio at no more than 30 per cent. Second, it focuses on your housing costs, excluding all other debts. Historically, lenders want to see this at no more than 28 per cent. This percentage can vary depending on the type of mortgage or other factors. It is important to note that lenders can request much higher ratios.

5. Fixed-Rate Vs Variable Rate

When considering your loan type, you need to decide what level of risk you wish to take and how long you plan to stay in your home. A variable-rate means the interest rate will fluctuate during the pre-determined term of the loan. Variable rates offered are usually prime, the best rates offered by banks to their best clients. Fixed means the interest rate stays the same for the term. They offer security and stability.

There are benefits to both. To help determine which suits your situation best, check out our article on the topic.

6. Amortization

The duration of your mortgage will also make a difference. Whether you stretch the loan over 30 years or you have a plan to pay it off in 15 years, your rate may be affected. To choose which is right for you, check out our article on the topic.

According to the Government of Canada, the amortization period is the length of time it takes to pay off a mortgage in full. The longer the amortization period, the lower your payments will be. Keep in mind that the longer you choose to pay off your mortgage, the more you'll pay in interest.

If your down payment is less than 20 per cent of the purchase price of your home, the most extended amortization you are allowed is 25 years.

7. What if Interest Rates Rise?

It is essential to protect yourself if interest rates start to go up. Especially if you are in an open mortgage or variable rate. Ask your lender if it offers:

an interest rate cap: a maximum interest rate your lender can charge on a mortgage. You'll never have to pay more in interest than the maximum cap, even if the interest rates rise

a convertibility feature: where, at any time during your term, you can convert or change your mortgage to a fixed interest rate *

Extra Tips

Shop Around

You are shopping around for the mortgage planner that knows their stuff and can best advise you on the steps to find the best mortgage rate. Also, they can educate you on being a mortgage consumer.

Cash Reserves

Make sure you have enough money in the bank after closing to cover your new mortgage payment for the next 60 days. That is the principal, interest, taxes, and insurance. If you are qualifying for a higher risk mortgage, you may be required to have higher cash reserves.

Note that if you choose a convertibility feature and adjust your mortgage to a fixed interest rate:

you'll usually have to pay a fee

certain conditions may apply

your new fixed interest rate may be higher than the variable interest rate you've

* source: Financial Consumer Agency

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Are you interested in selling or buying your home in the next few months? Work with award winning realtor, Carmen Leal and her team that specialize in Real Estate Vancouver and have qualified Buyers that are looking for a home in your area! 604.218.4846 & www.carmenleal.ca

Vancouver-Realtor-Carmen-Leal

This communication is not intended to induce breach of existing listing agreement.

Monday 24 February 2020

How to Qualify for a Mortgage as a Self-Employed or Small Business Owner

Vancouver-Realtor-Carmen-Leal

Navigating the world of mortgage approval without a pay-stub

In 2018, there were 2.9 million self-employed Canadians, accounting for 15 per cent of the total workforce. In 2017, Small business owners in Canada accounted for 97.9 per cent of entire employer businesses or 1.15 million. Those numbers continue to rise. Self-employed and small business owners can deduct certain business expenses; they can keep more of what they earn. Pretty attractive gig, would you think?

Unfortunately, the fortune runs dry when applying for a mortgage. If small businesses are thriving, making an income, having a bright future, why is it so difficult for lenders to hand over a mortgage loan?

Those who are self-employed or own a small business have the opportunity to claim or write off many business expenses against their income. So their taxable income looks much less on paper, reducing the amount of taxes they pay.

By lowering their taxable income by maximizing business expenses and personal deductions, they may be limiting their mortgage potential. There is a discrepancy between what's on their tax return and how much money they earn.

What Do You Need When Applying For A Mortgage

The earlier in the home buying process as possible, consult a Mortgage Broker or Specialist. Knowing what you will need to produce upfront will decrease the feeling of frustration and disappointment down the road. For an in-depth look at the different stages of the mortgage approval process, you may want to check our previous blog.

Homebuyers are required to contribute a 10 per cent down payment on the portion of the price of a home above $500,000, plus 5 per cent on the amount up to that amount. The average small business owner's salary in 2019 was $66,373, according to PayScale data. Eighty-three per cent of small business owners take an annual salary of less than $100,000, and 30 per cent report they take no pay at all. With this in mind, it is crucial not to overextend yourself – so you have adequate income to qualify for a mortgage and also to ensure you have money to reinvest in your business.

You will have to show two to three years' notice of assessments for reliable proof of income.

If you are new to the self-employed scene or just opened your business, you will have to produce other evidence of income.

You may want to consider completing a statement of income. A Stated Income or grossing up your income to qualify for a mortgage is an option with some lenders. You should be able to show the extra income you are claiming to make in retained earnings in the company or your investments.

If you are taking the Stated Income route, remember to stay reasonable in your declaration of income. Your lender will look at an average salary for someone of similar experience and occupation.

So, for example, as a plumber, you say you make $100,000, but the average self-employed plumber only makes $75,000, the lender is going to want to know why there is such a discrepancy. You also cannot be stating your income higher than the gross business income.

There are three mortgage insurance companies to consider: Canada Mortgage and Housing Corporation, Canada Guaranty, and Genworth Canada. Genworth is the only one currently taking Stated Income as an option as an unverified income.

And remember, being self-employed can mean tax savings, which should be taken into account when offered a higher rate. It is often more advantageous in the long run to accept a higher rate mortgage than paying additional income tax.

Be Pro-Active

The bottom line: Best rates are for those who are income-qualified and are reporting their income. To ensure the best possible success, and possibly the best interest rate, make sure you have your ducks in a row when meeting with your mortgage professional. Here are things you should put on your must-have list:

Accountant-prepared business financial statements for the last two years (particularly crucial if you are incorporated)
Business license documentation
Accountant-prepared personal T1 general tax returns
Most recent and possibly the previous three years' Notice of Assessment and proof that taxes are up-to-date. Owing taxes can do more damage than anything else. If you owe, pay off immediately.
Corporate bank statements illustrating current cashflow. These statements are not necessary, but it is a great document to have handy.
Bank statements showing regular income for the past six months or longer.
Be ready to discuss your business. Things like income, business expenses, and specific milestones will be among the topics addressed.

Are You a Sole Proprietor or Are You Incorporated?

Depending on your credit, and the way your business is registered, some lenders may add between 15 and 20 per cent to your total income as a way of "adding back some expenses." If you are incorporated and have verifiable income, some financial institutions can gross-up your income by as much as 15 per cent. If you are issuing a T4 to yourself as an employee of your company, the lender will use whatever salary you are reporting.

If you are a proprietor, many lenders will look at your statement of business activities and things you may have written off, such as the depreciation on a work vehicle. Those things may be added back in as income or at least taken into consideration and averaged out in terms of your previous income.

These tips are not exhaustive of everything your lender might ask from you.

Lenders usually take each case individually. They do not want to find a reason to turn you down. They want things to work out if it makes sense. Take your time to prepare your materials, save for your down payment, and consult a mortgage broker or banker as early in the process as possible, and you will find yourself in your dream home before you know it.

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Are you interested in selling or buying your home in the next few months? Work with award winning realtor, Carmen Leal and her team that specialize in Real Estate Vancouver and have qualified Buyers that are looking for a home in your area! 604.218.4846 & www.carmenleal.ca