8 Things To Avoid When Getting a Mortgage

Whether you're refinancing an existing mortgage, or getting a HELOC (home equity line of credit), or getting a new mortgage, keep the following 8 points firmly in mind. It will make the mortgage process easier for you. This goes for everyone  included (or even potentially included) in the mortgage application.


Don’t apply for new credit: You might think it would be useful to get a new credit card or two, especially one from a furniture store or a home improvement chain--after all, you are buying (or refinancing a mortgage on) a new home, and more credit can come in handy. But don't do this! When you apply for credit, your credit score actually takes a small hit; it lowers roughly 5 to 10 points. Every credit inquiry lowers your credit score. This makes it harder for you to get a conventional mortgage (as opposed to a private mortgage, for which the lenders usually pay less attention on your credit score). Even if you are approved for new credit, a potential mortgage lender will see this and may be concerned that you will quickly max out this new credit source, and then default on it, which could then cascade into defaults on your other credit sources, including your mortgage. In short, applying for new credit sends the wrong message to mortgage lenders. The message you want to send them is: "I am in control of my credit and my ability to pay back what I owe, and all I need is this mortgage, nothing more."


Don’t close any existing credit accounts: Maybe you are thinking that now is the time to get your finances in proper order. That is true - now is always the time to get your finances in order! But don't close unused credit accounts (which lowers your credit score), and don't transfer all the debt from one credit source to another (such as, to a credit card account with a low-interest balance-transfer offer). Transfers like these offset your "credit balance." Transfers like these make one (or more) sources of credit fully used, and another (or others) unused. You want your credit usage to be spread out among your credit sources. Otherwise you lose credit points. Just wait until your mortgage closing is complete before you make these debt manoeuvres.


Don’t shift your money around without a solid paper trail: Your mortgage lender is going to need your most recent bank statements before the mortgage can be closed (completed, funded). Therefore, if you have any unusual deposits then you're going to have to provide complete documentation of where those deposits (the money) comes from. If possible, move the cash you need for your home purchase into one bank account before you even apply for the mortgage. If you can't do this, then at least make sure you have complete records (and as detailed as possible) at hand.


Don’t increase your debts: Your credit score is a critical factor in getting most mortgage types. But in addition to that, another critical factor is your debt-to-income ratio. This is a snapshot of how much debt you have compared with how much income you have. If you increase your debts, then you put yourself in danger of exceeding the maximum acceptable debt-to-income ratio. There are actually two ratios that lenders use: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). Mortgage lenders use these formulas to determine exactly how much money they will to lend you. The Gross Debt Service Ratio is the percentage of your income needed to pay all of your monthly housing costs (which includes PITH: the mortgage's Principal, its Interest, Property taxes, and Heat). If you have condo fees, then you must include 50% of those too. The Total Debt Service Ratio is the percentage of your income needed to cover all your housing costs and debts. It uses the same formula as the GDS calculation, except that you add all of your monthly debts (such as payments on loans, car payments, credit card interest payments, alimony, child support, etc.) on top of your monthly housing costs. So how do you know whether you have too much debt? It's simple: for most mortgage borrowers with decent credit and consistent income, the maximum ratios are 39% (for GDS) and 44% (for TDS). Note that these ratios are actually above the industry guidelines (the affordability rules of the Canada Mortgage and Housing Corporation [CMHC]) which are 35% (for GDS) and 42% (for TDS).


Don’t make any late payments and especially don't miss any payments: One of the biggest factors that make up your credit score is your history of making punctual (on-time), complete (in-full) payments of what you owe at a given time. Sometimes, when people are getting a mortgage, they have so much going on (like preparing to move, or dealing with other issues) that they accidentally forget to pay some bills. Make it easy on yourself. Make a list of all your bills, and all their amounts and due dates, and try to pay them a week in advance if possible. Write all this down in your calendar (or whatever you use to organize your life). Mortgage lenders favour people who make their payments on everyday bills on time (or early).


Don’t buy a car:  I agree that a new car (even a new used-car) goes well with a new home, but let's be practical (and patient)! Buying a new car (or anything major, for that matter) will diminish your savings, your cash reserves, your cash on hand. Moreover, if you take on more debt (such as a car loan), that can kill your chances of getting a mortgage at the best rates. So remember this, even if you can easily afford a new car, wait until the mortgage is closed (and, if you're purchasing a home, wait until you have moved in to your new home) before getting a new car or making any major purchase.


Don’t change jobs if you can help it: Job security these days usually means having skills that allow you to quickly change jobs throughout your career. Changing jobs often means earning more money. But while you're applying for mortgage, avoid changing jobs if you can. Most mortgage lenders prefer you to be employed at the same company or organization for at least two years. The mortgage lender will have to verify your employment and will also need to review your paystubs in order to prove your new income before your mortgage can be closed (funded). Changing jobs can disrupt this process. The assumption is that the longer you hold a certain job, the more likely you will continue to be employed, uninterrupted (and earning the same or greater income, which means you'll be able to keep paying the mortgage). In most cases it's best to avoid changing jobs if you can.


Don’t spend your savings, keep them handy: Most people underestimate how much money they'll need on hand to buy a home. You're going to need cash at the mortgage closing (for your down payment, for example) as well as other closing costs. Often, mortgage lenders will verify your cash reserves just before closing, to make sure the money is there and the mortgage will be closed (funded) without any hiccups. If you're going to spend money or make any special purchases, do this after the mortgage is closed. Keep your cash handy and keep it in one place, ideally in one bank account.

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