When applying for a mortgage, provide prospective lenders with enough information about your work history, debts and assets. They're looking at the state of your personal finances. They will look at your gross income and potential mortgage payments and property tax expenses to come up with a Gross Debt Service ratio (GDS). This is usually limited to 30-35% of your gross income. To that lenders will add all other debts to come up with a Total Debt Service ratio (TDS), which can't exceed more than 40 percent of your gross earnings.
What Lenders Look For
Lenders are looking at the risk factors from two points. First, will you be able to make your scheduled monthly payments? Second, if you default (don't make your payments) can the financial institution get enough money from the sale of the house to repay the loan?
You'll be asked about your net worth, the difference between the value of everything you own and the amount you owe. Lenders take into account your bank balance, any types of investments, other real estate, cars and boats, other loans, credit card balances and many other things. Remember to be as specific as possible. So if you have a coin, significant stamp or art collection, have it appraised!
Your credit rating is your history of loan repayment and will be used by lenders as an indicator of your ability to repay your mortgage. It covers how you've managed past debts or if you've filed for bankruptcy. You'll be asked to sign a form allowing your financial institution to gather information from your employer, creditors and credit rating agencies.
If you've had credit problems, it may be a good idea to check and clean them up before you apply for a mortgage. You can check your own credit rating by contacting a company that compiles the information. One source is the Trans Union Customer Relations Department, P.O. Box 338-LCD1, Hamilton, Ontario L8L 7W2. Simply send a note asking for your credit rating along with photocopies of two pieces of ID with your current address, plus a photocopy of a utility bill or credit card invoice. The process takes about two weeks and you'll get a good idea of how you'll be evaluated by the banks.)
If there is an outstanding debt, contact the creditor and resolve it. If you notice an error, report it immediately in writing and get it resolved.
Although your credit may not be perfect, it does not mean you are unable to purchase a home. Make sure you talk to a mortgage broker about your situation before you give up on your dream. Even if you can't buy now, your mortgage broker can help you re-establish your credit so that one day you will be able to live your dream of owning a home.
Mortgage Loan Insurance
As a first-time home buyer, chances are, you're not walking into your deal with a huge down payment. As you may have already discovered in other areas of the site, you can purchase a home with as little as 10% down, or even a 5% down payment if you qualify with CMHC's First Home Loan Insurance.
Bottom line, if your down payment is less than 25% of the value of the home, you must purchase mortgage loan insurance. In Canada, most lenders are legally required to insure these high risk mortgages. This insurance means that if you default on your mortgage, your lender receives their money from the Canadian Mortgage and Housing Corporation (CMHC) or other insurer. And it's coverage like this that gives most lenders the confidence to finance up to 90% of your purchase.
What Does it Cost?
The actual premium of the loan ranges between 0.5% and 3%, and is based on the size of the loan and value of your home. You can make your premium in two ways: as a lump sum when you make your purchase or as part of your monthly mortgage payments. But keep in mind, if you're paying it monthly, you're also paying interest on the premium!
Of course, there are always additional fees:
(If you provide your own appraisal, the fee drops to $75, but neither cost covers the actual inspection or appraisal service.)
Application Fee $25
Appraisal Fee $235
First Home Loan Insurance
This is a special product for first-time purchasers. It allows you to mortgage up to 95% of the value of your home. Any type of home is eligible, as long as it meets the following criteria:
- The home must be occupied by you and be in Canada.
- You can't have owned a home in Canada during the past five years. (If there is more than one owner, only one has to meet this criterion.)
- All housing payments - mortgage principal and interest, property taxes, heating (and if applicable, 50% of your condominium fees) can't total to more than 32% of your gross household income, or be more than 40% of your entire debt load.