Are you Financially Ready?
So, you've decided that home ownership is right for you. Now you need to determine if you are financially ready to buy a house.
Test Yourself
To avoid any future surprises, you can do some financial exercises to see where you stand. They include: calculating your net worth, your current monthly expenses and your current monthly debt payments. To request a copy of these exercises please Contact Me.
Knowing your net worth is important because it will give you an idea of your current financial situation and show you how much you can afford as a down payment. Calculating your current monthly expenses will help you identify how much you can afford to make each month in mortgage payments. Knowing your monthly debt payments is important because it will effect the size of the mortgage that lenders will approve you for.
The maximum home price that you can afford depends on a number of factors but the most important are your gross household income, your down payment and the mortgage interest rate; to get an estimate of the maximum mortgage you are likely to qualify for use our Maximum Mortgage Calculator.
For most people the hardest part of buying a home – especially the first one – is saving the necessary down payment. Many people will not have 20% of the purchase price to put down. With Mortgage Default Insurance you can purchase a home with as little as a 5% down payment. Mortgage default insurance protects the lender and, by law, most Canadian lending institutions require it. The way it works is if the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. The cost for this type of insurance is in the form of a premium and can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
Most mortgage loan insurance products require home buyers to provide the down payment from their own resources, such as savings and RRSPs. Gift down payments from immediate relatives are also acceptable.
Get a Mortgage Pre-Approval
Once you've made the necessary calculations and feel that you are ready to obtain a mortgage, it's a good idea to talk to a mortgage broker and get pre-approved. Your mortgage broker will package your information in a manner acceptable to lenders and will send it to the most appropriate for your needs. The lender will look at your finances to establish the amount of mortgage you can afford and will give you a written confirmation or certificate for a stated interest rate for guarantee period of time, usually up to 120 days.
Having a pre-approved mortgage amount makes the search for your new home much easier and less time-consuming because you have a good price range in mind.
Some of the things you will be asked to provide before we send an application to a potential lender include:
- Your personal information, including identification such as your driver's license
- Details on your job, including confirmation of salary in the form of a letter from your employer
- Your sources of income
- Information and details on all bank accounts, loans and other debts
- Proof of financial assets
- Source and amount of down payment and deposit
- Proof of source of funds for the Closing Costs (these are usually between 1.5% and 4% of the purchase price)
Will You Have Trouble Qualifying for a Mortgage?
Your calculations from the previously mentioned financial exercises may show that you will have trouble meeting monthly debt payments and that you will likely have trouble getting approved for a mortgage. Here are some things you can do:
- Pay off some loans first
- Save for a larger down payment
- Revise your target house price
The Importance of Your Credit Rating
Before approving you for a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this a copy of your credit history (credit report) will be pulled from a credit bureau. The report will provide information on your financial past and use of credit. Before the lender pulls your credit history we will get a copy, with your written permission, and check to make sure the information is complete and accurate. If there is any activity that may have an adverse effect on your application we will contact you to discuss ways to address the issue(s) prior to getting a pre-approval.
Lack of Credit History
If you have no credit history, it is important to start building one by, for example, applying for a standard credit card with good interest rates and terms, making small purchases and paying them as soon as the bill comes in.
Fixing a Credit Record
If you have bad credit, lenders might not want to give you a mortgage loan until you can re-establish a good credit history by making debt payments regularly and on time. Most unfavorable credit information, including bankruptcy, is dropped from your credit file after seven years. If you have bad credit, you may want to consider credit counseling.
Despite your poor credit history, you might still be able to get a mortgage loan if you have a relative such as a family member willing to be a guarantor or co-signer on the loan. This person must meet the lender's borrowing criteria, including good credit history, and is legally obligated to make the mortgage payments if you do not.