Getting a mortgage is an important step of the home buying process. It's crucial to pay attention to all the financial aspects of the purchase — especially concerning your credit score. Without a good credit rating, you won’t be able to obtain the mortgage you want. You need to be able to prove that you're able to pay your bills on time. Qualifying for a mortgage is becoming more and more difficult as the economy struggles and the government tightens mortgage lending rules. However, you should be concerned about your credit rating even after a home seller accepts your offer and a mortgage lender approves your home loan application.
Of course, mortgage lenders review your financial situation before deciding to lend you money. Moreover, they can check and review your credit rating again, and they usually do so on closing day. It can take 30 days or more to close on a mortgage loan, and your financial situation can change during this period. Consequently, your mortgage lender wants to perform a last-minute check to confirm that your credit score remains positive. Many homebuyers don't realize this fact and take financial action within this period that puts their mortgage closing at risk. However, you can easily avoid these last-minute inconveniences by being careful. Here are some aspects you should consider if you don’t want to ruin your mortgage in the closing stage.
Avoid Major Purchases
Even though your lender approved your mortgage application, you shouldn't consider it a done deal. Keep this in mind especially if you’re considering another major purchase, such as a car. You might have enough income for the purchase, but your mortgage lender might not be satisfied with your total debt service ratio. It measures your total debt obligations (including housing costs, loans, car payments, and credit card bills) and should not exceed 40 per cent of your gross monthly income.
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According to Statistics Canada, the latest trend in Canada is an increasing debt-to-income ratio. While the Bank of Canada has described it as the “constructive evolution" of household balance sheets, many experts point out that the increase in the ratio reflects, to some extent, the increase in homebuyers rushing into purchases as rates started to increase. Jimmy Jean, strategist at Desjardins Capital Markets, remarked,
The idea of gradual realignment going forward thus remains valid and we do not expect the Bank of Canada to show more concern than in the past.
Apparently, Canadians are borrowing more and the government is tightening mortgage lending rules in order to cool the housing market. Lenders are being very cautious, and if your debt-to-income ratio rises above the limit due to your recent purchase, they may cancel the closing of your mortgage. Experts therefore recommend you wait on a major purchase until you’ve closed on your mortgage.
Be Careful With Credit Cards
Many borrowers pay down their credit card balances before applying for a mortgage in order to lower their debt-to-income ratio. It seems like a smart move, but it can be tricky — especially if you use your credit cards afterwards. If the lender finds out that your credit balance has considerably increased, your mortgage loan may be endangered. If you had to lower your credit balance in order to obtain a mortgage, then an increase in your debt-to-income ratio could threaten your home loan. Moreover, you put your home loan at risk if you miss some of your credit card payments or are late on a mortgage payment during the period between approval for a mortgage and the mortgage closing.
Avoid Any Major Career Changes
Your credit rating is not the only thing that lenders review again before closing. They also re-check your employment status and income, as it is an important factor influencing your home loan. Quitting or changing your job before closing on your mortgage will at least postpone closing. Lenders have to reevaluate your income again, and you have to prove that your new job is stable and will provide you sufficient resources to pay off your mortgage debt. This can take several days or even weeks. Keep in mind that any change in your employment can affect closing on your mortgage, and if possible, you shouldn't make any employment changes until you sign the mortgage documents and get your keys.
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Closing Costs Surprises
Many Canadians are prepared to pay the mortgage down payment but forget to consider closing costs. Closing costs are the legal and administrative fees and disbursements associated with purchasing a home. According to a 2007 Ipsos-Reid poll, 43 per cent of Canadians are not prepared for up-front closing costs before making the offer on their first home. Closing costs can count for as much as 3 per cent of the cost of a new home. Forgetting about these expenses when purchasing a home could, in the worst-case scenario, cost you the deal if you don’t have sufficient funds to cover them.
As you can see, it's important to be aware of your credit rating during the whole mortgage process. The fact that you’ve been approved for a mortgage doesn’t guarantee that you'll close. Lenders are very cautious, so be prepared to prove your positive credit rating at any time before closing if you don’t want your mortgage lender to pull out at the final hour. The period between the initial check and closing might be quite long, so we recommend you take into consideration these last-minute loan application issues.
Main photo: Financial District Toronto by ChrisTylerTO