Transcript for Video
How Do You Qualify for a Mortgage in Canada?
So, you are tired of renting and are thinking of buying a home, but don’t know where to start! The first step is seeing if you will qualify for a mortgage.
The mortgage process can be very intimidating and many lenders make the mortgage process very confusing. This has been caused by the banks not taking the time to explain to a borrower how the mortgage process works. In reality, there is no mystery, just a few basic principles.
Here is what you need to know to qualify for a mortgage in Canada. The mortgage process is broken into 3 elements, these being Credit, Income, and Equity or Down payment.
The First Part is your credit history! Today credit history is determined by a scoring system called a credit score. The credit score talks about the probability of default. A high score would be 800-this is someone who has very little chance of defaulting on a loan.
A marginal credit score would be 620. A score lower than this makes it difficult to get approved for a mortgage, while above this would give you a good chance.
In addition to the credit score, you will need to have at least two other credit items such as credit cards or auto loans with a major bank that has been established for a minimum of 24 months.
When your credit bureau is pulled by a mortgage broker, it is good for 60 days. With that, we can shop your deal with dozens of lenders and they will use the credit we provide. This saves your credit from being pulled multiple times and helps to preserve your credit score. How important is the credit report in the overall mortgage process? It is 60% of the overall application.
The second part of the mortgage process is Income and Job stability. You need to have enough income to service the mortgage. The lenders use a term called (GDS) Gross Debt Service ratio to determine how much of a mortgage you can afford - the GDS is actually the Principal, Interest, property tax, and heat for the property you are buying. This cannot exceed your gross income by more than 32%.
They also use a second criteria called Total Debt Service ratio (TDS), in that the Principal, Interest, Tax, Heat and all other fixed payments such as loan payments or credit card payments cannot exceed your gross income by more than 40%.
Last but not least, you must also demonstrate some job stability. Job stability is classified as being on the job a min. of one year. Less than one year on the job can also be okay, providing you are in a similar job to your previous job and you are past your probation period or if you are newly out of school and got a job in your field of studies.
How important is income and job stability in the mortgage process? It is 30% of the overall mortgage process! So you can see that the first two parts of the mortgage process account for 90% of qualifying for a mortgage. If one of these two items is impaired in any way, manner, or form, you will not qualify for a prime mortgage.
The third part of the mortgage process and the last 10% is the Equity or the Down payment in a purchase. Today a person can buy a home with as little as 5% down payment, but in addition to the down payment you will have other costs associated with the purchase, costs such as Land Transfer Tax, legal Fees, etc. You will have to
demonstrate that you have the closing costs that is 1.5% of the price of the home you are buying in addition to the 5% down payment.
All of these items are important in the mortgage process and if one of these is impaired in any way, then you are not a prime client. Do you know who sets the rules concerning all of these?
Most people think that the banks set these rules but this is not true. The banks are limited by charter that the maximum that they can lend on a property is 80% of the value of the home. This, of course, poses a problem as most people do not have 20% to put down. So, Years ago the Canadian government recognized this problem and designed a program where someone with less than 20% down payment can buy a home.
However, for this to happen, the government requires that you have the mortgage insured. This means that if you default the banks will be guaranteed to get all their money back. The company that provides this insurance is called Canada Mortgage and Housing Corporation or CMHC for short. They are the ones that set the rules governing hi-ratio financing and it is their rules that we must follow. Simply put, if CMHC does not think you are a good credit risk, then you will not qualify for a prime mortgage.
What’s important to understand is that no matter which lender or mortgage broker you go to, these are the rules!
Now that you know this, that is why you want Discount Mortgage Canada to work for you in getting you pre-approved before starting to look for a home. Simply, complete our online application and we will start the process for you at no cost or obligation! Click our online application and get started.
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