Last updated: May 2019
As a mortgage broker, one of the things I hear over and over again, especially with younger buyers, is that they think they have some credit report items that will prevent them from getting a mortgage. While that may be true, more often than not, it is actually a lack of down payment savings and/or too much personal debt that is the real culprit.
In this article, we are going to talk about how to calculate how long it will take for you to get your own home and make your dreams reality.
When talking with prospective buyers, I use a term called Time-to-Mortgage or "TtM" as a way of illustrating how long it will take for them to get their own home. Follow along with the math.
Time to Mortgage (in months) = [ Target House Price "THP" X 0.065 minus Current Savings plus UnPaid Collections ] divided by Available Monthly Savings
Current Savings or "CS" is what you have in the bank or RRSPs or might be gifted from a family member or perhaps from something you can sell.
UnPaid Collections or "UPC" are any amounts on your credit report that must be paid now to be completely caught up. As a general rule, you will be in the "no-mortgage penalty box" for at least 6 to 12 months after you are completely caught up, so these items must be addressed first, using Current Savings if necessary. (This last point is sooooo important!) Get you credit report free by mail.
Available Monthly Savings or "AMS" is the money you have left over after all your bills and housing expenses are paid. For most, the left over money is the "fun money." But here's where the tough decisions have to be made - fun money or down payment savings? Obviously a new vehicle is nice to drive, but do you want to sleep in your own house or a car? It's about priorities. For free resources on stretching your dollars and budgeting basics, click here.
Here's a TtM or Time-to-Mortgage example for Mike.
Mike wants to quit paying rent and own his own home. Starter homes are about $300K in his area (THP=$300K). He has $10K in current savings (CS=$10K). Unfortunately, after obtaining his credit report, he discovers he has a $1200 ambulance bill that he forgot about and went to collection and an $800 unpaid cell phone bill when he switched providers (UPC=$2K). Mike has been thinking about a new truck at $600/mo, but that could be used for savings instead and he'd probably be able to save $200/mo more. His AMS is therefore $800/mo.
Let's do Mike's math for Time to Mortgage...
$300,000 (THP) X 0.065 = $19.5K, which is the minimum down payment and closing costs. $19.5 less $10K already saved (CS) plus $2K he owes (UPC) equals $11.5K remaining to save, divided by his available monthly savings of $800/mo (AMS) = 14.4 months Time to Mortgage. Mike simply needs to set up an out-of-sight-out-of-mind savings program that automatically packs away his $800/mo or $400 every two-week pay-cheque, whatever works best. If he is really smart, he will save in a RRSP and use the First Time Home Buyers Plan to get the government to help out with bigger tax refunds, which are then added back to the savings account.
Other considerations. Mike understood why it was important to address the collections immediately to clean up his credit report. By using $2K of his current savings now to "pony up", he can see that in 15 months the collections will be showing on his report as paid well over a year earlier and his credit score will be in much better shape. That's what the mortgage lenders want to see - that you pay your bills as agreed!
There you go - Mike has a plan and time frame to get a mortgage. It all starts with a pre-assessment and a strong desire to own his own home!
By the way, if there are credit report items to fix, 9 times out of 10, the credit report can easily be fixed before a down payment can be saved.