Financial considerations and preparations are central to any home purchase. In addition to helping you make better decisions about what you can afford in a home, a buyer who already has financing in place, is in a better negotiating position when it’s time to make an offer to a seller.
Getting a jump on your financing now can greatly alleviate headaches later. If you’ve already lined up a lender and secured a commitment on your mortgage, the process of closing will go much smoother!
Determine Your Credit Status
Because any mortgage lender will review your credit history, it’s wise to verify your credit rating in the beginning of your home search. Even if you’re sure you have an excellent credit record, there may be blemishes in your credit history that you don’t know about. Identifying and resolving any credit problems to improve your credit rating will provide benefits, such as preferred rates from lenders and home insurers.
We will assist you to obtain a copy of your credit report and Beacon Score is simple. Two major credit bureaus, Equifax and TransUnion, compile consumer credit data.
If you wish to get a head start on this process, to obtain a copy of your report, visit freecreditreportsincanada.ca or canadafreecreditreport.ca. (Note: Sites may include membership offering.)
Pre-Qualification Or Pre-Approval
Typically you will first pre-qualify for a mortgage, then get pre-approved before you find the specific home you wish to purchase. It’s essential to understand the difference, and to clarify which your lender is providing.
Pre-qualification: An informal determination by a lender or mortgage broker stating the amount of the mortgage you can afford.
Pre-approval: A guarantee in writing by a lender to grant you a loan up to a specified amount (subject to receiving full documentation).
There are two advantages of obtaining a loan pre-approval as early as possible in your home buying process:
- Sellers will find any offer you make more attractive if you are pre-approved for a mortgage.
- The length of time before closing can be shorter if you’ve secured a mortgage approval prior to signing a contract to purchase property.
How Much Can I Afford?
Lenders look at a variety of factors when evaluating how much financing you can afford for your home,
but these two are most important:
Your monthly mortgage payment, as a percent of your gross (pre-tax) income.
Your total debt load, including your mortgage payment, relative to your gross income.
Another determining factor is the loan-to-value (LTV) ratio, meaning the amount borrowed relative tothe appraised value of the property. Higher LTVs represent a higher risk to lenders. Lenders can provide qualification details for various types of mortgages, including high ratio mortgages insured by Canada Mortgage and Housing Corporation (CMHC).
If you need help finding a lender or determining affordability, we will suggest providers and direct you to the best sources of information on mortgage programs, including online tools for estimating affordability.
When considering how much you can afford, don’t forget to consider other expenses, beyond your mortgage payment, that could also impact your monthly budget. Most mortgage payments are comprised of four components: principle, interest, tax and (homeowners) insurance, collectively called PITI. (See step 6 for more details on homeowners insurance.)
Beyond PITI, other expenses commonly associated with homeownership include:
- Mortgage Insurance
- Home maintenance expenses
- Homeowners association fees
- Parking expenses
- Utilities
*to determine monthly payments for different rates and terms, use the mortgage calculator link below.
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