Mortgage Basics Simplified
Buying a home is a large purchase. Mortgage is a type of loan, secured by the property you are buying. Therefore, you do not fully own the property until you paid off the mortgage because the lender can take the property if you do not pay your mortgage. A down payment is the portion of the property’s price not financed by the mortgage. You will have to save at least 5% of the purchase price of the home before considering buying a home.
Get Pre-Approved, Get the Peace of Mind
Before you actively shop for a home, you should talk to your lender and get pre-approved for a mortgage. Getting a pre-approval letter will help you set realistic expectations of what you can afford, and this will make your home buying process easier with the peace of mind.
The lender will require documents from you to confirm income and down payment. Also, your credit history will be reviewed. If satisfactory to the lender, the amount you can borrow, the mortgage rate and the terms will be included in the mortgage commitment letter.
Mortgage Math Simplified
Gross Debt Service (GDS) and Total Debt Service (TDS) are used by mortgage lenders to calculate how much you can borrow. Simply put, GDS tells the relationship between your gross income and your spending on your home. GDS should not be more than 32%. TDS tells the relationship between your gross income and your spending on your home and other debts. TDS should not be more than 40%.
What’s the Same for Everyone in BC
If you apply for a mortgage loan in BC, your credit history will definitely be reviewed because it determined the probability of the likelihood that you will pay back the money. 680 is the minimum score for lenders to minimize their risk of lending out funds for a home loan. While many lenders use credit scores to help them make lending decisions it is not the only factor. Also, the credit score is updated daily so you have a chance to improve your credit over time if it’s not satisfactory to the lender today.
Mortgage Requirements are Different for Each Person (Written before June 1, 2021. As of June 1, 2021, all mortgages are subject to stress test)
If you have stable income, excellent credit score, and 20% or more of the purchase price as down payment, then the following is what you should note for getting your mortgage:
- To qualify for a mortgage loan at a bank, you will need to pass a stress test. This means that the bank must use the higher interest rate of either (1) the Bank of Canada’s conventional five-year mortgage rate or (2) the interest rate you negotiated with your lender plus 2% to qualify you for the mortgage. Consider stress test as a buffer to ensure that you can afford payments at an interest rate that is higher than the actual rate in your mortgage contract.
- Credit unions and other lenders that are not federally regulated do not need to use this mortgage stress test. Therefore, it is recommended that you talk to a few lenders before borrowing.
If you have stable income, excellent credit score, but have between 5% to 20% of the purchase price as down payment, then the following is what you should note for getting your mortgage:
- You will need mortgage default insurance. This type of insurance protects the mortgage lender in case you are not able to make your mortgage payment.
- Usually the mortgage default insurance adds 0.6% to 3.85% to the cost of mortgage depending on the total amount borrowed. You still need at least 5% save for down payment.
If you have stable or unstable income, good credit score, and or less than 5% of the purchase price as down payment, then the following is what you should note for getting your mortgage:
- Check your own credit score and make an improvement plan. Timely debt payments will help. Utilize no more than 30% of your available credit will help. Also, remember not to close out any debt accounts that still have an outstanding balance on them.
- Check your bank account and put aside an account for home purchase savings. If you have an RRSP and you have never owned a home before, then note that you can withdraw up to $35,000 from RRSP toward buying your first home. Talk to you bank or account regarding this as the policy may change and you should be aware of the relevant personal tax implications.
Even if you are just starting to think about buying a home, it would be a good idea to start having a conversation with me. It does not matter if you are buying today or two years down the road. I am focused on providing the best service for you and that start with an assessment of how much you can afford. I will guide you through the equity building journey. I can help you with money saving strategies in buying a home and you will be on the road to owning your dream home today or in the future.