Getting a Mortgage for Your Next Home
Introduce
The very first step of buying a home is to run through the numbers and get a grasp of your budget, because truthfully, your budget determines what and where you can buy. If you already have this part figured out, jump back to our ultimate home buyer’s guide to see what’s the next step of your home buying process.
1. Main requirements: Down payment, decent credit score, supporting income.
Before you fill out a mortgage application, it is important to assess yourself financially first. Figure out how much money you have and how much you need to borrow, you want to make sure that after taking out a mortgage, you can still financially sustain yourself.
Pro Tip: another reason to access your own finance first is that if you submit a mortgage application and get rejected, it will show in your credit record. This is why our mortgage partners always help our clients gatekeep their financial situation before submitting their applications.
There are a few main qualifying factors for a traditional mortgage, down payments, credit score, and income. We will go through the minimum requirements of each in this chapter. If you are a newcomer with no local credit history or income, don’t worry, you might still qualify for a mortgage!
2. What is the Minimum Requirement for a Down Payment:
A down payment is the amount of money you put towards the purchase of your home; your lender will provide you with a mortgage that covers the rest of the price of your home. In Canada, there is a minimum amount of down payment that all lenders follow.
| $500,000 or less | 5% of the purchase price |
| $500,000 to $999,999 |
5% of the first $500,000 of the purchase price 10% for the portion of the purchase price above $500,000 |
| $1 million or more | 20% of the purchase price |
If your down payment is below 20%, you must purchase a mortgage loan insurance with your mortgage, which can range from 0.6% to 4.0% of the total loan! Check out our CMHC Insurance Calculator (link) to find out how much you need to pay. But be aware, for purchase prices of $1 million or higher, you must pay at least a 20% down payment.
Each bank has its own policies, this guideline only serves only as the minimum standard.
3. What Credit Score Do You Need for a Mortgage:
The banks/lenders look at a borrower’s credit history to assess his/her likelihood to repay their bills. In Canada, the minimum credit score required to be approved for a mortgage is 600. In Ontario, this number is between 600 to 680, it varies from situation to situation, and lender to lender.
Just remember, this is only the minimum requirement, a credit score of 680 might get you through the door, but a higher credit score is often needed for a larger mortgage and access to better mortgage rates.
4. Income or Mortgage Stress Test:
Aside from credit score and down payment, the other main factor to consider is the Mortgage Stress Test. You need to prove you can afford mortgage payments even when there’s an upsurge in interest rate, regardless of if your mortgage is insured or not. The testing rate they used is called to qualifying rate.
This stress test only applies to federally regulated lenders and credit unions.
Here is how the mortgage stress test works, based on your current income and recurring expenses, the test estimates your ability to make your mortgage payment if the mortgage rate reaches the qualifying rate. The qualifying rate is higher of
- 5.25% - the current Bank of Canada five-year benchmark rate, and
- our offered mortgage rate plus 2%.
With the current stress test rate of 5.25% (accurate as of August 10, 2022), this roughly means you can borrow up to 4.5 times of your annual income.
Pro-tip: pay down existing debt. Your existing debts are recurring expenses, it goes against your cash flow, and hence, a lender will take this into account in your mortgage stress test. This doesn’t you can’t have debts, but a lower debt-to-income ratio will definitely help!
Now you know the basics of how your mortgage is calculated, feel free to jump over to our Mortgage Affordability Calculator (link) for a quick estimate.
5. Shopping for Mortgages
Like homes, mortgages also come in various shapes and sizes, every lender has its own unique mortgage program, you have to shop around and pick the one that best fits your financial situation and goals. This is why at Team Priscilla Han Realty, we are partnered up with various lenders to give you all the options and access to the best financing programs catered to your situation.
To learn more about different types of mortgages and how to pick them, check out our: How to Pick Your Mortgage Guide. (link)
Call to Action: Ready to get pre-approved for a Mortgage? Contact us now to get access to all the best financing programs!