By: Penelope Graham,Zoocasa
Getting a mortgage can be a fairly smooth process – if you’re the perfect borrower. Those with pristine credit scores, stable employment, little debt and dual household income will enjoy some of the most competitive rates available, which can add up to thousands of dollars saved over the course of a mortgage.
But not all borrowers fit this ideal lender profile – and how far you deviate will determine how much more you’ll pay for your home financing.
Here’s what every prospective mortgage borrower should know, before making an offer on their dream home.
The Size of Your Down Payment Matters
In Canada, buyers are required by law to make at least a 5% down payment on their home purchase. Pulling together even this amount can be a challenge, especially in the ultra-expensive Vancouver and Toronto real estate markets.
However, it’s not in your best interest to underpay on your down payment if your affordability allows for more; anyone who puts less than 20% down must also take out (and pay for) mortgage default insurance. This coverage is actually for the bank – they’re the beneficiary – and is designed to protect them financially should you fail to make your mortgage payments.
This insurance is mainly offered by the Canada Mortgage and Housing Corporation (a taxpayer-backed Crown Corporation) as well as private insurers Genworth and Canada Guaranty. The total cost of premiums is rolled into your mortgage, and vary depending on your total mortgage loan-to-value ratio.
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The CMHC generally sets this pricing, with the other two insurers following suit. In fact, the Crown Corporation hiked premiums just last week to the following rates:
Loan to Value Ratio
Standard Premium (Current)
Standard Premium effective March 17, 2017
Up to and including 65%
Up to and including 75%
Up to and including 80%
Up to and including 85%
Up to and including 90%
Up to and including 95%
90.01% to 95% – Non-Traditional Down Payment
The federal government has also recently introduced measures to dissuade buyers from making smaller payments. Last November, they introduced a mortgage “stress test” which requires all those with less than 20% to qualify at a rate of 4.64%, regardless of the actual rate they qualify for. This has made it tougher than ever for buyers, and especially first-timers, to break into the market. In fact, a recent survey from the Ontario Real Estate Association finds as many as eight in 10 first time buyers have been impacted by the change.
A key part of your mortgage application is your income verification, usually proved via paystubs and a letter of income from your employer. But where does that leave those who are self-employed? This group must jump through even more hoops to prove their financial stability, including the provision of a tax Notice of Assessment for at least two years. If you can’t produce that, you’ll be required to pay a higher minimum down payment of 10%, and as much as 35% down to bypass the income requirement altogether.[home_insurance_square_widget]
Self-employed borrowers must also show:
Financial statements for their business.
Proof that HST and/or GST is paid in full.
Contracts showing expected revenue for the coming years
Personal and business credit scores
Proof they are a principal owner in the business.
A copy of their business or GST licence or Article of Incorporation showing they are licensed
Proof that the down payment has not been gifted
Your Credit Score Can Cost You
Lenders will also closely scrutinize your history of paying your financial obligations, such as revolving debt, monthly payments, and installment loans. This ability will be reflected in your credit score, and generally the better your score, the lower your mortgage rate will be. Ranging from 300 – 900, a good credit score falls above 700, with an excellent one in the 800 range. It’s smart to check in with that status of your score at least six months before a lender or broker pulls it for a mortgage application. Doing so can give you the opportunity to catch and pay off any lingering debts, the effects of which may take several months to be reflected on your credit report.
Take Care with Mortgage Conditions
While getting a pre-approval is a great first step in the home buying process, it only indicates how much you can borrow – it doesn’t mean your mortgage is set in stone. This can land you in hot water on your buying offer if you don’t take the proper precautions. Traditionally, buyers would add an “upon-financing” condition to their offers, meaning their deposit is returned if their mortgage doesn’t pan out, no harm or foul. However, given how competitive some Canadian real estate markets are, buyers have been dropping these conditions to make their bids more attractive.
Should you make an offer without a condition and your lender refuses to finance it (which can happen if they feel the property is overpriced), not only could you lose your deposit, but the seller is now in the position to sue you for losses.
Know Your As and Bs
For some borrowers, their financial situation or credit score just won’t qualify them for mortgage financing from a bank or credit union – but that doesn’t mean they’re out of options. There are financial institutions that cater to this borrower group, referred to in the industry as “B” lenders. They’ll have less stringent or forgiving criteria for qualification. The tradeoff, though, comes in the form of much higher rates- by as much as hundreds of basis points – than the most competitive available to prime borrowers.