Buying a home is an exciting accomplishment, but it can be a lengthy process. The first step toward becoming a homeowner is getting approved for a mortgage. When you apply for a home loan, the lender will ask for a number of documents to prove that you’ll be able to make the payments. You should have an understanding of the minimum qualifications for mortgage borrowers so that you know what your chances are of being approved.
Conventional Loans
There are several categories of mortgage loans, and the specific qualifications can vary depending on the type of loan. The most common type of loan is a conventional loan, which is provided by a bank, or private lender up to 80% of the loan to value.
The qualifications for a conventional home loan vary depending on the type of loan. Here are the general guidelines for what you’ll need to qualify for a mortgage.
Income and Employment
To approve you for a loan, lenders need to know that you have a reliable source of income. This can include a work salary, bonuses, self-employment income, child support, or income from rental properties.
You should have documented proof of consistent income for the last two years. Be prepared to provide pay stubs, tax returns, bank statements, or T4 or NOA’s to confirm your income and employment with the lender.
Your income will have a direct impact on the amount of money you qualify for.
Debt Ratio
The lender will consider the amount of debt you have compared to your income. Someone with a $40,000 income and no debt looks more appealing to a lender than someone with a $100,000 income and $300,000 in debt.
You can calculate your debt-to-income ratio by dividing your monthly debt payments by your pre-tax income. In general, lenders like to see a debt-to-income ratio of less than 45 percent, but they may accept a higher ratio if you have a high credit score.
Credit Score
Your credit score is a measure of how trustworthy you are as a borrower. It is calculated using the following factors:
• On-time payment history
• Credit utilization
• Length of credit history
• Types of credit accounts
• New credit and hard inquiries
A score of 660 is considered fair, and a score of 740 is considered very good. A higher score can get you a better interest rate.
Down Payment
The down payment is the amount you pay up-front for the home. Lenders want you to have some equity in the home so that you never owe more than you can sell it for. Most lenders accept down payments from these sources:
• Checking and savings accounts
• Stocks, bonds, or other investments
• Trusts
• RRSP’s
• Cash value life insurance
You typically cannot take out a personal loan to cover a down payment. The minimum payment is usually 20 percent for a conventional loan, but lenders may offer you a lower interest rate if you offer more up-front.
CMHC Insured Mortgages
CMHC mortgage loan insurance lets you get a mortgage for up to 95% of the purchase price of a home. It also ensures you get a reasonable interest rate, even with your smaller down payment. Mortgage loan insurance helps stabilize the housing market, too.
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums
Debt ratio:
Debt Service Ratios: CMHC restricts debt service ratios to 35% (GDS) and 42% (TDS). Principal and Interest*: Payments should be based on the applicable amortization period and loan amount, including the CMHC premium
Down payment:
CMHC insured mortgage will allow up to 5% percent down.
In Conclusion
Purchasing a home is a big financial decision, and lenders need to know that you can follow through with payments. To be approved for a mortgage, you should have consistent income, a decent credit score, and a manageable amount of debt. Be prepared to provide documentation for all of these factors to your potential lender. If you’re financially prepared for the commitment, getting approved for a mortgage can be an exciting first step toward becoming a homeowner.
