Yes, we all are aware the old adage: a home is the biggest purchasing decision you will ever make.
It is true, though, especially considering how the average home in Canada’s biggest cities are nearing $1 million. Interested in buying property? Well, you will need to qualify first for a mortgage – unless you invested in bitcoin a couple of years ago and yielded 20,000 percent return!
Do you have the qualifications to be approved for a mortgage? Let’s find out. Here are eight conventional mortgage requirements new homebuyers need to know:
1. Do You Have a Down Payment?
Down payments are necessary because then you have some skin in the game. At the same time, they have also become a hindrance to new homebuyers who could afford the monthly mortgage payment, but they lack the $100,000 upfront costs for a mortgage.
That said, here is what you need to know about down payments in Canada:
- A five percent down payment for homes that cost up to $500,000.
- A five percent down payment, plus ten percent of the remaining balance for homes more than $500,000.
Do you have it? If not, you may need to purchase private mortgage insurance (PMI). If you do have it, you’ll have a greater opportunity of being accepted.
2. Gross Annual Income
Your income is one of the most important and conventional mortgage requirements. Let’s put it this way: If you’re earning $45,000 a year, then there is no way you are going to be approved for a $500,000 mortgage. That’s just the way it is.
In other words, your gross annual income matters, and it is essential for mortgage lenders to determine if you are a borrower they are willing to take a chance on with something as immense as a $450,000 mortgage.
You will need income statements to prove your earnings.
3. Proof of Employment or NOA
Conventionally, it is a lot easier to get approved for a mortgage if you are a permanent, full-time employee for a large company than a self-employed applicant. The former has all the evidence and security necessary to attain a mortgage, while the ladder has to go through a series of hoops to prove otherwise.
There are two ways to show the mortgage lender that you are employed:
- Letter of employment, T4 slip, pay stubs, and other documents from the business.
- Notices of Assessment (NOA) from the Canada Revenue Agency (CRA) of the last two years if you are self-employed.
4. Credit History
How good or bad is your credit? If you don’t know – and many of us do not because credit reports are not free like they are south of the border – then it is important to find out before you initiate the mortgage process. The higher your credit score, the better it is for how much you can borrow from the bank, credit union, or alternative mortgage lender.
In Canada, credit scores range from 300 to 900; the magic number is 650, but anything lower will bring about trouble when obtaining new credit.
5. Assets vs. Liabilities
A lot of Canadian consumers have gotten into a world of trouble over the last decade by living beyond their means and taking on more than they could afford. From those daily trips to the shopping mall to that year-end vacation to some exotic destination, you could not pay for these types of expenditures without relying on credit cards or lines of credit.
As a result, your net worth continues to dissipate. How do you calculate your net worth? It’s a simple formula: assets (savings, stocks, bullion, jewelry, etc.) subtracted by liabilities (debts, loans, and overleveraged trading accounts).
6. Go Through Pre-Approval Process
The pre-approval process is an important step in your journey to homeownership. If you are pre-approved for a mortgage, then you know how much you can work with, how much you’ll be paying a month, and what type of house you can buy. Without it, you are walking around blind without a cane.
Some forego this process, but it’s ridiculous not to. You want to have the confidence and knowledge when you’re in the market for a house or condominium.
7. Total Monthly Housing Costs
Knowing your total monthly expenditures is critical to your survival in homeownership. You never want to exceed your incomes, you never want to rely on pieces of plastic to get by, and you never want to risk facing foreclosure.
When you apply for a mortgage, the lender will examine your monthly obligations and explain to you just what you can expect to pay when you own a property. Believe it or not, there are so many expenses that come with owning a home that many people decide in the end to just rent an apartment.
8. Don’t Take on Additional Liabilities
One of the worst things you can do from the moment you submit a mortgage application to the time you receive the deed to your newly-acquired humble abode is to take on additional liabilities.
For instance, you apply for a $650,000 mortgage to purchase the home of your dreams. During this lengthy endeavour, you decide to also buy a sailboat or apply for an auto loan for a luxury vehicle. That is bad, and it will negatively affect your desires for homeownership – or perhaps that need for a Porsche.
You walk down a street in a beautiful neighbourhood and you see people with a mcmansion, two automobiles, and two children. You wonder, “Why can’t I do that?” Well, you could, but then you would be buried in debt and loans and any income coming in would be to service those items. It’s hard work to go into so much debt to attain the Canadian Dream.
With interest rates going up, it is important to be fiscally responsible and to think about the future. A $400,000 mortgage might seem affordable on your income, but you need to take into account, such as rising interest rates, closing costs, a down payment, and a myriad of other elements associated with a mortgage. If you have, then apply away!