Need mortgage advice? Here is everything you need to know about the mortgage application process—plus, what not to say
When it comes to mortgage advice, there is no one-size-fits-all approach. The best mortgage for your clients will be tailored to their financial history as well as their long-term goals. And these, of course, can vary widely.
However, there are general pieces of mortgage advice that will pertain to just about every potential homebuyer. Most of these involve preparation, such as ensuring their credit scores are in order, and up to par, to give one clear example. Another is factoring in closing costs and mortgage insurance, costs, among others.
Here is an in-depth look at the best mortgage advice that you can tell your clients in Canada. It also answers the questions are mortgage advisors worth it and what not to do when beginning your mortgage application process.
Are mortgage advisors worth it?
Yes. Because they are knowledgeable of the mortgages offered by different lenders, mortgage advisors can search the market for you and recommend the best possible deal. Otherwise, finding deals yourself can be quite time-consuming, requiring a lot of research and discussions with multiple lenders—and even then, you could be wrong.
Not only will a mortgage advisor save you time, but an advisor may also be able to find a deal that you are unable to find on your own. And since they know which lenders are best suited to your financial situation, advisors can also improve your chances of being accepted for a mortgage in the first place. This is especially important if you are unable to make a large deposit, are self-employed, or have not been with your employer for long.
Here is a list of why mortgage advisors are worth it:
- Mortgage advisors review your financial situation to ensure you will meet a lender’s lending and affordability criteria
- Mortgage advisors may have exclusive deals with certain lenders that may not otherwise be available
- Mortgage advisors can help you finish your paperwork and move the process along more quickly
- They can help you take all the features of the mortgage and the costs into account
- Advisors will only recommend appropriate mortgages for you and tell you which mortgages you are most likely to get approved for
Two types of mortgage advisors
The are two types of general mortgage advisors.
- The first is a market advisor that is connected directly to mortgage lenders and can usually recommend mortgages from specific lenders only.
- The other type are mortgage brokers, or independent financial advisors, who look at the mortgage offerings from different lenders.
Some mortgage brokers may look at the entire market and offer you a wider range or mortgage products.
Read here to know how to become a mortgage broker.
What is the best mortgage advice that you can tell your clients?
Let’s be clear: the best mortgage advice for one client may not be the best for another. Because the best mortgage is dependent on your client’s specific financial situation and goals, there is no one size fits all.
Generally, however, there are ways to approach the home-buying process that can apply to just about anyone. Being prepared for some of the more common issues that homebuyers face—and strategies to avoid them—is what we’re really talking about here.
Here are five pieces of mortgage advice to share with your clients:
- Get pre-approved
- Know your credit score
- Consider mortgage insurance
- Shop around
- Consider your LTV ratio
Let’s take a closer look at the top five pieces of mortgage advice.
1. Get pre-approved
Often the first step in the home buying process, getting pre-approved for a mortgage offers clarity around your creditworthiness and ability to afford a property within a certain price range. It also gives you and your real estate agent a better idea of how much house you will be able to afford, the type of home loan you are most likely to qualify for, and the terms and interest rate you are likely to get from a lender.
During pre-approval, the lender will review your credit history and score, current assets and debts, recent pay stubs, tax returns, and other personal information. While it is not necessarily a requirement, getting mortgage pre-approval gives sellers the confidence that you are a serious buyer.
2. Know your credit score
Knowing your credit score early in the homebuying process is critical because that, along with your credit history, can affect your ability to qualify for a mortgage and play a significant role in determining your mortgage terms and rate. Knowing your credit score will tell you where you stand and, if it is lower than you’d like it to be, you can take steps to improve your credit score prior to filing your mortgage application.
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3. Consider mortgage insurance
If you are unable to make a 20% down payment, most lenders usually require that you buy private mortgage insurance (PMI), the cost of which typically ranges from 0.5% to 2% of the total loan amount each year and is often paid each month as part of your mortgage payment. With most conventional home loans, the PMI is removed after you pay 20% equity in your property. However, it is important to factor this cost into your payments and overall costs before making an offer.
4. Shop around
By shopping around for a mortgage, you will find the best one to meet your financial needs. If you get the best rates and terms, it can also mean more money in your pocket each month. You can use a mortgage broker if you do not have the time to comparison shop yourself. Since brokers work with multiple lenders, they might be able to secure you more a more competitive interest rate and more favorable loan terms.
