Prepping to get a mortgage: The COVID edition
While the process of applying for a mortgage hasn’t changed significantly in 2021 (besides becoming a little more online friendly), a lot has changed about getting a mortgage during COVID-19. In particular, there are extra considerations to account for before applying for pre-approval, especially if you’ve been affected financially by the pandemic.
Here’s everything you need to consider before getting a mortgage and how COVID might have impacted each step.
Check your credit report
Your credit report is a profile of your credit history and is maintained by Canada’s credit reporting agencies. You can request your credit report for free from each credit bureau, or you can pay for it, which gives you access to both your credit report and your credit score.
Your credit score is a number between 300 and 900 and is a numerical representation of your creditworthiness. Lenders will use your credit score and your credit report to determine whether to lend to you. Your credit score will also determine the interest rate that you’ll qualify for on your mortgage. A higher mortgage interest rate can add hundreds of dollars in interest charges to your monthly mortgage payment, so it’s worthwhile to check your credit report and score before applying for your mortgage, to determine if they need improvement.
Regularly checking your credit score and requesting copies of your credit report is always smart, but it’s an even wiser choice now due to COVID-19. If you were unemployed or underemployed during the global pandemic, you might have missed your monthly payments or accumulated some debt on high-interest credit cards. If this is the case, your credit score might have dropped in the past year, meaning you won’t qualify for the lowest possible interest rates on your mortgage.
If you check your credit score and find it has dropped or is less than ideal, you can work on rebuilding it right away. Start rebuilding your credit score by faithfully making your monthly payments, keeping your credit balance as a proportion of its limit under 35%, and keeping older credit tools open to lengthen your credit history.
Pay off your debts
One of the tools that lenders use to determine how much mortgage you can afford is your other debts. Lenders use your debts in a calculation called your Total Debt Service (TDS) ratio. Your total debt load should not be more than 42% of your gross income, and a higher TDS means that you are at risk of taking on more debt than you can afford.
If you’ve been unemployed during COVID-19, you may have needed to take on debt to make ends meet. Alternatively, you may have had to suspend your debt payments and are subsequently behind on your plan to pay off debt before applying for a mortgage. If this is the case, those debts may be driving up your TDS ratio, which may limit how much money you can borrow for your mortgage.
To resolve this issue, focus on paying off any debt you’ve accumulated during the pandemic. Once you’ve paid off your debt, you can apply for a mortgage pre-approval with the knowledge that your TDS ratio will not hold back your pre-approval amount.
Secure Reliable Employment
Before COVID, reliable employment was an essential achievement before applying for a mortgage. This requirement is no different now, so even if you have a substantial down payment, good credit, and no debt, you’re still not a good candidate for a mortgage without a reliable full-time job.
Unfortunately, the pandemic has resulted in massive layoffs across Canada, so reliable employment isn’t always a given. If you’ve struggled to find a job in the past year, you’ll need to put your house hunting goals on hold. Once you have secured a position, stick with it for at least six months before applying for a mortgage pre-approval. Obtaining employment is extra important from a budgeting perspective since once you have a mortgage, you’ll be on the hook for those monthly payments, whether you have a job or not.
Avoid Applying for New Credit
When you apply for a mortgage, your lender will pull your credit score and report. While they are looking for many indicators that you are a good borrower, one of the biggest ones is how you manage your existing credit. If you’ve applied for several new types of credit recently, this can signal that you are in financial trouble, which is a red flag to lenders.
If you can, try to avoid applying for new unneeded credit for six months before submitting your mortgage application. Holding off on new credit might not be possible during the pandemic since funds might be short, and you might need extra credit to get through periods of unemployment or underemployment. If this is the case, consider your need for credit a clear indicator that you should put your mortgage application on hold for the time being.
Scrutinize Your Budget
If there’s one thing that COVID-19 has taught us, it’s that there are so many aspects of daily life in Canada that we take for granted. The simplest things like steady employment, a roof over our heads, or the ability to seek comfort from loved ones have been challenged. When it comes to applying for a mortgage, it’s essential to take a good long look at your budget and scrutinize how it will hold up if the worst happens. What if you or your spouse (or both) lose your job? Will you still be able to make your mortgage payments? If so, for how long?
When planning to buy a home during the era of COVID-19, you should examine your potential new home budget to make sure you can make ends meet even when something like a pandemic comes along. You may find that you should lower your maximum purchase price, pay off some debt first, save a bigger down payment, or bulk up your emergency fund. Whatever you decide, it’s important to hope for the best and plan for the worst.
The Final Word
The process of buying a home in 2021 is not that different from pre-COVID times. More of the paperwork can be completed online, and you won’t have the opportunity to view as many homes, but the process remains essentially unchanged. What has changed is how you manage your finances in the face of a global pandemic that has the power to stop the economy in its tracks. If you’ve been adversely affected by the pandemic, you may need extra time to recover, and that’s ok. If you feel ready to buy now, take another look at your finances to ensure you are prepared to commit to a mortgage that you’ll still have to pay even if you or your spouse becomes unemployed.
These are simply words of caution, and as long as you are making fiscally responsible choices, now could be a great time to get a mortgage in Canada.
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