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Considering a Purchasing? Know the 5 C's of Borrowing Money

Mortgage and Lending with Mortgage Intelligence Mortgage Consulting


Purchasing a home is a major decision for most people; it represents the single largest purchase they will ever make.  So when it comes to qualifying for home financing, what should you know?  What is important to the bank?  Here are five questions to ask yourself:

Capital - How much do you have to put down for the purchase of your new home?  The larger the down payment, the less risk you present to the lender.  A minimum 5% down payment is normally required to purchase a home in Canada.  However, if you have good credit, there are some lenders who will consider lending you the down payment as well.  Having no down payment is not always a limitation.

Capacity - Is your income sufficient to support the repayment of the requested loan amount?  Most lenders will allow 40% of your income to go towards housing costs and debt.  The calculation looks like this: monthly debt payments plus housing costs plus heat plus ½ condo fees if applicable

•·         Monthly debt payments includes:  car loan, credit card, lease payments, etc.

•·         housing costs include mortgage and taxes for all your properties

•·         heat is usually estimated between $85 to $100 per month  

If you have good credit, you can be allowed to use up to 44% of your income for debt and housing payments.

Credit - Is the financial institution confident that you will pay them back?  Credit is the evaluation of the borrower's habits in meeting credit obligations.  If you have never taken out a loan or secured a credit card...you may be surprised to find out you have no credit rating.  A credit check will report your credit history and provide a numerical score (0 to 900, 900 is the best score). 

Collateral - Will the real estate purchase offer suitable collateral to the lender?  Collateral is the security offered up to lender should the borrower for some reason be unable to provide repayment.  In the event of a default, the lender could sell this collateral to recoup their costs plus expenses.  Now it only makes sense that the lender will want to ensure that your purchase will not put them in a money losing position. 

Lenders watch out for terms like "fixer upper" or "handyman special" when examining your purchase, and will want assurances the property is in good condition without problems which may make it hard to resell.  In some cases, lenders will require an appraisal.  The appraisal serves to quiet any fears the lender may have about the value or condition of the home.

Banks will also pay attention to your assets i.e. vehicle, bank account, RRSPs, etc.   The greater amount of assets you have, the lower risk you present.  These assets could be conceivably be sold and used to make mortgage payments in times of crisis.  

Character - What kind of impression do you make?  Character is your reputation and reliability - the general impression you make on the potential lender. The lender may look at:

•·         educational background

•·         business experience

•·         length of time at your current employment and residence.  People with a transient job history or address history are seen as less reliable than someone who has been in a home or job for 20 years.

For more information about qualifying for a mortgage or if you have questions about your specific situation, please call 250 682 6077 or e-mail stevebucher@invis.ca or check out my website at www.mortgagebuilder.ca

copyright Steve Bucher 2009 reprint only with permission