Prepare to Qualify
If you think owning a home is for you, start planning for it right now. You need to get your finances in order, save for a down payment and mentally prepare for the responsibility of owning a home.
The down payment is usually expressed as a percentage of the price of the house. A $10,000 down payment on a $100,000 house would be a 10% down payment.
How much do you need to save for a down payment? It depends on a lot of variables. But no matter how much you need for a down payment, save more. There are a lot of fees included with buying a house and you'll be in much better financial shape when you move in if you've given yourself a little padding.
Unless you're some kind of a financial magician, don't try to pull this down payment out of your finances all at once. Decide how much you want to spend on a house and how much you will need to save for a down payment. By saving a reasonable amount every month, you can compute a target date when you will have your down payment and start your house shopping.
High-Ratio Mortgage — Mortgage Insurance
According to the Canadian National Housing Act (NHA), when you require a residential mortgage loan greater than 75% of the property value, you must obtain a "high-ratio" form of default mortgage-loan insurance. With this, the lender gets a guarantee that (high-ratio) borrowers will not default on their mortgage payments.
Companies such as Canada Mortgage and Housing Corporation (CMHC) and GE Mortgage Insurance furnish the necessary insurance to NHA Lenders for this. This loan insurance is automatically factored into the mortgage application. The high-ratio mortgage insurance premium ranges from 1% to 3.4% of the new mortgage amount. This one-time premium is generally added to the approved new mortgage balance.
It is thanks to this high-ratio loan insurance that many Canadians, who might not otherwise have been able to buy a home, can do so. Mortgage Insurance makes it possible for buyers to purchase their family home with as little as a 5% down payment, or to refinance their present home for up to 90% of its current market value.
Check Your Credit Report
Becoming familiar with your credit report is an important part of financial fitness at all stages in life. But it's especially important when you're ready to buy a house. With your approval, a mortgage lender will check the status of your credit rating. The better your credit rating, the better interest rate you're likely to get. So while you're taking the time to save money for a down payment, also take some time to get your credit report in order.
Your first step is to get a copy of your credit report as soon as possible. Contact one of the two major credit bureaus:
or in Quebec: 1-877-713-3393
For more information on what is contained in your credit report, see our Credit History section.
If there are any errors on your credit report, contact the credit agency immediately. As for the less-than-stellar reputation you may have built up on this document, take heart. Your credit report can be improved upon, but it will take some time and effort. Don't trust anyone who claims to be able to fix your credit instantly or erase your credit history. It is illegal to falsify your credit rating. Here are ways to legally fix your credit.
If you have poor debt ratios, meaning you've got too much debt compared to your income, start paying down your debt. That's not an easy thing to do. But it's crucial in repairing your credit and getting favourable interest rates.
If you have insufficient credit history, you're in a good position to build good credit. If you can, get a credit card and be sure not to carry a balance on it. If you don't qualify for a credit card, apply for a department store charge card so you have some instrument with which to improve your rating. But be sure to pay it off every month because those cards can have extraordinarily high interest rates.
Whenever you apply for credit, the inquiry by the potential creditor shows up on your credit history. If you have too many inquiries, you need to hold up for a bit. Stop applying for credit. These inquiries will become less relevant as time passes and, as long as you don't continue to apply for more credit, this will cease to be a problem fairly quickly.
If you just can't wait to fix your credit and you need to move forward with buying a house, you don't have to live with your mistakes for the next 25 years. Three things determine mortgage interest rates: your credit history, the amount of your down payment and your current income. If your credit rating isn't as positive as you'd like it to be (or as the banks would like it to be, really) try to increase your down payment and income to make up for it.
If worse comes to worst, you may have to accept a higher interest rate to start with. If you continue to improve your credit rating, you may qualify for a lower interest rate in a few years and then you can refinance your mortgage.
Negotiating for a house is a lot easier when you have a cheque for the full amount in your back pocket. That's sort of what you have when you pre-qualify for a mortgage. A pre-approved mortgage is a preliminary approval by a lender of your application for a mortgage to a certain maximum amount and rate. If you and the property qualify, the interest rate will be fixed for 60 to 90 days, depending on your financial institution. This means if rates go up during that period, you retain your fixed rate. But if rates go down, you automatically get the lower rate.
When you pre-qualify for a mortgage, you can shop around for houses with confidence, knowing that if you find one within the amount of your pre-approval, you will get financing if you decide to buy it. And when it comes time for negotiations, you're in a much better position because the seller knows you can get the financing. To prepare yourself to earn that important pre-qualified status, get your personal documents in order. For a checklist, visit our Mortgage Pre-Qualifying Documents section.