Essential Knowledge Series
If you've ever searched for a home in Canada, you know it can be a difficult process. Most people who give up their search are often deterred from searching again because they can't seem to find a home they can afford. Sometimes, the real estate market in your area is out of your control but sometimes, it's your own decisions that can hold you back.
The following information will give you 5 ways you can increase your approval amount and relieve the stress of never being able to purchase your own home.
Pay off debts that have large monthly payments
Look at homes with lower property taxes/condo fees
Look at homes with the ability to rent a basement/separate unit
Increase your credit score
Create a more consistent income
1. Pay off debts with large monthly payments
This might be one of the most important, if not the most important piece of information in this article. When you apply for a mortgage, your mortgage agent will determine your income and complete a credit check. With these two factors, the agent will then calculate what are known as your debt servicing ratios.
In short, lenders don't want your mortgage payment, plus home costs (property taxes, heating, condo fees) to exceed 39% of your gross annual income. In addition, the lenders don't want your total debts (home costs plus any other debt payments) to exceed 44% of your gross annual income.
Let's run through an example.
Bob is looking for a home. Bob makes a gross income of $52,000 per year. Bob has a car payment of $400 per month, a line of credit payment of $100 and home costs including the mortgage payment of $1900.
$52,000 per year is approximately $4,333.33 per month. We then have to divide the total debt payments by the monthly income to determine the second ratio.
$1,900 + 400 + 100 / $4,333.33 = 0.5538 or 55.38%. 55.38% > 44%.
Let's see what happens when that car payment and line of credit are paid off.
$1,900 / $4,333.33 = 0.4384 or 43.84%. 43.84% < 44%.
Being under that 44% threshold is going to help you tremendously with lender approval. I know what you're thinking. If I have large debts, how am I going to come up with the money to pay them off? A great question.
The first option is the most obvious answer which is to use any of your savings outside of your emergency fund to pay down the debts. If you can't do this, the next best thing is to set up a plan to pay down the debts over time. One thing that is very important to remember - when it comes to being approved for a mortgage, always pay off the debts with the highest monthly payments first. It will help you increase your approval amount more than smaller debt payments.
The second option is to use some of your down payment to pay off the debts. Of course, you'd rather have your down payment go to the purchase, but sometimes it makes sense to pay off a debt with a large monthly payment. That is for the agent you are working with to figure out.
2. Look at homes with lower property taxes/condo fees
This option is definitely something you can take advantage of if you don't have specific preferences for where you are looking to purchase. If you don't mind moving to areas with lower property taxes and or lower condo fees, it could help you increase your approval amount significantly. Sometimes, the property taxes and monthly condo fees are the only barriers between you and being able to purchase a home.
3. Look at homes with the ability to rent a basement/separate unit
When you apply for a home loan, the income you currently have is what will determine your approval. When it comes to a home you are looking to live in, there are times when you can take advantage of partial rental income. In these instances, look for homes where there is a basement apartment, in-law suite etc.
Something to note about this is that you can't claim rental income for rent that isn't coming from a separate unit. For example, if you are purchasing a 3-bedroom home, you can't rent out two of the bedrooms and claim that as an income. You will have to look at properties with a completely separate unit for your home appraisal to give a market rent analysis. Additional rental income can make a huge difference in your approval amount.
4. Increase your credit score
This is one of the easiest variables to change and is directly in your control. Some lenders are willing to give a higher approval amount and stretch their limits for borrowers with higher credit scores.
If you don't know how to increase your score and maintain it, we are going to have a guide coming out in the following weeks to help increase your score to 750 and above.
5. Create a more consistent income
I included this point even though it is much easier said than done. If it was easy to increase or create a more consistent income with ease, everyone would do it. What I want to point out is that if you are looking to purchase a home in the next 3-5 years, try your best to at least get into a full-time position.
We often see applicants apply for mortgages as part-time employees with full-time hours. Although that is fantastic for the person making the money, lenders generally give a more difficult time to part-time individuals when it comes to mortgage financing. In addition, they might not take all of your income or scrutinize your income more in-depth. Try your best to take advantage of any opportunities that come your way and this can significantly help your approval amount.
When it comes to purchasing a home, a lot of these tips will take some hard work and determination. Knowing that, I will leave you with this quote, "Work and you’ll get what you need; work harder and you’ll get what you want".
Questions/Comments?
Give us a shout in the comment section or find our contact details on the main page of our website at www.triedandtruemortgages.ca
Comments