A sound rule, not only of managing finances but of generally responsible living: never assume that “can” and “should” are the same things.
That goes especially for taking out loans, Toronto.
Many borrowers may have the numbers optimally aligned for mortgage approval from seemingly any reputable Greater Toronto Area lender. A credit score in the “Good” or “Excellent” ranges? Check. An appropriate debt-to-income ratio within both federal and private guidelines? Check. A 20-per-cent-or-more down payment? Check.
That doesn’t mean it’s necessarily a responsible time to take out a mortgage, one of the few kinds of debt that it isn’t necessarily irresponsible or shameful to have. A mortgage with optimal terms that’s been well thought-through can be the stuff of dreams. Diving into one with ill-advised terms or not enough understanding of the lifelong ramifications can be the stuff of disaster. Remember, the U.S. housing crisis of the 2000s was largely caused both by insufficient federal oversight over the financial sector, but there’s also some fault in under-qualified buyers taking out ill-fitting mortgages and lenders being told, “Lend to them or else…” by the federal government.
Please, take heed of a few warnings before signing on your mortgage’s dotted line…
- (CREDIT) CHECK, PLEASE
Want to avoid perilously high interest rates? For starters, unless exceptional circumstances dictate otherwise, don’t take out a mortgage if your score qualifies you only for a mortgage with a sky-high variable rate. It can be a matter of several percentage points.
If you sit down to look over your credit report several months before applying around and don’t like what you see, consider hitting the brakes. Take a year or more to wipe out debt, improve your record of on-time payments, and generally put yourself through a fiscal boot-camp.
- NO NEW CREDIT
Time to make an all-or-nothing decision: if you’re going after a mortgage, make that your one-and-only credit pursuit until you receive final approval.
Your pre-approval guarantees very little. It’s a vote of confidence that you look like a promising enough borrower for a lending institution to want to further consider your prospects. However, new credit applications around the same time as your mortgage can cost you your eligibility entirely (at worst) or, at best, kick your rate up several percent.
- THE BIG PICTURE
It also includes thousands more in taxes, origination fees, insurance, closing costs and other considerations. This is where debt-to-income ratios come into play. This measurement of your current total debt against your gross monthly income takes all of the above into consideration and helps a lender assess whether or not you can truly afford the complete cost of a mortgage without falling into foreclosure.
Have some money that has just sat dormant in your account for at least several months to “season.” Underwriters aren’t fools and will recognize a sudden massive transfer from another account that just covers the down payment, especially if you can’t demonstrate consistent employment and income. Be extremely realistic and ask yourself, “Will I barely be making the monthly payment, or will I have room to breathe?”
- SHOP AROUND
Never let one pre-approval rule out comparison shopping.
Even better, shop around with a mortgage broker’s assistance. You never know when one lender might have a loan offer that competitively offsets another mortgage’s comparatively high fees, interest, closing cost, or other factors. More importantly, a mortgage broker can likely more effectively negotiate your interest rate among several banks at once and stir competition in your favor.
You might not live all the rest of your days in the Toronto home that you ultimately take out a loan to buy – few do anymore. Still, your mortgage represents a financial obligation that can, and will, set a course for the rest of your life. Choose wisely.