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Are you considering working with a mortgage broker to help you find the best lender during the home buying process? Great idea! However, you may have some questions about what the process looks like to find the perfect lender. How do brokers match you with the lender who is right to take you on as a borrower? There’s a lot of information and exchanges involved in the process, which is why a broker is so crucial to your experience. Here’s what brokers will want to know about you, and how they use your information to find you the right product and lender.
Types of lenders
Traditional lenders are also called “A” lenders, and they are what most people think of when they think about mortgage financing. These are your big banks and credit unions, federally regulated lenders with the biggest names. Examples include TD and Scotiabank. Traditional lenders offer the most desirable interest rates and terms, but this also means they have the strictest requirements. Borrowers need to have a traditional income stream, good credit history, and low debt levels to qualify for the best rates with these lenders.
Private lenders represent many borrowers who don’t qualify for mortgage financing with traditional lenders. Private lenders can be businesses, groups, or individual investors. They provide mortgages with higher interest rates and shorter amortization periods, in exchange for more flexibility with a borrower’s credit and debt levels. Borrowers who face issues with debt or are self-employed, for example, might find a private lender is their best lender.
What do brokers consider?
When brokers match you with the best lender, they need to evaluate several criteria. There are many different mortgage lenders, and a broker needs to narrow down the ones who will serve your situation best. Here are some things a broker will want to learn about.
Income and employment
Let’s begin with your income. To support a mortgage, you will need to prove you have the income to do so in one way or another. A mortgage is a hefty loan, plus the interest rates you will face on top of it. A broker will ask you for proof of income to measure how much money you bring in to pay for your mortgage. They will also want to know details of your savings. Based on your income, brokers can gain an understanding of which lenders may be willing to work with you. To prove your income, you will need to provide documentation like T4s, bank statements, pay stubs, and tax returns.
Your employment will be another significant factor in finding the best lender for you. You may think if you have the right income, your exact employment shouldn’t matter. However, employment type is important to traditional lenders. They will want to see you have a salaried job with consistent and predictable payments, otherwise they will have limited assurance that you will have the income flow to support a mortgage. This can obviously be a problem for self-employed individuals, even if they make a lot of money. A broker will examine your income to determine the best lender based on your employment.
Your credit score is another factor that will help decide the best lender for you. Traditional lenders want to see a borrower has a high credit score, preferably above 650. Scores below that can indicate previous issues with making payments or staying within a credit limit. Sites like Equifax and TransUnion will provide you with a credit score, and many banking websites allow you to access your credit score on your account. Once a broker knows your credit score, they can help you either begin the process of improving it, or finding a lender who will work with your current score.
Debt service ratios
Finally, brokers will examine your debt service ratios to determine who the best lender may be for you. There are two main ratios they will look at: Your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. Your GDS ratio looks at how much of your monthly income needs to support your monthly housing payments. This ratio only focuses on housing costs like rent, utilities, and property taxes. Ideally, it shouldn’t be over 35 per cent, meaning you spend less than 35 per cent of your income on such expenses.
Meanwhile, your TDS ratio looks at all your existing debts, including your housing expenses, but also items like credit cards or car loans. This ratio shouldn’t be over 42 per cent. Lower scores are better because it means less of your money goes towards paying off debts. Higher scores and debt levels can often mean a private lender is the best bet for a borrower.
Finding the right match
After examining all your information and comparing it to the requirements of different lenders, brokers will narrow down the type of lender they think you are best suited for. From there, they will be in contact with specific lenders to match you with the right one. Some lenders only work with clients who use brokers, so brokers likely have a wider access to lenders than you would on your own. After narrowing down your options, you will be given information on different lenders’ terms and conditions.
There’s a lot that goes into finding the best lender for a borrower. Brokers carefully compare your situation to the standards of lenders to determine who might suit you best. This means you are guaranteed to find the most appropriate lender for you, given brokers’ wide range of access. We strongly recommend using a broker to help you for this part of the process!
If you have questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.