Steps to take before meeting with your lender.
Whether you’re on the hunt for a new home or found the place of your dreams, doing a bit of homework and planning before applying for a mortgage can help the application process go more smoothly.
A lender will want to see evidence that you’ll be able to make regular, on-time payments, and you may need to submit paperwork to verify factors such as your income and cash reserves.
Before you meet with a lender to apply for a mortgage, tackle these 5 steps:
- Determine the cost of homeownership: If you’re a first-time homebuyer, the price of the home you want to buy is important, but it’s just the starting point. The size of your down payment — ideally 20 per cent of the agreed upon price — will determine your principal and interest costs. If you have time, consider getting mortgage pre-approval, which will help you crunch the numbers and determine how much you can afford.Use these numbers to create a budget, which should include your estimated mortgage costs, as well as additional expenses, such as utilities, property taxes and home insurance. To get a sense of your current spending habits, try using the Canada Mortgage and Housing Corporation (CMHC) household budget calculator. Also, be sure to save as much as possible for your down payment to help reduce your monthly mortgage payment.
Related: 6 questions to ask yourself before buying a home
- Check (and improve, if needed) your credit score: A low credit score may prevent you from qualifying for a mortgage. Find out how to correct any discrepancies on your report from the two major credit reporting agencies, TransUnion®* and Equifax Canada®†. Both agencies use a scale ranging from 300 to 900, according to the Office of Consumer Affairs (OCA).The OCA also provides the following tips to help improve your score:
- Pay your bills on time and in full — or, at the very least, pay the minimum required amount.
- Do not apply for new credit cards or other loans. A large number of lenders inquiring about your credit during a short time period can negatively affect your score. (You checking your score, however, won’t affect it.)
- Don’t go over the limit on your credit card. The Financial Consumer Agency of Canada (FCAC) recommends using less than 35 per cent of your available credit. (Paying down outstanding credit card or lines of credit balances can also help.)
- Know your total debt service ratio: Lenders divide all your monthly debt payments — including your housing costs and all other credit card, car loan and other debt payments — by your gross monthly income to estimate your ability to handle mortgage loan payments. The number matters. To receive an affordable mortgage, you’ll generally need to have a total debt service ratio that’s 40 per cent or less, according to the Canada Mortgage and Housing Corporation.
- Get your personal documents in order: Various lenders may ask for different documents, but according to the Financial Services Commission of Ontario, most request:
- Confirmation of your income and/or employment earnings
- Your banking information
- Proof that you have a down payment
- An assets and liabilities list
- Estimates for your monthly housing expenses, including utilities, property taxes and other fees
- Your lawyer’s or notary’s contact information
- A mortgage preapproval certificate, if applicable
- The property’s address and, potentially, a copy of the real estate listing
- Contract and building plans (if the property is due to be constructed)
If your parents or another family member are giving you money to put toward the purchase, you sometimes need to provide a gift letter stating that the money won’t need to be repaid.
- Have money earmarked for closing fees: This is the day you’ve been waiting for, but if you’re a first-time homebuyer, you may not know what to expect. At your closing, your lender will give your mortgage money to the lawyer or notary, you’ll provide the down payment and any remaining closing costs, and your lawyer or notary will register the home in your name and give you the deed and keys, according to CMHC. According to the FCAC, you can anticipate that your total closing costs will average 1.5 to 4 per cent of your home purchase price. For additional costs associated with purchasing and owning a home, check out our 8-point checklist.
For additional home-buying resources, try these mortgage calculators and tools.
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