The troubled times we experienced in 2020 were anything but troubling for the real estate market–after the March to June lull, at least. The housing market has boomed, rising prices reflecting that boom.
The same urges that have prompted homeowners to move up, are prompting renters to enter the market. But mortgages are increasingly difficult to qualify for, in part a product of this pandemic-fueled boom.
The inability of many to qualify for a mortgage is pushing rent-2-own demand like never before. The flip of the calendar has not changed things, and likely won’t for some time.
This post starts a series to help us all understand better what is required to get a mortgage. Today, we’ll address the basic question: What are the banks looking for, to qualify for a mortgage? It is elementary, but sets the stage for more detailed posts to follow.
The answer really boils down to another question: Can we trust the borrower to pay back the loan (a mortgage is simply a particular kind of loan)? Put yourself into their position; that’s what you’d want to know, too.
Of course, that question cannot be answered with 100% certainty; lenders can only consider the probability that the borrower will pay back the funds on schedule. That probability will have to be very high for them to agree to loan you money at a very low rate.
To assess that risk, the banks consider three subsidiary questions:
- Does the applicant have a good track record of meeting their financial obligations?
Two credit bureaus, TransUnion and Equifax, have been established to track your personal behaviour with regard to your financial responsibilities. Most financial obligations you enter into: credit cards, car loans, retail loans, financial contracts (like cell phone contracts), and various other financial obligations are reported monthly. In addition, any delinquencies in your financial obligations, such as late payments, collections, judgements, loan consolidations, etc. are reported.
Combining all the data, the bureaus compute a composite score for you. That score gives a general rating of how responsible you have shown yourself to be in the past and portend how likely you are to be responsible in the future.
I sometimes hear people say, “I must have good credit because I have no loans or credit cards; I always pay everything in cash.” Wrong! If you have not accessed credit before, it does not mean you have good credit, it means you have no credit. You will need to begin building a credit track record, and have at least two years of history before you will have enough data for any lender to approve you.
The composite score isn’t the only thing, though. Lenders also look at the nature of the various accounts (revolving credit such as credit cards, for instance, are better than car loans, and they’re better than cell phone contracts); whether you have outstanding collections; whether you have ever been late with your payments, and how recent those late payments are; and how large an amount of credit you have previously been able to handle responsibly.
- Can the applicant afford the monthly payback schedule?
Your mortgage payment will not be your only expense. A lender will want to be sure you can handle all your monthly expenses, plus the mortgage payment. Will they be shorted if you’re short of funds at the end of the month?
The bank will confirm the amount you earn, and assess whether it is sufficient to cover your mortgage payment plus all other expenses. The lender will only approve you for an amount that they deem affordable. In fact, it is not even their sole decision; for mortgages of 80% value or greater, it is regulated by the federal government through its crown corporation, CMHC.
So, it doesn’t matter whether you think you can afford it. It depends almost entirely on the formula passed down to the lenders by the feds.
Practically, this means you will qualify for a total mortgage amount ‘X’ times your gross annual income.
- How secure is the applicant’s ability to repay the loan?
The lender wants to know not only whether you can afford the payment now but whether you can maintain that throughout the typical three- or five-year term of the mortgage.
To ascertain this, they want to know what kind of employment you have and how secure it is for the foreseeable future. Lenders love union and government jobs because they know they are really secure and wages will likely never go down. They have a lot of trouble with incomes that are uncertain or variable. Self-employment falls into that category, as does commission income and new employment.
The covid pandemic has, justifiably, increased lenders’ concerns over job security, so this criterion is being more heavily scrutinized. CERB doesn’t count as income; and if you left your job to collect CERB, your employment track record may need to start over. Due to this increased concern, lenders may require a longer track record of security than they used to, as well.
Future posts will examine these questions in more detail.
If you don’t qualify now for a mortgage, a rent-2-own plan may be right for you. It might be a good fit if:
- your credit score and file needs to be repaired before you will qualify,
- you haven’t yet established a credit file,
- you currently have some, but not enough (10%), down payment,
- you want guidance and assistance with reaching mortgage eligibility status,
- you want to lock in your future purchase price now,
- you have too much other debt that needs to be taken care of to get under maximum debt allowance,
- you need time to establish a more secure work situation,
- you are a new immigrant and haven’t yet had enough time to build up a track record.
If any of the above applies, you will want to visit our website and begin the process of exploring whether rent 2 own is a good fit for you.