Shopping for a first mortgage is not like shopping for a new car. When you shop for a new car, everyone wants your money and in order to make sure they get your money, they’ll do/say whatever they can to make sure you leave with a car. You’ll have tons of cars to choose from; new and old, luxury and sporty, basic and fully loaded… the options are endless and the dealership is not at all concerned about whether you can make those payments as long as you have the minimal credit and down payment (in some cases credit is irrelevant) If you do make those payments, great for them! If you don’t make those payments, they repossess the car and your credit is shot! Shopping for a first mortgage is different is every sense. The bank isn’t trying to sell you a first mortgage anymore… you are trying to sell yourself as a ‘borrower’ to the bank! Good credit only gets you in the door these days, but it doesn’t automatically get you a first mortgage. It’s unfortunate how drastically things have changed, but in a sense it’s also a very positive thing for home buyers, the real estate market, and the economy as a whole.
The most common phrase I hear from first mortgage shoppers is: “Hi, I have good credit and good income and I want to know the best first mortgage rates.” Well, they have the right idea for the start of a conversation, but it’s really not that easy anymore. If this were 2 decades ago, sure! This is to no fault of their own as people tend to think it’s still really easy to get a first mortgage and advertising tends to do that to anyone, for anything. Yes, the bank wants borrowers with good credit and yes, the bank wants borrowers with good income. However, what many borrowers don’t understand is the number of other variables that go into determining the ‘borrower’s profile.” I could probably write a book on the further detailed explanations of the variables that go into underwriting a first mortgage request, but instead I’ve created a list to help illustrate my point in a manner that won’t put you to sleep.
Here is a list of factors to consider when shopping for a first mortgage. These are factors the bank will look into, so I find these factors to be the most important preliminary legwork before getting to the steps of rates, amortization, maximum purchase price, etc.:
- Credit Score: Good, fair, average, bad? Do you fit into any of those? If so, what does it even mean? Scrap the description and instead focus on the score. Credit Scores must meet the minimum criteria (Ex. 650) in order to qualify for a first mortgage. Some banks allow for lower scores while others require higher scores. Not all banks follow the exact same underwriting guidelines and for that reason alone you need to work with an expert that understands them!
- Credit History: History is more important than it’s ever been. A good score alone doesn’t get you the thumbs up on a first mortgage. History counts for a lot. Your score could easily be 650+, but your history might show 2 late payments (R2’s) 14 months ago… the bank won’t forget to ask why this happened.
- Nature of Employment: Status, tenure, structure. Are you full time, part time, contractual? Have you only been there for 2 months? Are you paid hourly, commissioned? Are you guaranteed a certain number of hours? Being employed is great, but if you’re looking for a first mortgage, the bank wants to make sure income is consistent and somewhat guaranteed.
- Debt servicing ratios (GDS/TDS): The most important numbers in the first mortgage process are not the ones the bank writes on the commitment, but the ones that the bank analyzes before they decide to issue any commitment. Your debt servicing ratios have huge importance. They determine your maximum affordability, but also your ability to repay. The entire first mortgage game is centralized around these numbers. If they’re too high, the bank doesn’t make exceptions. These are the ratios that are put into place to ensure that you can buy a home that you can continue to afford! Continuity is everything. The bank may be strict on these ratios, but put it into perspective and you’ll notice that it’s really for your own benefit. If you have co-signers, and important thing to understand is how much are they contributing to lowering your debt servicing ratios and without their income… can you really afford this mortgage?
- Unsecured debt: If you carry a lot of debt, it might hurt your numbers when applying for a first mortgage. Any balance you carry in terms of unsecured debt must be factored into you debt servicing ratios and hence, will impact your maximum affordability. If you have thousands on credit card balances and a new car loan (as an example), your maximum first mortgage affordability will not be as high under the scenario where you had no debt. If you want to strategically plan for the absolute maximum purchase price (which given today’s prices, might be necessary), then planning to pay off debt prior to closing is a great idea.
The factors to consider when shopping for a first mortgage do not end here, though these are among the most important. I have to reiterate that these are all important things to understand before/while shopping for a first mortgage, not solely the rates! Far too often, applicants will venture from bank to bank with results that do nothing but confuse them and that is partly due to the lack of guidance/education from banks and other brokers. If you’re not there now, you will make it there… with the right help, guidance and effort of a professional who understands the industry in and out.