Mortgage qualifier tool

When shopping for a mortgage, your credit score will play a part in determining how much mortgage you can afford. It’s one of the many factors lenders will look at when deciding whether or not you are a good candidate for a loan and also shows the level of risk when it comes to lending you money. Generally the better the credit score, the lower the rates you can secure. However, there are different mortgage options you can opt for such as uninsurable or insurable, each requiring a minimum down payment amount and each providing different mortgage rates. Which one you qualify for will depend on your credit score.

As a rule of thumb, here are the credit score thresholds you want to meet:

• To qualify for a high ratio mortgage (less than 20% down) or a prime mortgage lender, you should aim to have a credit score of at least 620
• If you’re under 620, you will likely need at least 20% down payment and would be working with an alternative or private lender. These usually come with much higher rates (1.50% to 12.00% higher than prime mortgage lenders)

Lenders will also check if you have a low debt-to-income (DTI) ratio, which divides the total of all monthly debt payments by monthly gross income, as they want to make sure you will be able to repay a loan. If you have a high DTI, this might show lenders that you will have difficulties making your payments. If you are wondering ‘how much mortgage will I qualify for?’, use the Perch mortgage qualifier calculator to gain insight into your purchasing power.

To learn more about your credit score and how it affects your purchasing power, read here.

1. Your payment history (35%)

2. Your average credit utilization (30%)

3. The length of your credit history (15%)

4. Public records (10%)

5. Number of credit inquiries (10%)

Although your credit score is crucial in the home buying process, it is not the only factor that matters. If anything, the most important thing is just having the minimum required since it determines if you can get financing or not. Someone with a 700 credit score or someone with an 850 credit score likely would end up with the exact same mortgage rate. Lenders will also look at your income, debt levels, equity in property and at the actual property you intend to buy.

1. Always pay at least the minimum payment on any credit card bills, and make sure they are paid on time. If you know that you won’t be able to make a payment on time, let your lender know as soon as possible as they can possibly extend the due date. It’s important to make sure you receive your monthly account statement first, before you make the payment. If you make a purchase on your credit card and pay it off immediately, it doesn’t get reported to the credit bureau.

2. Do not use more than 35% of your total available credit. So if you have a $10,000 credit limit, do not use more than $3,500. The easiest way to lower your utilization is to increase your credit limits, but you’ll need to ensure you have the discipline to not overspend with the higher limits. Remember, this is just a general rule of thumb and not a rule that can “never” be broken.

3. You can help improve your credit score by having multiple credit lines or products (they don’t have to only be credit cards). This could be two credit cards, or a credit card and a line of credit, a cell phone contract, etc. However, be sure to fully pay off the balance each month. A “thin” credit file, meaning you only have one credit product can actually give you a lower score.

4. Establish a long credit history as it can give you a better credit rating. Keep your older cards active by using them once in a while to ensure they don’t close due to inactivity. If you can demonstrate a consistent history of paying back multiple loans over a long period of time, you’re far less likely to default on them!

5. Avoid applying for multiple credit products frequently in a short period of time, as it can look bad to lenders who may wonder why you need so many loans.

When it comes to your income for your mortgage application, there are three things lenders will look at to check your mortgage eligibility. They will look at consistency of income, how long you have been receiving the income, and the likelihood that income will continue. There are different types of income that lenders will look at for your mortgage application as well, and you should always confirm your qualifying income with a mortgage advisor.

Employment income

Lenders will look at tax slips and/or pay stubs to verify your income. You may be able to include overtime, bonuses and commissions as well.

Employment income will vary based on if you’re salaried or self-employed and can vary by lender.

Pension income

You can use your Canada Pension Plan (CPP) payments and RRSP as a part of your monthly income if you are applying for a mortgage in your retirement.

Rental income

If you make an income from renting out part of your home, you can include part of this. You must also show official proof of your rental income through a lease or your T1 tax filing.

Child support and alimony income

If you are receiving support from a settlement or child support, this can be considered a part of your monthly income. In order for lenders to see that you won’t struggle with future mortgage payments, you must show that the payments will continue for as long as your mortgage term and show that you have been receiving the payments on a consistent basis for a minimum of six months.

Investment income

If you have investments, you can use interest payments and dividends to help you qualify for your loan as per your T1 tax filing. Lenders will average out the payments you have received in the last two years to help you qualify for your loan.

• Single family home
• Condominium/apartment
• Townhouse
• Multi-unit (duplex, triplex, etc.)

A co-applicant is an additional person who is considered in the underwriting and approval of a loan or application. Co-applicants can improve the chances of loan approval or even get you better loan terms, since it involves additional sources of income, credit and assets. It is not the same as a co-signer or guarantor, as a co-applicant will have more rights and responsibilities.

A credit application for both borrowers will be reviewed by an underwriter, where the credit scores and profiles of both borrowers will be considered. More favourable lending terms are usually established based on the credit information from the higher quality borrower. Often borrowers with higher credit can help those who are having difficulty getting financial approval or even lower the interest rate on a loan for those with average credit. It can also allow you to afford a higher value home if you apply with a co-applicant as it can increase the principal amount received from a loan.

Co-ownership type

Many people decide to co-own a home as joint tenants or tenants-in-common. It’s important to establish the co-ownership type before buying. If one of the owners in a joint tenant agreement dies, the other owner will receive the shares of the home. In a tenants-in-common arrangement, each tenant owns a portion of the property which becomes a part of their estate when they die. Buying with a co-applicant is a very important decision and you must be sure you trust the other buyer to make payments on time, as everyone’s credit score on the mortgage will be negatively impacted if they fail to do so.

Agree on the details

Before signing, all details and agreements should be clear to everyone. Ensure all expectations and contractual arrangements between parties are discussed, such as what would happen in the scenario that one would want to sell. It is also wise to specify the percentage each person owns of the property if it is not being split equally.

Since there are risks associated with being a co-applicant, it’s important to consider if it’s in their best interest. Here are some things to consider before agreeing to become a co-applicant:

• Mortgage payments will be visible in the co-applicant’s credit report. This can impact any future mortgage applications on other properties, which could result in them not receiving the loan or financing needed if they choose to buy another property in future.

• If you cannot make payments and your co-applicant can’t make up for your short fall, both you and your co-applicant will be impacted as you are both legally responsible for any missed payments

• If your co-applicant has never purchased a home before, they would lose their ability to participate in specific first-time home buyer programs for any future purchases, which could result in them having to pay higher closing costs. This is because being a first-time home buyer is based on never having owned any property and as a co-applicant you are deemed to be a co-owned in the property.
• If the property is sold and you aren’t living in the home, your portion of the sale may be subject to capital gains.

To learn more about how co-applicants can affect how much home you can afford, read here.

Check your mortgage eligibility by using our mortgage qualifier calculator or speak to a Perch mortgage advisor today. You can also take a look at Perch’s Guide to Buying a Home to get tips and resources to help you in your home buying process.