Home-buying basics

Mortgage pre-qualification – more important than ever

As we head into the spring market, I think it’s important to revisit the basics of the home-buying process.

Whether you are a first-time home buyer, have purchased a home in the past, or worked with a mortgage professional last fall before the rules changed, I strongly recommend you reconnect with your mortgage professional before you go home shopping.

It is a good idea to meet with your mortgage professional to complete (or review) your application and determine how much you are qualified to borrow under the new guidelines. This will determine the price range you should be considering.

Your mortgage professional will outline how much you need to have on hand to cover your down payment and closing costs.  

To complete an application, you will need to have the following information:

• personal data such as your legal name, birthdate, and social insurance number
• home address and employment information
• a description of your assets that includes what you will use for your down payment
• a list of your outstanding debts (credit cards, loans, etc).

Your mortgage professional will review your credit report. Your credit report provides a history of how you manage your finances and is a key factor that potential lenders review when considering your application.

You will also be asked for confirmation of the information that you have provided. You will need to provide documentation such as:

• bank statements
• tax returns
• letter from your employer
• current pay stubs.

It is helpful to start gathering this information ahead of time to avoid last-minute stress.

You will be required to show that you have at least 6.5 per cent of the purchase price of your home set aside to cover your minimum down payment and closing costs.

The minimum down payment required to purchase a primary residence is five per cent (for purchases up to $500,000). Over this amount, the minimum down payment required changes to five per cent up to $500,000 and 10 per cent of the balance over $500,000.

The more you are able to put down toward your purchase, the less interest you will pay over the long term.

If you are putting down less than 20 per cent of the purchase price, lenders require default insurance. You may hear this referred to as CMHC insurance.

The purpose of this insurance is to protect the lender in the event that you default on your mortgage payments. It is a one-time up front cost that can be added to your mortgage.

It is calculated as a percentage of the amount you borrow and is based on a sliding scale – the more you put down, the lower the percentage that is charged. 

In some remote areas, lenders may require default insurance even if you put down more than 20 per cent.

Your down payment ideally comes from your own savings.

If you have invested in RRSPs (provided they are not considered locked in), you may be able to take advantage of the Home Buyers Plan and use them as your down payment.

Your down payment may also come from an immediate family member.

Closing costs include items such as:

• an appraisal
• home inspection,
• title insurance
• property transfer taxes
• legal fees.

Depending on your particular circumstances, an appraisal may not always be necessary. As a first-time buyer, you may not have to pay property transfer tax.  

Your mortgage professional can give you an idea of what these costs are in your particular area. It is a good idea to use a checklist to keep track of your estimates for these expenses, to ensure you have enough money set aside to cover them.

Once you have completed an application and demonstrated that you have your down payment, your mortgage professional will submit an application to determine if you are pre-qualified.

You will find out the maximum amount you are qualified for, and most lenders will issue a 120 day rate guarantee. This rate guarantee means that even if rates go up while you are shopping, your mortgage will be at the pre-approved rate provided it closes within the 120 day period.  

It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender.

As well, you must be able to satisfy the lender’s requirements for appropriate documentation.

It is important to consider your lifestyle and spending habits — just because you are pre-approved to a certain amount does not mean it will be comfortable to carry that particular mortgage payment.

Practice making the higher mortgage payment and additional expenses of owning your own home for a few months. This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.

Knowing the amount you are pre-approved for will help guide your search as you move to the fun part of the process – shopping for your new home.

Make sure you leave room in the budget for snow shovels.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.