Don’t wait until you’re ready to move to start preparing nancially to buy a home.
The Office of the Superintendent of Financial Institutions (OSFI) issued new mortgage guidelines, which went into effect at the beginning of the year and raised the standards for mortgage applicants. The requirements may seem overwhelming, especially if you’re a first-time buyer. But we’ve outlined three simple steps to get you started on your path to approval.
STEP 1: CHECK YOUR CREDIT SCORE
It’s a good idea to review your credit report and score yourself before you’re ready to apply for a mortgage. If you have a low score, you will need time to raise it. And sometimes fraudulent activity or erroneous information will appear on your report, which can take months to correct.
Credit scores range from 300 to 900. A higher credit score will help you qualify for a lower mortgage interest rate, which will save you money.1
For information on how you can request a free copy of your credit report from the two major bureaus, visit https://www.canada.ca/en/ nancial-consumer-agency/ services/credit-reports-score/order-credit-report.html.
Minimum Score Requirements
The new OSFI rules require a minimum credit score of 600 for a mortgage under $1,000,000. If you have a credit score below 600, you may still be able to secure a loan through a credit union or private lender. However, you should expect to pay a higher interest rate and additional fees.2
STEP 2: SAVE UP FOR A DOWN PAYMENT AND
When you purchase a home, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage).
The minimum amount you’ll need for your down payment depends on the purchase price of the home. For homes priced under $500,000, you’ll need a minimum down payment of ve percent of the purchase price. For homes priced between $500,000 and $999,999, you’ll need a minimum down payment of five percent of the rst $500,000 AND 10 percent for the portion of the purchase price above $500,000. Finally, for homes priced over $1 million, you’ll be required to put down at least 20 percent of the purchase price.3
If you’re self-employed or have a low credit score, your down payment requirements may be higher.
Generally speaking, the higher your down payment, the more money you will save on interest and fees. For example, if your down payment falls below 20 percent, you will be required to purchase mortgage loan insurance.
If you don’t have the minimum requirements for a down payment, the Home Buyers’ Plan might be an option for you. It enables you to withdraw up to $25,000 (or $50,000 if you are buying as a couple) from your Registered Retirement Savings Plan to buy or build a qualifying home. For more information, visit https://www.canada.ca/en/revenue- agency/services/tax/individuals/topics/rrsps-related- plans/what-home-buyers-plan.html.
Closing costs—which can range between 1.5 to four percent of the home’s purchase price—should also be factored into your savings plan. These may include legal and administrative fees associated with the purchase of your home.3 If you don’t have the funds to pay these outright at closing, you can often add a portion to your mortgage balance and pay it over time. Remember, though, that you’ll pay interest on the fees.
If you’re a current homeowner, you may have equity in your home that you can use toward your down payment and closing costs on a new home. We can help you estimate your expected return after you sell your current home and pay back your existing mortgage. Contact us for a free evaluation!
The above references an opinion and is for informational purposes only. It is not intended to be nancial advice. Consult a nancial professional for advice regarding your individual needs.
It’s important to have a sense of how much you can reasonably afford—and how much you’ll be able to borrow— to see if homeownership is within reach.
To get started, visit the Canadian Real Estate Association’s Affordability Calculator at https://www.realtor.ca/ Residential/calculator.aspx?tab=3.
This handy tool will help you estimate how much you can afford to borrow depending on your income, debt, property taxes, condo fees, heating costs and interest rate. It also offers a projection of your monthly mortgage payment. Add the “maximum mortgage” estimate to your down payment amount to nd out your total home purchasing power.
Under OSFI’s new rules, all mortgages issued by federally- regulated lenders are required to undergo a “stress test” to ensure applicants can continue to make their mortgage payments if interests rates rise. To simulate the stress test, when you enter the interest rate on the affordability calculator, use either the Bank of Canada’s ve-year benchmark rate or two percentage points above your estimated rate (whichever is higher).4
Once you have a sense of your purchasing power, it’s time to nd out which neighbourhoods and types of homes you can afford. The best way to determine this is to contact a licensed real estate agent. We help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your speci c needs.
If there are homes within your price range and target neighbourhoods that meet your criteria—congratulations! It’s time to begin your home search.
If not, you may need to continue saving up for a larger down payment ... or adjust your search parameters to nd homes that do fit within your budget. We can help you determine the right course for you.
START LAYING YOUR FOUNDATION TODAY
It’s never too early to start preparing nancially for a home purchase. These three steps will set you on the path toward homeownership ... and a secure nancial future!
And if you are ready to buy now but still aren’t sure if you meet the minimum requirements, don’t get discouraged. You may be able to secure a loan through a credit union or a private lender. We can connect you with one of our trusted mortgage providers.
Want to find out if you’re ready to buy a house? Give us a call! We’ll help you review your options and determine the ideal time to begin your new home search.