The 'Mortgage Chair' Analogy
The 'Mortgage Chair' Analogy
Qualifying for a mortgage is easy to understand if you think about the 4 legs of a chair. Each leg is equally important.
A longer leg cannot compensate for a shorter leg. A lender needs stability from each leg in order to feel comfortable giving you a loan. It’s no different than feeling uncomfortable sitting on a wobbly chair. The lender could feel 'uncomfortable' with your application if all four legs are not equally strong.
Leg #1 – Credit:
All mortgage financing is based on your credit score. The higher the score, the better rates and terms you will receive. If you have never been issued any credit in the past, this is an indicator that you will not be approved for a mortgage. But if you have never been issued any credit in the past, you are not going to get a loan. The guideline is for a minimum of 2 active trade lines, for at least 2 years, with at least $2,000 credit available. If you are short on that requirement, you could also find yourself not getting approved.
Leg #2 – Income:
You need money coming in to pay the bills! Income qualification is by far the most complicated of the 4 legs.Now while there are exceptions to almost every rule, you must have stable, legitimate income in order to qualify for a loan. In general, 2 years in the same line of work, receiving the same type of pay, without any major gaps. To break that down even further, yes you can move from job to job, but you have to be doing the same type of work. If you are self-employed, you must have a minimum of 2 years of that income reported on your tax returns in order to use it. A stable chair includes income that is regular and stable.
Leg #3 – Funds Required for the Transaction (Equity and Assets)
Savings, RRSPs, GICs, investments, verifiable liquid assets to show you can afford the down payment and closing costs. Real estate transactions are bound by rules of the anti-money laundering banking rules. This means you cannot use money you have in a home safe or under the mattress. All funds for a mortgage transaction must be supported by statements with recent 90 days transaction history. If you get statements every month, you must provide three. If your statements are quarterly, you only need to provide one. Screen shots from your computer showing online activity are not accepted, because anything other than a regular statement must contain the account holder’s name and account number.
Leg #4 – Collateral (the property)
The lender is not only investing in you, they're investing in your home too, and most of the time, they're putting in a much higher investment than you are, typically 80 - 95% of the funds come from them, so they want to be sure they're making good investments in good properties. If you plan on getting a loan on a property for 30 years, it has to be in at least decent enough condition to last 30 years.
This is also why a Pre-Approval is never a guarantee, as the lender has to approve your home too, not just you! There you have it - your mortgage chair. Reach out today to find out if you qualify.
Louise Mason Mortgages
587-999-9768 | [email protected]