Apply for a Mortgage in Canada?

The Canadian mortgage application process originates in simple common sense, but do the math before you go shopping.

Consider: if you offered a substantial loan to a friend or colleague, you would need reassurance he could repay the debt; and you would expect proof you could trust your friend to honor his obligation. A mortgage lender shares those needs and expectations, putting procedures and numbers to the needs. In the mortgage application and approval process, first, you apply and get "pre-approval" from your lender. The application entails simple listing of your income and expenses, and many lenders allow you to apply on line for quick "pre-approval." Then, you secure loan approval by documenting all the information on your application. When your lender has approved and packaged your loan, you work with an attorney to satisfy the legal requirements of a home purchase.

When you first apply and pre-qualify for a mortgage, your lender will take your statements at their face value. "Pre-qualification" for a mortgage sets the parameters for your house-hunt, but it does not guarantee your lender ultimately will fund your loan. When the time comes to approve the loan and close the deal on a home purchase, your lender will demand proof of your income, expenses, and "total debt service." Be prepared to document and substantiate everything about your work, income, expenses, and credit history. Of course, you should work with an experienced professional loan advisor at eve4ry step of the process.

Basic income standards

Determine how much you can afford using the same standards and guidelines lenders will apply-income amount and income stability. As the terms imply, "income amount" is the official calculation of your taxable income, and "income stability" is the official determination of your prospects for continuing employment and career growth. Your income amount determines how much you can borrow, and your income stability affects your interest rate. A long history of steady employment and growth in your profession may help you qualify for lower interest rates or other considerations. If, on the other hand, you work in commissioned sales, depend on regular bonuses to meet your expenses, or are self-employed, prepare to submit much more extensive documentation of your earnings than salaried workers or wage-earners. If you pay child or spousal support, your payments will be deducted from your income as common sense would suggest. Conversely, if you receive child or spousal support, your support payments will be added to your income, provided you can document a history of steady payment.

Total debt service

"Total debt service," or TDS in the professional jargon, works by two simple algorithms, and the numbers make or break your mortgage application. First, working with your taxable income as your baseline, calculate 32% of it-the proportion lenders will allow for your mortgage payment, energy costs, and property taxes. If you bring home Canada's median income, $64,000(Cdn) per year or $5333(Cdn) per month, your lender will feel comfortable with basic household expenses totaling approximately $1700(Cdn) each month. Consider it no coincidence that the number corresponds almost perfectly with the average cost of a Canadian home-approximately $342,000(Cdn). Second, calculate 40% of your taxable income, deducting the total of your monthly payments for your car, your credit cards, and any other unsecured debts. Your lender may use the remainder as the best indicator of how much you really can afford in monthly housing costs. He inevitably will use the lower of the two numbers.

Your down payment

In general, you must put at least 10% of the purchase prince down on your new home. In a few areas-Vancouver, for example-you may put down only 5% if the home or condo price does not exceed $250,000(Cdn). If you are a newcomer to Canada, expect lenders to demand 35% down payment. No matter how much you put down, lenders require no less than 5% of the payment to come from your own cash resources or a gift from a family member. If your down payment includes a gift, the donor must stipulate in writing that the money is an outright gift and comes with absolutely no expectation of repayment. If you plan to put less than 20% down on your purchase, you must secure mortgage loan insurance from the Canada Mortgage and Housing Corporation. Approximately half of first-time Canadian home-buyers finance down payments on their homes with their RRSP savings. Under the terms of the Canadian government's Home Buyers' Plan, an individual may take up to $25,000(Cdn) or a couple may take up to $50,000(Cdn) from retirement savings to make the down payment on a first home. Naturally, a few conditions and restrictions apply: for example, the retirement funds must have been on deposit for at least ninety days, and you must document your agreement to purchase a qualifying home. If your borrow your down payment from your retirement account, you have fifteen years to repay your RRSP.

Closing

You also must have cash on hand to pay closing costs, which may add-up to 2.5% of your purchase price. In some areas, you may pay interest adjustment costs or a land transfer tax calculated according to the value of your property or the amount of your mortgage. If you are a first time homebuyer you may be subject to tax credits for this land transfer tax. Speak to your Real Estate Lawyer about your elegibility. Most realtors recommend you have your new home inspected by a professional building inspector before you close your deal, because professional inspection guarantees not only the house's structural integrity but also its compliance with local building and safety codes. Of course, if you commission the inspection, you must pay for it. You also must be prepared to pay attorney or notary fees; their fees and services vary dramatically, so that realtors very strongly recommend you shop around for the best value.

The Canadian mortgage application process is simple and straightforward. The devil is in the details. Searching for and submitting all the documents your lender requests can be demanding and occasionally frustrating. Naturally, the more you complete before you make an offer on a new home, the easier your qualification process will become. Similarly, the larger your down payment, the less rigorous your lender's qualifying standards will be. Many professional realtors and experienced homebuyers recommend you have your mortgage approval securely in hand before you even begin shopping for a new home.