It’s important to get approved for a mortgage as soon as you start the search-especially since many homes today are selling with multiple offers and Buyers that have been preapproved know they can waive the condition on financing thereby making their offer look more attractive to the Seller. In todays’ market many Sellers expect Buyers to be preapproved for a mortgage and as such are only granting 2-3 business days for mortgage approval which simply puts too much pressure on everyone.
Obtaining mortgage approval before starting your search will let you know exactly how much you can afford to spend and avoid wasting time looking at homes out of your budget. Getting preapproved ahead of time will allow you to meet with a couple of different lenders to determine who’s willing to offer you the best rate. In addition to the chartered banks, I always recommend that my clients meet with a mortgage broker as well. Their rates are as good if not better then the banks, there’s no cost to you to arrange a mortgage with a mortgage broker plus they have access to 40 -50 different lenders each of which have different lending requirements and possibly more flexibility to approve you for a mortgage especially if you’re self employed or have less than ideal credit
Purchasing a home with a least 20% down payment is known as a conventional mortgage. Purchasing a home with less 20% is known as high ratio mortgage and the mortgage must be insured thru CMHC (Canada Mortgage and Housing Corporation).
The Federal Government has expressed concerns about the increasing debt load Canadians are carrying-particularly first time buyers and effective February 15, 2016 introduced changes to the minimum down payment requirements on purchases above $500,000. You can still purchase a home with 5% down payment providing the purchase price is $500,000 or less however if you purchase a home valued over $500,000 then the minimum down payment must be 10%.
To simplify, if you were to purchase a home for $600,000 the down payment requirement would be as follows;
$500,000 x 5% = $25,000
$100,000 x 10% = $10,000
$600,000 $35,000 minimum down payment
Buyers purchasing a home in Canada with less than 20% down payment must have the mortgage insured thru CMHC (Canada Mortgage and Housing Corporation). Mortgage insurance is mandatory and it protects the lender if the buyer/borrower defaults on the mortgage. The CMHC insurance cost/premium can be added to the principal amount being borrowed.
A CMHC Insured Mortgage may not be amortized over a period greater than 25 years
The CMHC insurance cost/premium is calculated on a percentage basis as follows;
Down payment % charged on loan value
90.1% - 95% 3.6%
85.1% - 90% 2.4%
80.1% - 85% 1.8%
You must be able to show proof to your lender that the funds being used for your down payment are “free and unencumbered” - in other words you can’t borrow money to use as your down payment. Most lenders will accept a gift from an Immediate Family Member as an acceptable proof of down payment
Next Step: Deposit