Deciding to buy your first home can be an intimidating yet exciting time. Being prepared for the process and knowing what to expect will ensure you’re organized and ready to start your home search.
Before you start going to look at houses, there are things you should know about how to get your first mortgage. While this is the less fun part of the experience, getting your financial details in order is essential to qualifying for a home loan.
There are ways to make the process smoother and have your mortgage application approved with little to no stress. If you’re ready to buy a home, read on for our tips on how to best qualify for a mortgage.
1. Evaluate Your Credit Score
Credit scores in Canada range from 300 to 900. 300 means your credit score is very poor and 900 is excellent. The average Canadian’s score is around 650.
If your score is above 650, it will help you secure a loan and lower mortgage interest rates. Having a higher score is ideal as the higher you are, the lower your interest rates will be.
Your credit report will also include information about how many credit accounts you have open, if you’ve ever been late on a payment, and how long you’ve had a credit history. Paying your bills and loans on time and having more open available credit will result in a higher score.
You can check your score online at Equifax or TransUnion. Checking them before you’re ready to start the home buying process is important because you can evaluate where your score is and ways to improve it.
2. Save a Large Down Payment
Having a larger down payment means you’ll have to borrow less on your house and pay less interest over time. In Canada, the minimum down payment required is 5% of the purchase price of the home. If your down payment is lower than 20%, you will need to get mortgage loan insurance.
Sometimes you may be required to get mortgage loan insurance even if your down payment is above that amount, usually because you have a poor credit history or are self-employed. The cost of mortgage loan insurance ranges from 0.6 to 4.5% of the total amount of your mortgage.
Saving up as much as you can will not only mean your mortgage payments are lower, but your mortgage loan insurance costs will be as well.
3. Don’t Quit or Change Jobs
When working with a certified mortgage broker, they will ask you to bring in proof of income. You will need to show that you can pay your mortgage. Having a full-time job that you’ve had for a long time is a great way to show that you can make the payments.
If there is more than one person on the loan, both people having full-time jobs will help. Having a stable job will help secure your loan and lock in lower interest rates.
For people that are self-employed, you’ll have to show details on the income of your business for at least several years prior. Mortgage lenders will want to know that you’ve been making a profit long term. Your mortgage broker will provide invaluable information in this area.
4. Reduce Debt
If you have a lot of existing debt, some mortgage companies won’t want to issue you a loan. They want to guarantee that you’ll be paying them for the loan they gave you.
Lenders also review your debt-to-income-ratio. They will look at your existing monthly payments and divide them by your monthly gross income. The higher ratio you have, the more of a risk you are.
They will look at the following types of debt:
- Spousal or child support
- Credit cards
- Car loans
- Student loans
- Lines of credit
Paying down your existing loans will lower this amount, making you look more appealing to lenders. It will also lower your credit score, helping you get a lower interest rate.
5. Documents You’ll Need
In order to apply for a mortgage, you’ll need to provide a mortgage broker or lender with:
- Employment pay stubs/proof of employment
- Information about your assets
- Details regarding your debts
- Financial statements from investments or bank accounts
- Previous years’ tax information
Having this information ready to go will save you time. You won’t have to rush around trying to find where everything is.
6. Get Pre-Approved
Getting pre-approved for a home loan will help you figure out how much you can actually afford when buying a house. It shows you how much a mortgage lender is willing to loan you and what your monthly payment will be.
Having a pre-approval already in place helps you in your home search. When you decide to make an offer on a home, a seller seeing you’re already pre-approved shows them that you’ll have no issues paying for the home. That will make closing on the house even easier.
You can get a mortgage pre-approval with a mortgage broker or directly with a lender. They will look at your credit score, down payment amount, and debt to income ratio.
7. Start Your Home Search
If you don’t have a realtor already, your mortgage broker can provide you with some recommendations. With your pre-approval in hand, it’ll make looking for a home even easier because you will know exactly how much you can spend.
Having a realtor you can trust will ensure you’re getting the best price possible when buying a home. They should be your advocate during the entire process.
Start on the Road to Your First Mortgage
Being prepared isn’t half the battle when purchasing your first mortgage — it is the entire battle. Not knowing the state of your finances when going into the pre-approval process can set you up for disappointment. Even before you’re ready to purchase a home, review your credit score and see where you stand.
Having all of your documents ready and working with a mortgage broker will have you on the road to buying a house in no time. For more information on real estate, check out one of our other articles.