Your credit score and history is a key factor in receiving a mortgage approval. So, how is your score determined and what can you do to increase it.

Payment History:
Payment history accounts for the largest portion of the credit score at 35%. Late payments, and especially collections, have a negative impact on your credit score. And those late payments and/or delinquencies will remain on your bureau for 7 years so make sure you are paying on time.

Balance to Limit Ratios:

Your account balances also contribute to your credit score. You want to keep balances at or below 70% of the credit limit. Balances over this amount for extended periods will erode your score.

Length of Credit History

Think carefully before cancelling credit you’ve had for a long time, such as credit cards. The longer credit has been reporting, the better for your score as it shows well established credit patterns.

New Credit and Inquiries

New credit and many inquiries in a short period of time can decrease your score as it appears you are searching for more credit sources. Your credit will need to be checked if you are applying for a mortgage or financing. However, multiple checks for different types of credit are more concerning than multiple checks for the same type of financing, such as vehicle financing.

Type of Credit

Finally, having a balanced mix of different types of credit (credit cards, lines of credit, loans) will add more points to your score than having only one type of credit.

Checking your credit is an important part of the pre-approval process. It allows me to check for errors and provide advice, if needed, on improving your credit so you are in the best position possible to be approved for a mortgage.

By now you will have probably heard that the Finance Minister has made drastic changes to mortgage lending rules making it tougher to qualify for a mortgage. For Canadians with less than a 20% down payment, their purchasing power has been dramatically reduced. So what can you do if you want to purchase a home in the next few years? Below are five main points you will want to consider if home ownership is one of your financial goals.

First, however, let’s clarify the role of debt servicing in the mortgage approval process. There are two types of debt servicing ratios that lenders look at. The first is Gross Debt Servicing (GDS) and it includes the costs associated with housing – mortgage principal and interest payment, property taxes and heat. The second ratio is Total Debt Servicing (TDS) which includes all costs in the GDS plus all other outstanding debt. These ratios need to be below 39% for GDS and 44% for TDS. So let’s look at what you can do to qualify within these ratios.

1. Pay Down Debt. Balances on unsecured debt, such as credit cards and unsecured lines of credit affect your TDS ratio. Even if the GDS is in line, if your TDS is high, your maximum mortgage amount will be limited. All unsecured debt must be calculated at a 3% payment per month regardless of the actual payment required. For example, a $10,000 credit card balance equates to a $300 per month payment for debt servicing. High balances combined with other types of debt (i.e. car payments) will affect the maximum mortgage amount so pay them down.

2. Hold Off on that New Car. We all love that new car smell and dealerships make it very easy to purchase a new car. However, that car payment may make the difference between qualifying for a mortgage or not. If home ownership is a goal for you, then you need to understand how that car payment will affect your debt servicing ratios. Like unsecured debt, that car payment is calculated in your TDS.

3. Manage Your Credit as if it is Your Most Valuable Possession. Now, more than ever, good credit will be a key to home ownership. As the landscape of the mortgage world continues to change, credit will become a main focus of lenders when considering mortgage applications. Always make your payments on time, keep balances below 70% of your limit and maintain at least two types of credit with a two year history.

4. Save, Save, Save. Start saving now for that down payment. As mortgage guidelines tighten, the larger the down payment you have saved, the more options available to you. Gifted down payments from immediate family can also be considered as part of your down payment.

5. Start Claiming Income on Your Tax Returns. This sounds contrary to what most people would think as we all strive to pay less taxes. However, over the last several years lenders have been requiring proof of income based on your tax returns. The higher the income on the tax returns, the more income that can be used to qualify you for a mortgage. Income such as self-employed income, tips, overtime, etc. require a two year average in order to be used. If you want to purchase a home in the next few years, you may want to start claiming all income earned to maximize the mortgage amount you qualify for. Guidelines around self-employed income have been tightening up for a few years so there is no guarantee the programs available now will be available in the future.

As the government continues to tighten mortgage lending rules, it is more important than ever to ensure you work with a mortgage professional you trust who can guide you towards home ownership.

Refinancing your home to pay off high interest debt, such as credit cards, is an excellent option to consider. By refinancing, you can combine several payments into one, reducing your monthly expenses. As well, mortgage rates are much lower than standard credit card interest rates, saving you money on interest. This will also provide you with more cash flow on a monthly basis. 

Refinancing allows you to access up to 80% of the equity in your home. As home prices in the area increase, the equity available to you increases as well. Tapping into this equity may be the right option if you are struggling to meet your monthly obligations. It is a good idea to set a budget after refinancing to ensure your debt load remains low afterwards.

There are several considerations when refinancing, such as the amount of equity available, current mortgage amount, current mortgage rate (today’s rate may be lower) and potential penalties, if any with your current lender. It is important to review your specific situation to determine if refinancing your home is right for you.

Be your own boss!  Control your own destiny!  Freedom!  Self-employment often seems glamorous.  Shows like Dragon’s Den and Shark Tank promote the possibilities of self-employment.  While it has many perks, these come after years of hard work, sacrifice and even more hard work.

