By Alisa Aragon-Lloyd, as seen in "New Home + Condo Guide" magazine, July 9, 2022
1. WHAT’S THE BEST RATE I CAN GET? Your credit score plays a big part in the interest rate for which you will qualify, as the riskier you appear as a borrower, the higher your rate will be. However, the rate is definitely not the most important aspect of a mortgage, as many rock-bottom rates often come from no-frills mortgage products. In other words, even if you qualify for the lowest rate, you often have to give up other things such as pre-payments, portability privileges and at times, will have the highest penalties if you pay off your mortgage earlier. That’s why it is critical that you focus on the best mortgage with the best terms and rates. If not, it can end up costing you thousands more in the long run.
2. WHAT’S THE MAXIMUM MORTGAGE AMOUNT FOR WHICH I CAN QUALIFY? To determine the amount for which you will qualify, there are two calculations you will need to complete. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and strata/condo fees, if applicable). Generally speaking, this amount should be no more than 35 to 39 percent of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,560 in monthly housing expenses. Secondly, you will need to calculate your Total Debt Service (TDS) ratio. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 42 to 44 percent of your gross monthly income. The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get prequalified by a mortgage expert. This will help you stay within your price range and look at homes you can reasonably afford.
3. HOW MUCH MONEY DO I NEED FOR A DOWN PAYMENT? The minimum down payment required is five percent of the purchase price of the home. If the property is more than $500,000 and under $1 million, you will need to put five percent up to $500,000 and 10 percent on the balance. This is with properties that are priced less than $1 million. For properties over this price, you will need at least a 20 percent down payment.
4. WHAT HAPPENS IF I DON’T HAVE THE FULL DOWN PAYMENT AMOUNT?
There are programs available that enable you to use other forms for a down payment, such as from your RRSP, or a gift from a parent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, in order to qualify, you still have to be within the TDS ratios as mentioned above.
5. WHAT WILL A LENDER LOOK AT WHEN QUALIFYING ME FOR A MORTGAGE? Most lenders look at five factors when determining whether you qualify for a mortgage: 1. Income 2. Debts 3. Employment history 4. Credit history 5. Value and marketability of the property you wish to purchase.
6. WHAT CREDIT SCORE DO I NEED TO QUALIFY? Generally speaking, you are a good candidate for a mortgage if your credit score is 650 and above. The higher you score, the better, as you will have more options and advantages. These days, almost anyone can obtain a mortgage, but if you have a lower credit score, your options will be more limited and interest rates could be higher. However, a mortgage expert may be able to help you find a way to obtain a mortgage.
7. WHAT HAPPENS IF MY CREDIT SCORE ISN’T GREAT? There are several things you can do to boost your credit score fairly quickly. The following are five steps you can take to help attain a speedy credit score boost:
1. Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they are below 50 percent of your limits. 2. Limit the use of credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score. 3. Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. 4. Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off. 5. Don’t let mistakes build up. Always dispute any mistake or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.
8. HOW MUCH WILL I HAVE TO PAY FOR CLOSING COSTS? As a general rule of thumb, it’s recommended that you put aside at least 1.5 percent of the purchase price (in addition to the down payment) to strictly cover closing costs. You will need to have more than 1.5 percent of the purchase price if you purchase a property over $500,000, as you will need to pay for the property transfer tax. Although you must have this amount, it doesn’t mean you are going to spend it.
The following are some of the closing costs you may encounter: • Legal costs • Property tax adjustments • Strata/condo fee adjustments • Cost to register property in land title office, as an example.
9. HOW MUCH WILL MY MORTGAGE PAYMENTS BE? Monthly mortgage payments vary based on several factors, including the size of your mortgage; whether you’re paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.
To get more details about these and other questions, please give me a call, and I will be able to analyze your personal situation and provide you with more information so you can make an informed decision on buying your home.