5. Consider your loan-to-value (LTV) ratio
To help assess the risk of writing you a home loan, lenders use the loan-to-value (LTV) ratio on property purchases. The LTV measures the mortgage amount versus the market value of the property. In fact, several federal mortgage programs set specific limits on LTV as a part of their qualifying criteria. If, for instance, your LTV is higher than 80%, you could be required to buy primate mortgage insurance (PMI). On the other hand, if you increase your down payment you can reduce your LTV ratio.
What should you not say to a mortgage lender?
What you say—or don’t say—to a mortgage lender can impact whether your loan application is approved or denied. Because a mortgage loan application process is a full examination of your financial history, there are many questions to answer and documents to complete. However, remaining up-front and honest with your lender will help you gain approval and, hopefully, secure the best possible rate.
Here is a quick list of the 10 things you should not say to a mortgage lender:
- Anything untrue
- What is the maximum amount you can borrow?
- That you forgot to pay a bill (again)
- New credit cards
- Maxed out credit cards
- That you change jobs regularly
- Exchanging a salary job for commission-based income
- Cash gift for downpayment
- How does foreclosure work?
- Credit score?
Let’s take a closer look at each.
1. Anything untrue
Not only can lying to a mortgage lender destroy your chances to get approved, but giving untruthful information on a loan application is also considered mortgage fraud. While some applicants try to bury certain information, lenders are required to verify key financial documents. If you are unsure about which information you must disclose, let your mortgage lender know.
2. What is the maximum amount you can borrow?
By asking this question, you will be showing most lenders that you have not done your homework and are uninformed. One way to do your homework is by understanding basics, such as the 28/36 rule. This rule states that a household should spend no more than 28% of its gross monthly income on total housing costs and a maximum of 36% on total debt service. If you earn $5,000/month, you should spend no more than $1,400 on housing expenses such as mortgage payments, property taxes, and utilities.
When reviewing your financial history, consistency is important. If you reveal that you missed a bill here or there, it will likely cause some concern with your lender. Regardless of whether you mention it, missed bills will appear in your credit report. To avoid getting your loan denied, remember—pay your bills on time.
4. New credit cards
If you open or apply for several new credit cards, you may come off as reckless with your spending before getting approval. While you may want to make other significant purchases along with buying your home, it is best to wait until after you finish the home-buying process.
5. Maxed out credit cards
Most lenders do not want to see significant increases in your credit balances. For this reason, it is important to be aware of your debt-to-income ratio, or DTI. While small charges are usually okay, lenders can run a final credit report days or even hours before closing. Not only can that last look change your loan terms, but it can also even result in being denied.
6. That you change jobs regularly
If you can help it, it is best to show that you have stable employment. A common requirement for mortgage lending approval is an employment history of at least two years, because a lender will rely on you to save a portion of your income for mortgage payments. Changing jobs frequently may cause your lender concerns about your ability to meet your monthly mortgage payments.
7. Exchanging a salary job for commission-based income
Whether you are seeking a self-employed mortgage, a documented employment history—without any significant employment gaps—will help you qualify for a home loan. However, leaving your more stable salary job for a commission-based job could make you more of a gamble in the eyes of most lenders.
8. Cash gift for down payment
Most lenders allow cash gifts for certain loan programs (if you qualify). Keep in mind, however, that specific rules exist, meaning it is critical that you talk to your lender about the right way to move forward. You do not want your loan application to get reject simply because you overlooked a rule.
9. How does foreclosure work?
If you ask how a foreclosure works, it could be a red flag for your lender. While you may mean it as a harmless curiosity, it may indicate to the lender that you could have problems repaying the loan amount each month.
10. Credit score?
It is important that you monitor your credit score throughout. Chances are, if you do not know what your credit score is—or what a credit score is generally—you may not be quite ready for a home loan. One key to your success if getting a home loan is knowing your credit score and the factors that make up that score. It is even a good idea to improve your credit score before applying for the home loan in the first place.
There are many perks to using a mortgage advisor. Because they usually have a wide network of lenders, advisors are more likely to secure the best mortgage rates and loan terms for their clients. Clients will also likely discover that a mortgage advisor can help them save a lot of time and energy comparative shopping.
There are also plenty of dos and don’ts when it comes to the mortgage application process. Before committing yourself to getting your mortgage, do your research, such as checking in on what the best mortgage lenders in your area can do for you. That way you can find the option that best fits your financial situation, both now and in the future.
Have experience with providing (or receiving) mortgage advice? Let us know about your experiences in the comment section below.