Back to basics

Before you look at houses for sale, it’s a good idea to meet with your mortgage professional to determine how much you can borrow.

This will help you determine the price range you can be looking at, as well as give you an opportunity to learn more how mortgages work.

Sometimes this initial meeting may show that you are ready to start shopping for a house right away. Sometimes it shows that you need to address issues that might be affecting your credit score.

For your initial appointment, we will complete a credit application with you. Information you need to have on hand includes:

• Personal data such as your legal name, birth date, 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).

Depending on your history and how close you are to purchasing a home, we may review your credit report. This report provides a history of how you manage your credit and is a key factor that potential lenders review when considering your application.

Lenders will ask for confirmation of the information that you have provided in your application. You will be asked to provide documentation such as bank statements and 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% of the purchase price of your home set aside to cover your minimum down payment and closing costs. 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 funds given to you by a first-degree relative.

The minimum down payment required to purchase a primary residence is 5% (for purchases up to $500,000). Over this amount, the minimum down payment required changes to 5% up to $500,000 and 10% 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.

We will review what to expect in terms of process, timing, and costs. Closing costs include items such as an appraisal, a home inspection, title insurance, Property Transfer Taxes, and legal fees.

Depending on your particular circumstances, an appraisal may not always be necessary.

It is a good idea to use a checklist to keep track of your estimates for these expenses, to ensure that you have enough money set aside to cover them.

Once you have completed an application and demonstrated that you have your down payment in place, we will submit an application on your behalf to determine if you are pre-approved.

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.

If you have not purchased within the 120 days, it is often possible to extend the rate guarantee if rates have not increased.

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.

How much can I afford?

The standard rule of thumb (subject to certain exceptions) is that your housing costs should not be more than 39% of your gross income, and your total debt payments should not exceed 44% of your gross income.

Lenders follow two rules to help calculate the maximum mortgage payment you qualify to carry. These two rules are explained as follows:

Affordability Rule 1:

The first rule is that your monthly housing costs shouldn't be more than 39% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses.

This is known as PITH for short —Principal, Interest, Taxes, and Heating. Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio.

To be considered for a mortgage, your GDS must be 39 per cent or less of your gross household monthly income.

Affordability Rule 2:

The second rule is that your entire monthly debt load should not be more than 44 per cent of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.).

This figure is called your Total Debt Service (TDS) ratio.

Many clients find the documentation part of the process the most challenging. Lenders are particular about confirming the information provided, so you will find the application process goes much smoother if you have done your homework ahead of time and have your documents organized up front.

Common documentation required to be pre-approved for a mortgage may include:

• Ask your employer to prepare a letter on company letterhead outlining your name, base salary or hourly rate, normal hours worked per week, position and length of service. A recent pay stub and a copy of your T4 from last year may also be required.
• If you are self-employed, previous two years personal tax returns together with the Notice of Assessments from Canada Customs & Revenue Agency, as well as previous two years business financial statements, and two years business tax returns (if applicable)
• Social Insurance Numbers
• At least three years history of residence and employment
• Banking information (name of financial institutions, address, and type of accounts, account numbers)
• Know your assets (what you own) and their value. i.e. cash amounts, stocks, bonds, RRSPs, car
• Know your liabilities (what you owe). i.e. car loan, credit card balances, child or spousal support payments
• It's also a great idea to write down a list of any questions you would like to have answered.

If you are thinking about whether this is the right time to buy a home, feel free to reach out and we can help you with a pre-approval. You may be ready to buy soon, or you may need a bit of time to get yourself ready to go.

By taking the time to look into a pre-approval you will know where you stand.

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