Tuesday, November 15, 2011

How to qualify for a brand new mortgage

If you have just graduated from university with student debts, the prospect of buying your own home may seem remote. Advisors suggest formulating a plan early on to help get on track to qualify for that mortgage.

“For new graduates, once they’ve got their job and regular income, they need to [pinpoint] what it is they want to buy,” says John Nardi, a financial advisor with Edward Jones in Mississauga. “Have a budget in place. Don’t get caught up in the emotion of buying a home,” which can lead to over spending, he says. “The last thing you want to be is mortgage poor — you can’t enjoy your life at all.”

A mortgage professional can advise on what a lender will be looking for.

“There are three criteria that are really important when you come out of school: No. 1 is credit, No. 2 is employment and then there’s the down payment,” says Victor Peca, a broker with Mortgage Intelligence in Toronto. “At least a year of employment will make the lender see [you] have stability.”

Student debt does not have to be all bad news.

“Having some student debt when you graduate isn’t necessarily the worst thing,” Mr. Nardi says. “Having the debt and paying it back on a regular basis, without missing payments, can actually help improve your credit rating.”

Mr. Peca agrees that the key is not whether or not you have a debt, but how you handle it that is of interest to mortgage lenders.

“The beacon score is really a blueprint of how someone spends. They have to make payments on their debts. It will reflect on their credit report,” Mr. Peca says. “The lenders view this as the client’s first chance to prove they are responsible and credit-worthy.”

Mr. Nardi says every situation is different, but recent graduates should take tax and financial advice before switching their student loans from the government to a bank or other lender just to secure a lower interest rate.

If your credit score falls short of the rough threshold of 620 required to get a good mortgage deal, Mr. Peca says, maintaining payments will help increase the score.

“Do not listen to friends when they say ‘Hey, don’t pay it off, it comes off your record in seven years,’” Mr. Peca says. Clients with high salaries but low credit scores can struggle to get a good mortgage deal. “[Your low credit score] proved to the bank that you don’t like making payments.”

Mr. Nardi says get rid of all but one of your credit cards. With too many cards, the lender will assume that you are making use of all your available credit and will reduce the amount of mortgage lending accordingly. Mr. Nardi says try to keep the balance below 15% of your credit limit. “That shows you are disciplined and you’ve got a strong commitment to paying it back.”

If a mainstream lender tells you that you do not qualify at this time, Mr. Peca suggests working with a professional to improve your credit score and deposit, rather than get yourself into a situation you cannot afford.

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