5 Reasons You Might (or Might Not) Be Approved For A Mortgage

You have been looking at PEI real estate, or indeed real estate anywhere, and you are about to apply for a mortgage. What are the factors that are taken into consideration by lenders before they will grant you the mortgage? While economic climate will have a bearing on how difficult money is to secure and how stringently the rules and these considerations will be applied, basically these 5 points comprise most of the decision to lend or not to lend.

1. All lenders want to know that the loan is covered by good, marketable collateral. This is either something you own that you are offering up as security or the value of the thing itself that you are using the loan to buy. In the case of real estate the home or property that you are buying represents the collateral. The lender wants to know that the property you are buying is worth what is being paid. This is determined by an appraisal. They also want to ensure that the type of property is readily saleable should you default.

2. The second point considered when making a determination regarding the granting of a mortgage is based on the amount of money that you are putting into the deal upfront, ie. your down payment. Generally the greater the down payment the more favourably the lender will look on your application because your mooney will defray the potential risk that the lender is exposed to. It will also show that you have saved and committed to the purchase.

3. Credit Worthiness, expressed as your Credit Score is another factor used to determine your mortgage worthiness. Credit scores range from 300 to 900, the higher your score making it not only more likely that you will be approved but also that you will get a better interest rate. If your credit score is borderline it may be worth your while to wait and work at increasing your credit rating over the next 6 to 12 months by ensuring that bills are always paid on time and using other credit building behaviours to build your credit score. This can save you a lot of money over the life of your mortgage in reduced interest.

4. Additionally to the 3 points above, your potential lender will place great importance on your ability or perceived ability to pay the loan back. They will look carefully at your sources of income to ensure the likelihood of continued income as well as any other sources of money that may be used to continue paying should your regular income be interrupted. This might include other property, savings, investments etc. All lenders want to ensure that the mortgage obligations do not exceed 32% of your monthly income and that the combination of your mortgage and other credit payments, credit cards, car loans etc do not exceed 40% of your income. As you can see, if you are planning to buy a home, lowering your debt is very important as is refraining from purchasing big-ticket items such as a car. Buy the new car after the home to ensure that you get the mortgage.

5. The last item is your general character. This isn't whether you appear in a suit and tie but rather your education, time in your current industry and with your current employer, how long you have lived at your last address etc. Really this is a subjective measure by the lender of your reliablity. In the days of decisions made "at head office" this is perhaps a little less relied upon in the decision process than at one time but it is still important to come across as trustworthy.

The economy is probably a 6th factor as if the economy is good and housing prices are rising lenders are less worried about having to foreclose, as the property will have appreciated enough that even if you can't pay, the money is easily recovered. Right now times are a bit tougher and lenders are looking at everything most carefully. Therefore take note of these 5 points and make sure that you have addressed each one before attempting to enter the PEI real estate market and applying for your mortgage.