While some first time homebuyers may thing that the first step of buying a home is the shopping itself, it's a good idea to take some preparatory steps before you delve deep into house hunting.
1. Save Your Down Payment:
The lending rules for CMHC have recently changed (December 2015). You do need to put down at least 5% of the value of a home to qualify for a mortgage in Canada up to $500,000. These are the rules. This is a positive, it means we live in a more stable community when it comes to the real estate markets. You may think you want to be able to qualify for a mortgage with nothing down, but that would make us a lot like the U.S. before the recession. Not a great prospect.
It's not hard to calculate 5% down payments, but here is what they look like for some common home values.
|HOUSE PRICE||5% DOWN PMT|
When it comes to homes priced over $500,000, any additional value on the home must be purchased with a10% down payment.
|HOUSE COST||5% OF $500k||Balance over $500,000||10% of Balance||
Total Down Pmt
(5% + 10%)
Houses over $1,000,000 require 20% down, and at the point CMHC Insurance is not needed.
2. Break It Down, How Much Can You Afford?
Before you pursue online house listings or start viewing homes with a REALTOR®, it's crucial to know what you can afford. While simple calculations can be done to determine what price range you should be shopping in, most REALTORS® and loan officers will encourage you to get pre-approved for a mortgage loan by a lender.
It is a good idea to avoid trying to obtain credit, or making any large purchases while you are in the approval process. Any changes to your credit score or balances could have a negative effect on your ability to obtain a mortgage.
If you've saved your down payment and you're looking to buy in the next three to six months, it's time to get pre-approved. Getting pre-approved allows you start setting realistic expectations upfront in terms of affordability, and you don't get caught looking at houses you love but cannot afford.
In addition, getting a pre-approval will allow you to act quickly and with confidence when you do find your perfect home. A pre-approval is the beginning of the loan process. To provide you with a pre-approval, the lender will review your income, the source of your down payment, your assets and liabilities (credit-to-debt- ratio), and reviews your credit report to determine your credit worthiness.
You will generally need to provide the following items you will need to be able to provide the following information to begin the pre-approval process:
- Photo Identification
- A Record of Employment (T4 Slip, or a personal income tax return (if you are self-employed you will need at least two years of personal income tax returns and income statements.
- A letter from your employer stating the length of your employment and current salary
- The account numbers and locations of your bank accounts and investments and our down payment (if your down payment is being gifted to you, you will need to provide a letter from the gift-giver stating the money does not need to be paid back.)
- Details of your assets, such as vehicles, investments etc.
- Details of your liabilities, such as credit card balances, car loans, student loans, or lines of credit, co-signed or guaranteed loans, or any other monthly obligation you may be paying on an ongoing basis.
- Name, address, telephone number of your lawyer
Not All Mortgage Pre-Approvals are Created Equal
While the pre-approval process is intended to give you peace of mind during your home search, pre-approved mortgages are always subject to conditions, if you verify your financial information upfront, you're that much closer to getting the loan.