My husband and I have both been self-employed most of our working life.  As such, we have encountered many “perceptions” of what it is like to be self-employed.  This is intended to be light-hearted and hopefully give you a chuckle or two.  For those of you who are self-employed, you can probably relate to most of these at one time or another.

Perception:  You have the freedom to decide how much and when you work.

Reality:  Yes.  You decide if you want to work 14 or 16 hour days, at home, at the office, on the weekends and on vacation.  Most likely, all of the above.

Perception:  You can delegate the jobs you don’t like to do.

Reality:  Absolutely.  Except you end up delegating them to yourself.  From dealing with unhappy customers (there are always a few) to unclogging toilets and cleaning the office.  You are customer service, marketing, janitor, human resources, maintenance, etc.  It really is a glamorous life.

Perception:  Self employment is the road to riches.

Reality:  Unfortunately the road is unpaved, unmarked and has many forks along the way.  There are no GPS’s or maps to show you the way.  But the journey is part of the adventure.  

Perception:  You don’t have a boss telling you what to do.

Reality:  Nope.  Instead, it is all on your shoulders.  You are responsible not only for yourself but all your employees too.  Some days it would be nice to be given direction.

Perception:  You get great tax write-offs.

Reality:  This one is true!  It is a great benefit of being self-employed except when it’s time to get financing.  Suddenly, those tax write-offs aren’t so great.  (Although a mortgage broker can help…hint, hint)

In all seriousness, I love being self-employed.  Certainly it is not for everyone nor should it be.  Success is not about “what” you do, rather “how” you do it. Whether you are employed or self-employed, enjoy what you do and give it your best.  Success will follow.

The goal of most, if not all homeowners, is to be mortgage free someday.  We have been taught this from previous generations.  It is seen as one of the keys to financial freedom.  But is it?  Is it good to be mortgage free?

The short answer is yes!  You are probably wondering why someone wouldn’t want to be mortgage free.  And if the answer is yes, then why write about it?

Let’s take a look at an ordinary couple, Joe and Diane.  Joe and Diane bought a starter home, fixed it up and then years later sold it.  The equity they gained, they used to purchase a more modern, larger home for their family.  They took advantage of bi-weekly payments and making lump sums payments to pay down their mortgage faster.  After all, the goal is to be mortgage free.

As Joe and Diane near their 50^th birthdays, the kids have moved out, they have down-sized their home and have finally reached their goal.  They are mortgage free.  They did it.  They had arrived so to speak.

Joe and Diane are both still working with good incomes.  The money they used to spend on their mortgage is now being used in other ways.  Some goes to savings, some to vacations, however, most is unaccounted for.  As with most people, when their disposable income increased, their spending habits increased as well.

While they had a mortgage, they were building equity.  Now, mortgage free, they are building some additional net worth in terms of savings, but not to the same extent.

Now consider what would happen if they leveraged the equity in their house to continue to build their net worth.  Taking equity out of their house, they could invest it in a number of ways such as purchasing an investment property.  A good investment should earn them a higher rate of return then the interest paid to finance it.  With an investment property, someone else is paying the mortgage.  Because both Joe and Diane are working, if need be they could cover the mortgage. Eventually, they will own two properties free and clear, substantially increasing their net worth and the rental income will supplement their retirement income.  In addition, the interest paid on their investment may be tax deductible.

So while striving to become mortgage free is a worthy goal, it may not be the final goal.  It is important to re-evaluate your financial situation and goals regularly with your financial advisors.

This strategy is not for everyone and should not be considered without proper advice from financial experts such as accountants or financial planners.  Everyone’s financial situation is different so consult the experts to see if this strategy makes sense for you.

When it comes to picking the type of mortgage and term, there are several factors to consider.  Most 5 year fixed mortgages are broken at 38 months resulting in potentially large pre-payment penalties.  It is sometimes difficult to predict where you will be in 5 years.  A job transfer, the need to refinance, there are many reasons why mortgages are broken before the end of the term.

What can you do to avoid these large pre-payment penalties?  If you are set on having a fixed mortgage product, then you may want to consider going with a 1, 2, or 3 year term.  Shorter terms give you the flexibility to make changes without incurring large mortgage penalties.  A 5 year fixed term is great if you know for certain that you will not need to refinance or change your mortgage. 

A variable rate mortgages offers some great advantages over a fixed rate mortgage.  Historically, variable rate mortgages perform better than fixed rate mortgages.  In addition, the penalties associated with variable rate mortgages are lower than fixed rate mortgages.  Typically, variable rate mortgages have a three month interest penalty.  A fixed rate mortgage, by contrast, uses the higher of a three month interest penalty or the Interest Rate Differential (“IRD”) which is usually substantially higher depending on when you break the mortgage contract.  There is no standard formula for calculating the IRD.  Each lender has their own method for the calculation.

With a variable rate mortgage, you can “lock in” to a fixed rate usually without penalty, provided you lock in with the same lender for a term that is longer than the remaining term of the variable rate mortgage.  For example, if you have a 5 year variable rate mortgage with 2 ½ years remaining, you could lock in at the 3 year fixed rate and have the penalty waived.

It is important to understand the terms and conditions of the mortgage product you select.  A mortgage broker can help explain the advantages and disadvantages of various mortgage products.