Given that the median home price in Canada is $718,000 according to Trading Economics (www.tradingeconomics.com), it's fair to assume that most of us can't afford to just buy one outright. For many buyers, getting a mortgage is an absolute necessity to make homeownership possible.
Your mortgage might be the single largest sum of money you borrow in your lifetime. So, it's important to be strategic when you're getting a home loan. And that means avoiding these mistakes that a lot of Canadian makes when purchasing.
1. Not shopping around
The average 5 year term on a 25 year mortgage with more than 20% down payment is 4.80%. You will get little lower of a rate if you have less than 20% down payment because CMHC will insure your mortgage. emember, it's up to each to figure out what rate it wants to offer you based on factors like your credit score, income, and loan amount.
So don't just accept the first mortgage offer you get. Instead, shop around with different lenders so you can compare offers.
But also, do your rate shopping quickly. If you apply for different mortgages within a 14-day period, you shouldn't have to worry about each application counting as a separate hard inquiry on your credit report.
That's important, because each hard inquiry on your record could drag your credit score down a bit. The lower your score, the more expensive it usually is to borrow -- in the context of a mortgage or any other loan you might need.
More: Factors that can impact your Mortgage
2. Assuming you can afford the amount a lender is willing to loan you
Each mortgage lender you apply with will look at your financial information to figure out how much you can borrow for a home. Lenders consider your down payment, current salary, and any other income streams you have.
But don't assume that the amount your lender says you can borrow is the amount you should borrow. Your lender will have a basic sense of your financial picture based on the information you provide, but ultimately, you are the one that knows what you can afford. The lender won't consider your Netflix subscription, how much you spend going out, potential car repairs, clothes, coffee, food expenses, day care...etc. So, consider these numbers when you make your purchase.
Generally, your total housing costs, including mortgage payments, homeowners' insurance, and property taxes, should not exceed 45% of your take-home pay. Once you have a mortgage offer, you can run the numbers to see if you're within that limit.
More: Complete a Mortgage Pre-Approval / Refinance / or switch lenders here.
3. Not boosting your credit score before applying
The higher your credit score, the lower a mortgage rate you might qualify for. This means that you may have a lower monthly payment.
An example is a $500,000 mortgage on a 5-year term. If you have great credit, you might get a 4.90% interest rate, leading to monthly payments of $2,879.63 for principal and interest.
If your credit isn't best, you may get 5.20% on that same loan, causing your monthly payments to be $2965. That's an extra $1,026 a year or $5134 over the 5 year term.
To boost your credit score fairly quickly, you can usually get a free credit score from your bank. You just have to enable it on your banking app if you haven't already. You can contact your bank to do this. You can also visit Borrowell to get a free credit report.
If your credit report shows a mistake, like a delinquent debt that's actually current, correcting it could lead to a credit score increase.
Additionally, make sure you continue to pay your debts on time. Lowering your revolving credit like credit cards, lines of credit, usually have a higher impact that paying down a loan. However, even better is if you can pay off the loan.
Try to be patient and give your credit score an opportunity to rise before putting in your mortgage application. It could make a huge difference in your monthly payments for many years.
Applying for a mortgage is a major step on the road to homeownership. Avoiding these mistakes could leave you with a loan that's less expensive to pay off.
