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10 do's and don'ts for getting an ideal mortgage

Here's the good news: More people than ever can buy a home.

Now for the bad: It's going to take a lot of patience, restraint and some careful planning to get there. That loan officer sitting across the table won't look kindly on the new Lexus you bought or the stack of credit card bills on the kitchen counter. And if you've only managed to put away $1,000 in savings by then, it'll be time to forget about the $300,000 waterfront property.

To pull the purchase off, try heeding some of the guidelines below that our experts suggest. It may not always be fun, but doing so will help get you where you want to go.

Pay your bills and start saving
Simply put, there is no way to overstate the importance of planning ahead for your mortgage by paying your bills on time and starting a regular savings plan. "Three years ago, a client came to see me who had really poor credit and no savings, and I had to tell him, 'You won't qualify for anything like this,' " says Cara MacKillop, mortgage development manager at VanCity in Vancouver, B.C., Canada's second largest credit union.

So she worked with him to develop a plan to pay off his debts and start a monthly savings plan. "He came to see me a month ago saying he was ready to buy, so I pulled up his information and his credit was re-established and he had savings," says MacKillop. "But if he hadn't done the work three years ago, he wouldn't have been in the position to buy today."

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Everybody comes into the real estate market with a different perspective and level of experience. The fact that online mortgage applications and new loan products are competing for attention these days makes it all the more difficult to give foolproof advice. But some general rules apply to everyone when it comes to getting the money to buy a home. So here are some of the do's and don'ts that buyers will want to consider.

Five do's
1. Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It sounds simple, but every 30-, 60- or 90-day delinquency on a loan or credit card is going to reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine how good a loan you get -- if you get one at all.

2. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have and finally, the payment for an existing mortgage. That's because credit scoring systems look at the performance of similar loans first when deciding what type of score to assign. It will give the most weight to the payment history on another mortgage, for example, than the history on a car loan, which features fixed payments and a fixed rate the way many mortgages do. Lastly, it would evaluate the payment performance of revolving loans, such as credit cards, which feature variable payments that fluctuate with the outstanding balance.

If, in the worst-case scenario, you had to prioritize your bill payments, pay your mortgage loans, then your installment loans and then your revolving loans.

3. Consider paying off more consumer debt and putting down a smaller amount at closing. This leaves borrowers with larger mortgages, but it will allow them to replace high-interest-rate debt, such as credit card debt, with lower-rate mortgage debt.

"If you have high consumer debt and a good down payment saved, a lot of people will reduce their down payment to pay off their debt," says VanCity's MacKillop. "Yes, you may pay a higher premium on the mortgage to do it, but a lot of people do it specifically so they can borrow more money under the mortgage and get a better rate. It makes sense if you have a lot of consumer debt at tremendously high rates and limited cash flow."

4. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as new applications for credit cards, can hurt a borrower's credit score, especially if they're filed in the months prior to the home loan review process.

5. Increase the size of the down payment you're able to make by saving as much as possible, as often as possible. Don't put the savings into something volatile, such as an individual stock. But evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions or other financial incentives to save.

"The best thing is to put it into a Registered Retirement Savings Plan because it reduces the tax paid on their income and starts the savings right away," says Maggie Edgar, a mortgage consultant with Mortgage Intelligence in Simcoe, Ont. She says the money withdrawn from an RRSP is tax free -- the only catch is you have to pay 1/15th of it back into the RRSP every year until it is reimbursed or else it will become taxable.

To make saving even easier, you can set up a monthly direct debit from your bank account and have it deposited directly into your RRSP account.

While these are all good steps to follow, borrowers have to think of what they shouldn't do as well. Resisting the temptation to splurge or slip-up in the credit arena are at the top of the list.

Five don'ts
1. Don't make any big purchases over the next couple of months. Besides the obvious fact that it makes less money available for the down payment, it might require you to get yet another loan. A significant debt such as a $15,000 car loan will look bad to the mortgage lender's credit scoring systems. Plus, the human underwriter won't want to see you adding a couple of hundred dollars per month to your monthly expenses.

"Total debt service should not eat up more than 40 percent of your gross income," says Janice Church, manager of Scotiabank's Horizon Square branch in Calgary. So it's best to reduce your debs as much as possible and keep big new purchases to a minimum before looking for a mortgage.

2. Don't try shooting for that six-bedroom mansion in Toronto's Forest Hill neighborhood if it's going to be too much of a stretch in your current budget. Lenders consider what's known in the industry as "payment shock" when approving loans. Somebody who goes from a relatively small monthly housing payment to a huge one either won't qualify for a mortgage or will end up having to cover too much loan with too little money.

"It's a question of affordability," says Scotiabank's Church. "You get hooked up with the real estate agent, and they usually have lots of nice houses to show you, and they usually start at the maximum you can afford." While those houses may be tempting, Church says people are better off with something a little more modest, with mortgage payments more in line with their current payments.

3. Don't just get pre-qualified for a mortgage, get pre-approved. To get pre-qualified, a borrower need only submit credit, income and debt information voluntarily to a mortgage broker or lender. That means the resulting estimate of the maximum mortgage and home that's affordable is exactly that -- an estimate. Before they can get pre-approved, however, home buyers must allow their lenders to pull credit reports, check debt-to-income ratios and perform other underwriting steps. That puts a borrower much closer to obtaining a loan and locking in a rate and term.

4. Don't forget what kind of money personality you have when getting a mortgage. With a long-term mortgage, you may be able to invest the money saved on monthly payments and earn a higher return on your money in the long run. But that approach won't work for people who spend any extra cash on dinner and a movie twice a week. They can force themselves into saving and accumulating equity faster by going with the shorter term and higher payment.

5. Last but not least, don't forget that homeownership brings with it many burdens. The cost of defaulting on a loan is much greater than the penalty of missing a rent payment. Too many black marks on your financial history and it will be 23 percent interest credit card mailers that show up in the mailbox rather than the 9.9 percent ones your neighbor gets.

Bruce Gillespie is a freelance writer and editor in Simcoe, Ontario.


-- Posted: Sept. 20, 2004
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Home Buyers's Guide
B Y  T H E  N U M B E R S
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  10 dos and don'ts for getting an ideal mortgage
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