Searching for a suitable home is just a piece of the puzzle among others. And to bring those pieces together, getting a mortgage is essential.
But before you worry about the responsibility of paying a monthly mortgage, there’s a question that must be addressed first: Are you qualified to get a mortgage?
Now let’s rewind your life and think of how you’ve managed your finances in the past; Are you frugal? Do you set aside a portion of your income to savings? Do you still have outstanding debts? Are you able to pay your bills and dues on time?
These can all add up to your financial capacity and standing today.
To better prepare you for what lies ahead in your mortgage journey, ask yourself these 5 important questions:
1. How much is your budget?
Knowing your budget gives you a view on how much you can afford for a property. Of course, setting this would mean looking for a house that’s within your capabilities to pay.
Also, determining if your income is enough to cover all your expenses with the addition of a home loan is very necessary.
The best way to analyze everything is by creating a monthly budget. You don’t need a financial expert to do this – just list the following items in an Excel file to start (put down what’s applicable to your circumstances):
- Car loan
- Utility bills (water, electricity, gas)
- Cable, phone, internet
- Credit card dues/other debts
- Add other payables not mentioned above.
2. How much is your income?
Lenders will certainly look at your monthly salary and other income sources to make sure you’re capable of fulfilling your obligations. Aside from that, they’ll also investigate how long you’ve been at your current company because that’ll give them an idea of your future cash flow.
After knowing your income, compare it with your expenses. Check if your monthly numbers are consistent; if not, check the variations and you’ll have a number that can tell you if you’re able to qualify to purchase a home.
So, if you have a higher debt load, strategize on how you can reduce it before you partake in a new loan in the form of a mortgage.
3. What does your credit history look like?
Your credit history tells your lender your ability to pay your bills and other expenses on time. This is important because qualifying a borrower is a risk for them too.
Lenders will look at your credit history, ranging from six months to two years or more to look at your financial behavior. It’s like making large purchases and not making your minimum payments on time. Or worse yet, being blacklisted by the financial institution for not paying your dues.
If you’ve been having difficulty making payments, your chances of being approved are minimal.
As the responsible person that you are, you should already have an idea of what your credit report will look like. Regardless, it’s a good idea to check your credit report periodically. You can click here to access Equifax for your credit report.
It’s possible to achieve a debt-free life that would help you to become mortgage-free faster. Read this article to further help you: Your Pickering Financial Advisor Suggests a Debt-Free Life.
4. Can you afford the down payment?
The down payment is very crucial because it starts the process of homeownership. Once secured, that’s a sign that you’re ready and capable for the long-term commitment of a home loan.
There are options to pay as low as 5% down payment for a property. But remember, the lower your down payment is, the higher your monthly mortgage payments will be. Your mortgage consists of principal + interest rates.
Moreover, it’s recommended to have an additional 2% to 4% set aside for fees such as closing costs, legal, appraisal, taxes, etc.
5. What type of property is the mortgage for?
Lenders are more attentive; if you settle on an abode for personal use, that’s great. However, if you’re looking to purchase a property for investment (rental, commercial development, etc.), they’re more careful.
Why? Because getting real estate as an investment involves much higher and bigger risks. As mentioned before, you must qualify based on your cash, credit and income.
Additionally, the location plays a role because different areas have different prices.
Don’t be discouraged on the items that you’re not sure of yet; if you’re having some qualms regarding your budget or income, the best way is to adjust.
If your dream home or investment property is above your budget, you can use this time to earn additional income or limit yourself to a home that you can afford.
It’s a lot! I know. Let it all sink in. The best way to handle everything is to have a helping hand to guide you through the process, especially when you have questions. A trusted Mortgage Broker & Financial Security Advisor can be of big help 😉
Just a tip though, your broker should have more than 5 questions than mentioned above.
Daisy Raouph, CLU, CHS, specializes in mortgage financing solutions and financial services. A Mortgage Broker and Financial Security Advisor with over 30 years of experience in financial services. Contact us today to review your mortgage financing options. We can help!