Three Secrets to Getting Your Mortgage
The ABSOLUTE most expensive purchases an someone will make in their lifetime is usually a house. How houses were acquired in the past was either inheritance or, like after World War 2, people would pay cash to avoid the high interest rates. Today if someone wanted to own a home they are less likely to inherit it or work for decades to save hundreds of thousands of dollars. They are going to get a Mortgage. Mortgages are the most popular way to purchase a home in the 21st century. The three secrets to getting a mortgage is good standing credit, a minimum deposit, and a source of income.
Secret number One: Good credit can sometimes seem elusive and even magical at times; how is good credit developed? What increases credit? Does checking my credit score really lower it? Without getting into the science of building a great credit report, it is absolutely possible to understand, control, and increase your credit score. Credit is determined by one’s ability to obtain, use, and pay back monies borrowed from someone else. In future articles we will talk about what makes up a credit score, who keeps score, what different types of credit there are, and how credit is rated. Credit score is like a bouncer of what kind of money is available, anything below a 680 score the bouncer says “come back when the score is higher,” and when the score is above 680 the bouncer allows entry level access. Mortgage hinge on the 680 score mark heavily, however there are two other pillars that can be utilized.
Secret number Two: Warren Buffet popularized the saying “skin in the game” in reference to having one’s own money in an investment. That’s exactly what lenders are looking for when lending money. No lender is going to give money scot free; there must be some commitment on the borrower’s part. Having a deposit shows that the person isn’t as willing to walk away from the investment, especially if they have their skin in the game. The government understands it can be difficult to get thousands of dollars together for a home, that’s why there is a first-time home buyers incentive. Regularly 20% is needed for a down payment, but the government only asks for 5% for new homeowners. On a home that is $400,000, instead of putting up $80,000 to purchase a home, only $20,000 is required. This way for the typical buyer with a dual income home, each person is putting aside only $10,000.
Secret number Three: The final requirement for obtaining a mortgage is income. The importance of income has grown tremendously since the recession in 2008. In Ontario there have been stress tests implemented to ensure that people have the proper cash flow to withstand a financial crisis if it hits again. Each lender will have their own income requirements to lend money out. The general rule that can be followed is that the mortgage amount should be no greater than a person's household income for four years. So if a household has an income of $100,000 per year, the mortgage amount should not be greater than $400,000. If the down payment is $20,000, the house price in this scenario will be in the range of $420,000.
Conclusion: The three secrets of getting your mortgage are: good credit, adequate down payment, and consistent income. As one building block is stacked onto another, week by week, month by month, and year over year, creating wealth through homeownership is the smart man’s way to financial freedom in life. Purchasing a first home is the hardest part, once over that hump, with diligent management, a second home, a larger home, or a rental house seems that much more attainable for the personal economic engine to roar.