HOW A BANK DECIDES TO GIVE YOU A MORTGAGE
From the bank’s perspective, your mortgage is an investment. To minimize the risk of this investment, the bank looks at your employment history, income, assets, debts, down payment and credit history, then determines how much money they will lend you. Certain formulas are used to ensure that, after paying your student loans, car payments, credit card balances, strata fees, property taxes, etc., you will still have enough left over to cover your monthly payment.
Mortgage lenders rely on the five C’s of credit:
- Character This subjective opinion is based on your employment, education, business experience, length of time at current residence, etc. Much of this information is drawn from your application so it helps to be as detailed as possible.
- Capital The size of down payment carries a lot of weight in deciding how much money will be lent. Obviously, the more money the borrower personally invests in the property, the less likely they are to default on the loan.
- Capacity Your income and debts are evaluated to determine whether you can repay the loan. Keep in mind that for self-employed, overtime or commissioned jobs, banks have different standards for calculating your income. If you did well selling widgets last year and made $90K, but only $60K the year previous, chances are you won’t be able to use $90K as your income.
- Credit Your credit/repayment history is reviewed to see how you’ve handled previous debts. I recommend checking your credit annually as often clients don’t realize they’re in trouble until it’s too late. This can be done safely from sites like www.equifax.ca.
- Collateral The property you plan to buy is the security for the loan. Lenders prefer to deal with properties that are easily marketable should the mortgage go into default. These days, former grow ops or leaky condos, for example, are extremely difficult to obtain financing for through traditional means.
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