Qualifying to buy a home - the 40,000 foot view
A general overview of buying a home and what gets looked at to qualify.
TL;DR: if you were going to lend hundreds of thousands of dollars to someone, these are the things you'd probably want to know about them: what's your repayment history like? Do you work and how much do you make, and how much of that is already spoken for (i.e. what's left for me, if I lend you this money)? How much skin in the game will YOU have, if I am taking on most of it? Can you actually afford this?
Did you know that the average Canadian will spend almost a year actively engaged in the house buying process? Most of the dreaming (and preparation) happens before then. Buying a home is a huge deal, and it's a decision that should of course be taken seriously. With all the recent changes, there's no such thing as being too prepared!
Even if you don't plan to buy for a couple years, general information can only take you so far. Every client and financial situation is very different. That's why we think it's important to apply as early on in the process as you can. That way, if something can be optimized, fine-tuned, or.. tweaked, as they say - you can do it now instead of rushing to do it later.
Finance-y things take time, so if there's something that needs fixing we think it's best to get on it sooner rather than later.
Here's the quick n' dirty on what you should think about and how the process unfolds.. sort of.
Are You Credit Worthy?
Do you have a good credit? Having good credit is super important when applying for a mortgage. A good credit score takes time, and a stronger borrower (i.e. easier approval!) will have managed their credit well over a minimum of a 2 year period.
Even if you have a huge down payment and manage your money perfectly, and the idea of debt disgusts you, having an established history of borrowing and repaying money is crucial. It's really hard to get mortgage financing without a credit history.
How Will You Repay Your Mortgage?
If a lender is going to lend you money to buy a property, they are going to want to know you can pay them back. They want to know that you have a steady job, and will make you prove it through documentation. Depending on how you get paid, lenders will want to see an employment letter, pay stubs, and maybe some tax stuff, and really anything else they feel gives them an accurate picture of how much money you make. Sometimes borrowers get offended by home much a lender will ask for - but remember the golden rule. The one with the gold makes the rules!
Do You Have A Down Payment?
In order to borrow money, you're going to have to bring some money to the table. The best down payment comes from an accumulation of your own resources, but there are other sources of down payment that are available to you. A 5% down payment will be the bare minimum required, and depending on the purchase price, it might be more.
It's important to know that you will have to prove the source of all down payment funds. This can typically be done through 90 days of bank statements. The lenders (and government) want to ensure that you aren't purchasing the property with the proceeds of crime and that you're not laundering money.
As houses become more expensive, a lot of parents have decided to help their kids with the purchase of a property by gifting down payment funds for a down payment. A gifted down payment is permitted, with only a few (but very specific) requirements.
How Much Can You Afford?
What you can afford on paper and what you can afford in real life are often very different. The amount you qualify to borrow is based on way too many things to include in a single article. And the rules keep changing. The government introduced a financial "stress test" that forces buyers to qualify at a mortgage rate that is at least 2% higher than the rate they will pay.
So once you are ready to actually start shopping, or even months before then, it's a good idea to contact Click Mortgage so we can let you know exactly what you can afford to spend on a property.