Qualifying for a home mortgage loan in Canada is not as out of reach as many aspiring homeowners assume.
Though financial equity can take years to achieve, it isn’t unmanageable for most. Any downside to saving for a mortgage is fortunately only temporary in terms of the sacrifices one has to make. While it takes time to build the financial resources to complete a transaction this size, it’s not the only thing you have to watch for either. A stable income and a strong credit score matter. Through small, steady lifestyle adjustments, you get closer to qualifying for a home mortgage loan little by little.
With real estate in Canada being what it is right now, buyers are snatching up properties everywhere very quickly. It’s extremely competitive. Sellers aren’t struggling to sell. For a homebuyer, here are a few tips to help you make owning a mortgage a reality.
To qualify for a mortgage loan, you have to prove to your lender that you can afford the payments. After all, the lender is taking a chance on a loan. It’s in their best interest to put an applicant through a stress test to ensure they are equipped to take on the agreed-upon commitment.
A stress test is typically issued with a calculation using a higher-than-average interest rate. The actual rate on your mortgage contract will likely be lower; however, lenders want to know that you’re able to afford monthly payments above what you’re likely to qualify for. When you refinance a home, switch your mortgage to a new lender or take out a home equity line of credit, you are subject to a new mortgage stress test.
If you do not pass the stress test, you do not qualify for a mortgage. This isn’t the be-all, end-all, though. It simply means you cannot obtain a mortgage today. Keep saving. Look at different properties and those lower in price. Continue to ready yourself for eventual homeownership.
A mortgage isn’t just a destination. After you’ve scrounged and saved to qualify, a mortgage becomes a responsibility. A lender wants to know you’re able to afford a mortgage long-term without straining your finances or putting undue hardship on yourself. This necessitates a stable income.
Mortgage applications are not completed overnight. Future homeowners plan for them years ahead of time. It’s not enough to show up with a down payment and past savings accomplishments. You’ve got to prove you can repay the loan. A bank doesn’t want foreclosure. They often work with their borrower to do everything within their power to avoid it, hence why a stabilized income is so important.
The longer you are with an employer, the better. If you are applying with a partner, their employment should also be equally stable. Demonstrate you have full-time employment and consistent income. This reassures a lender your income is reliable, and your current financial predicament isn’t going to change after you become a homeowner.
This applies to self-employed persons as well. More and more Canadians are self-employed, and lenders are aware of this. You can apply for a mortgage as a self-employed person, and just like you would as an employee, the responsibility is on you to demonstrate stability. You should be prepared to show clear financial reports that share long-term projections on income and to reinforce in a lender’s mind that your self-employment income is not reliant upon variables that are likely to change.
Can you still apply for a mortgage without stable full-time employment – yes, absolutely. It puts a borrower at a disadvantage, though. You will add thousands more onto your mortgage, pay non-preferential rates, and the terms of your contract will be less favorable. With mortgage loans, stability is everything.
If you aren’t currently in a stable financial situation, making the necessary changes to get you there is the best thing you can do for a mortgage application on top of continuing to save for a down payment.
The one thing every Canadian knows about mortgage loans, homeownership, and buying property is that you need a down payment.
The bigger the down payment, the less you pay long-term. In fact, you can dramatically cut repayment installments and save on interest by saving more for your down payment. Even if you’ve got a down payment goal, once you hit it, keep saving. It will only benefit you.
How much of a down payment you need also varies according to value. A home valued at $500,000 or less requires a down payment of at least 5% of the total purchase, compared to $1,000,000 homes and above which usually requires a minimum of 20% as a down payment.
Read more about closing costs here.
For a down payment, save at least 20% of the home value you’re aiming for. Regardless of property value, this is your best approach. Saving 20% is not unachievable, although in Toronto, Vancouver, and similar real estate markets, it will no doubt be tougher to get there.
Another key area to zero in on to improve and optimize is your credit score. This number tells a lender your ability to manage debt. A credit report is used to determine trustworthiness, also outlining any history of borrowed amounts and repayment schedules. Through Equifax or TransUnion, you can obtain a free copy of your credit report and can see for yourself what a lender’s going to be looking at. Some banks often offer a free credit report as well so be sure to check there as well.
If you see on your credit report that your credit score is low, it may be best to hold off on a mortgage. Canadian credit scores range from 300 to 900, with the average credit score for a mortgage being 660. The consequence of a low credit score is a higher interest rate. The alternative is true with a credit score that is high. You will pay more long-term – often, a lot more – if you’re applying for a mortgage with a low credit score. A lender instills more trust in someone with a high score because there’s a better chance, they’ll recoup their loan in full and on the desired payment schedule.
Know your credit score ahead of time and if it’s low, work to improve it. You can knock off thousands from a mortgage loan by doing so.
Don’t navigate the unfamiliar world of mortgages and qualify for a home mortgage loan alone. Talk with a real estate lawyer today to determine your best course of action according to where you’re at in qualifying for a mortgage. Make the process of buying a home easy and simple.
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