Are you hoping a mortgage broker can help you out with your home financing needs, but afraid that they wont be able to do anything for you? With the current economic crisis affecting millions over people all around the globe, there are scores of homeowners who feel unsure with regards to applying for a mortgage and those living in Canada are no exception.
Interestingly enough though, if you want to renew your existing mortgage, or even if you want to apply for a new one, while it may sound strange, there couldn't be a better time than the present. Of course, this does also depend on whether or not you manage your finances properly and whether or not you have a good credit history.
Unfortunately, with regards to lenders, there's a lot of false information going around. Perhaps the most misleading bit of information is that it's virtually impossible to get finance in Canada at the moment. While there may be a measure of truth in this with regards to our American neighbors, Canadian money lenders on the other hand are desperately seeking out new business. In fact, they are going to great lengths in order get your business and provide you with a mortgage, hence the reason why mortgage rates in Canada are at an all time low.
How exactly should you go about securing a low rate mortgage?
One great start is seeing a mortgage broker in your local area. They are local and they can walk you through the whole process. As you go to meet your mortgage broker it is important to have a basic understanding of the mortgage process and of course, if you have an idea as to how the bank thinks, then that's an added bonus. One thing I noticed while working in the financial industry is that the vast majority of Canadians don't really understand how banks operate.
Essentially, banks view lending you money primarily as an investment in much the same way you see putting your money to the bank as an investment. Of course, when you search f or an ideal investment opportunity, you try to find one which offers the best return for your money. Of course, you also need to manage the risk that you could lose your money and as a result, you're sometimes prepared to trade lower investment returns in exchange for less risk.
Just like when you invest, banks are in the business of investing their money to make money. Banks, however invest most of their money in the form of mortgages and loans to individuals and companies. Right now because of what has been going on in the global economy, the large banks don't want to take on high risk investments so they are willing to trade lower returns for safer investments. What that means to you is that if you look like a safe investment to a bank, you are going to get an amazing deal on your rates. On the other hand, if you don't look like a safe investment, then good luck getting a loan.
What can you do in order to look like a safe investment?
All Canadian banks are looking for people with demonstrated "financial maturity" are the p roven past ability to manage their money and finances and not take on too much debt. Here are the five key factors they take into consideration to see if you have proven financial maturity: your credit history, Income, existing debt, savings and security.
Lenders in other countries probably follow similar lending processes to the Canadian banks, and with the Canadian banks faring so well compared to their peers through the current debt crisis, more countries will likely model the Canadian system going forward, so it pays to know what Canadian lender look at.
Your Credit History:
Banks want to know how long you've had credit for, whether it's a mortgage, credit cards or some other form of loan. Contrary to what some people believe, the longer your credit history, the better. Likewise, having open long-term accounts also plays in your favor providing they are in good standing, just as it's good to have closed accounts that were settled in full.
Income:
Of course, it's only understandable that banks want to be sure you're in a position to pay back the money they lend you, together with interest. Generally speaking, banks like to see that you've been working with the same employer for a reasonable amount of time although of course, they will also consider loan applications based on other forms of income such as if you're self-employed or if you receive income from investments. However, you will be required to provide proof that your income is not only regular, but that it's also sustainable. If you're employed, banks will often accept your pay slips as proof of income but if you're self-employed, you'll need to show tax returns.
Existing debt:
Remember, irrespective of how good your credit history is, or how much you earn each month, if you're unable to meet the monthly repayments, no bank will grant you a loan. In other words, if you already have what the banks consider too much debt, they'll decline your application. For the most part, Canadian banks will not grant you a lo an if your total debt repayments exceed 40% of your gross income.
Savings:
When banks consider 'savings' they are considering your overall net worth, which includes all of your assets and investments, both fixed assets like your home, and cash-able assets like a mutual fund investment. People who save/invest a portion of their income regularly are more likely to show the qualities of financial maturity that will make them a low risk investment to the banks. Savings also gives you the borrower a cushion to fall back on if you land on hard times so that you can still make your payments even if something happens and you are off work for a while. In general for an uncured loan or line of credit they will be looking to see if you have twice the positive net worth of the loan amount you are requesting. So if you want a line of credit for $5000, you should have a positive net worth of at least $10,000.
Security:
Another question which banks ask is what happe ns if you stop making payments? In order to protect themselves agains t such an eventuality, they will more often than not ask for some form of security. The type of security they require will of course depend largely on the sort of loan you're applying for, as well as the first three points listed above. On the other hand, if you apply for a mortgage to buy a home, the home itself will often be required as security, unless of course you have other property or real estate.
Be Prepared:
In order to make your experience getting a loan as stress free as possible, here are a few tips to help you prepare:
Ask for your credit report from the 2 major credit bureaus in Canada (Equifax.ca and TransUnion.ca), federal law in Canada mandates that you can get your credit report from both companies once per year for free, but since they both send the report by postal mail, make sure you ask for it early. If there is a problem, call the bureau to find out what you need to do to fix it Make sure you are saving some of your income on a monthly and regular basis, a good way to do this is to set up an automatic savings program with your bank to take 10% right off the top of your pay cheque automatically every time you get paid. As a side note: if you can't afford to save 10% of every pay cheque then there is a good chance that your bank will tell you that you can't afford the loan payments. List out on paper all of your assets List out on paper all of your debts and the monthly payments (including rent if you rent) Get paper proof of all your income (pay stubs, tax returns, etc When you have all these things together, bring them all into your bank or mortgage broker, since this covers what most banks ask for as part of the mortgage lending process, they will be able to look it over quickly. This speeds up the approval process for your loan, and also allows them to give you pointers if they can't approve you at this time.
Remember, if the bank says no, they are just saying "not now" so keep saving and making all your payments on time, and maybe you can try again in 12 to 18 months.
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