Buying and getting financing for your first home will involve a medley of feelings. Excitement, happiness, nervousness, uncertainty and stress could describe a few of those. Of course, the best way to rid yourself of the latter examples is to know what you need in order to make this big life transition a smooth and seamless process.
With rules and regulations for Canadian mortgages changing constantly, it is essential to be properly prepared before sending in your application. Securing a mortgage can be challenging, but with the right preparation, you will set yourself up for success in getting the solution that is right for your financial situation. Here are a few tips to get started:
1. Know your goals
When planning on applying for a mortgage you will want to have at least a rough idea of what your plans and goals are within the next few years of your life. Knowing this will ensure you get the most suitable product in order to best serve those goals. For example, you may be planning on moving within the next two years after buying your home, in which case you would have to break or discharge your mortgage. If your mortgage has a five-year term, this could mean thousands of dollars in penalties which in turn would be astronomically more than simply having a slightly higher interest rate to start off with. Having a clear idea and relaying these goals to your mortgage professional is of the utmost importance.
2. What you need to send along with the application
When you fill out the application, you will need to provide a list of documents in order for the lender to confirm your income, financial health and your ability to consistently pay off the balance of the mortgage. This will include documents such as your last two years tax filings, most recent pay stubs, a current letter of employment from your job(s) and also a bank statement that shows history of where your down payment is coming from. In the case your down payment is a gift, you will need a gift letter signed from the person who gave it to you.
3. Your budget and how much you’re able to spend on a monthly basis
The general guideline most lenders refer to is the 39/44 rule. This means that your monthly mortgage payments should not exceed 39% of your gross monthly income, and your total revolving debt payments; including the amount of your potential mortgage, car loans/payments, and any other monthly installment payments you make (heat/hydro) should not exceed 44% of your gross monthly income. These numbers are typically concrete, but your ratios can vary if you decide to consolidate debt or can prove you get bonuses with your job for example.
4. Understand your market
Often times, the area you’re planning on buying in or even the property itself will influence your mortgage or potential mortgage. For example, in condominium purchases, the lender will have to look into the financial situation of the building/corporation to make sure you they are in good financial standings as well. Aspects such a zoning, or protected areas of land will also determine what you’re able to do with the property once you move in (construction, renovations, creating a rental unit, etc.).
Your best option is to ask your real estate and/or mortgage professional what type of property you’re buying and to get their advice.
5. Understand your credit score
A credit score is a number assigned to an individual that will give an indication of your likelihood of paying off a loan based on your credit history. In Canada, the lowest possible score you can have is 300, the highest/best being 900 and 680 being the sweet spot to easily accessible credit, according to most lenders.
Credit is complex. With a narrow range of credit reporting agencies to pull scores from, what we know is that their algorithms are confidential and that your score is based on a wide variety of factors. This includes payment history, delinquencies (outstanding bills that went to collections), balance to limit ratio (using more than 30% of your total available credit), recent inquiries (opening new credit accounts), length/history of accounts, or simply having too many accounts in general.
The best way to improve your score is to pay off balances, use and pay off your credit in a timely manner, and to correct errors you may have noticed on your credit history.
6. Have your taxes in order
For your potential mortgage, the lender will want to see your tax filings from at least the last two years if you are self-employed, get paid hourly or make commission. Salary jobs do not often require this in Canada, but you may still have to provide the documents, depending on your situation. This will verify your income and ability to pay off your mortgage consistently. The type of tax documents will vary depending on your employment (self-employed, business owner, employee, etc.). It is essential for you to file your taxes on a yearly basis in order to have this documentation readily available to give to your mortgage representative or to sign a consent form in order for them to retrieve it from the CRA. The documents you give your mortgage representative must match the ones you filed.
7. Be wary of big purchases
Receiving an approval from your mortgage professional will be exciting as it confirms your ability to acquire your new home! But be wary that your finances will be monitored through the closing as big purchases could improve the likelihood of your mortgage acceptance being revoked. Taking on more debt will affect your ratios as mentioned in point 3 and if you exceed the required debt ratios, you may no longer be applicable for the mortgage product that was first offered to fit your financial situation.
Being concerned about your ability to afford improvements or needed renovations to your home is completely normal and there are even financing options available to wrap the costs of improvements into your mortgage, depending on what you’re looking to accomplish and how much more you will qualify for.
Overall, mortgages are unique to every individual and can require creative financing solutions in order to successfully align with your goals. Being well organized and following the tips as stated above will give you an advantage during the process, but the best advice will come from your mortgage professional.
Marina Vander Heyden | Mortgage Agent | Vine Group | marina@vinegroup.ca | (647) 332-9857 | 555 Bloor St. East, Toronto, ON, Canada M4W 1J1