If it’s your first time buying a home, the process may seem overwhelming. You’ll find yourself learning a whole new set of vocabulary and asking yourself a lot of new questions. What kind of home should I buy? How do I know I’m getting a good deal? And one of the most important questions, how do I go about getting a mortgage?
The good news is there is plenty of information at your fingertips to help you with this part of the process, especially when you have a new home builder in your corner with experts at their disposal. Below, we have outlined some starter tips to getting a mortgage.
Determine Your Affordability
To begin, you’ll want to have a general idea of how much mortgage you can afford. The way lenders typically calculate your affordability is by considering your debt service ratio. This is something you can do on your own using the formulas. You can also play around with online mortgage calculators to gain a better idea of what to expect.
Getting pre-approved for a mortgage is a smart move. Being pre-approved for a mortgage is not locking you into anything, and you won’t be required to work with this lender. What it does is give you a great starting point to the type of home you can buy, and gives you options. Having a mortgage pre-approval also locks in a specific interest rate for a period of time so that you have time to shop for a new home while reserving that interest rate until you purchase.
Keep in mind, your pre-approval is a soft approval, and you should set a budget you feel most comfortable with. Once you make an offer to purchase, a full assessment of your qualification will take place and your lender may adjust your qualifying amount. It's always best to select a home that doesn’t max ou
t your pre-approved mortgage amount. This wiggle room in your budget gives you peace of mind in case your income changes or there's an unforeseen emergency.
Start Saving for a Down Payment
You’ll be financing your new home with a mortgage, but you still need to come up with a down payment. The absolute minimum down payment in Canada is 5% of a home’s purchase price. That being said, any down payment under 20% requires home buyers to pay for CMHC mortgage insurance, which is a lump sum premium added to the mortgage. This protects lenders as they’re taking on more of a lending risk in such cases. Consider your ability to put down a larger down payment and avoid this additional fee.
You may have to spend more time saving, but there are plenty of creative ways to come up with a down payment. If you’re committed, it may not take as long as you thought. You should also take the time to look into cost-saving programs for home buyers – there are some specifically for first-time buyers!
Keep an Eye on Interest Rates
Not all mortgage rates are the same. The Bank of Canada, however, does set a “target rate” used to determine whether or not you can qualify for a mortgage. This benchmark rate fluctuates, and other banks’ rates will follow suit. This means you’ll see interest rates go up and down all the time. So if you’re on th
e hunt for a new house, you’ll want to stay tuned for mortgage rate changes.
It is possible for you to lock in a rate for an agreed-upon period of time with a lender or bank. This can allow you to – during the specified time – obtain a mortgage at a low interest rate, even if the benchmark changes. Often, working with your builders preferred lender can come with the perk of a much longer rate lock-in period. This is because they know it takes longer for a home to be built than it does to transition into a resale home. Ask your builder about whom they trust for the job.
Choose a Mortgage Specialist
This brings us to choosing a lender. Since interest rates vary, you can “shop around” for lenders as you look into available rates. However, you don’t want to base
your decision solely on the interest rate they’re offering. There are many factors to look for in order to find a trustworthy lender. It’s a good idea to “interview” lenders; ask them about things like their requirements, fees and possible penalties, and other costs beyond principal and interest payments.
Using a builder’s preferred lender is a great option if you’re buying from a builder – they know the process of new home builds specifically and your builder already has a strong relationship with them. This can make the process easier for everyone.
Check on Your Credit Score
Since your credit score impacts your ability to qualify for a mortgage, obtaining your credit report will show you where you stand. You can request to receive one from both Canadian credit bureaus, Equifax and TransUnion. Credit Karma is also a user-friendly, free app that uses the data from TransUnion so you can keep track of your credit score on a weekly basis.
Collect Relevant Documentation
Paperwork you’ll want to get in order is the documentation needed to apply for a mortgage. This will include things like proof of employment, paycheque stubs, latest tax returns, and recent bank statements. Throughout the process you may be required to provide other financial documents; this mortgage document checklist from CIBC is a good reference. Having all this paperwork prepared in advance will save you a lot of time and headaches.
As with doing anything for the first time, getting a mortgage can bring about many uncertainties. Thankfully, there are plenty of resources available to first-time buyers, and working with a quality home builder means having people to guide you along the way.