This piece was originally published on March 12, 2018, and was updated on November 24, 2022.
Buying a home is exciting. And stressful. Getting a mortgage only adds to the stress, so why not make sure you plan accordingly – and try to reduce some of that stress — before taking on the largest financial commitment you will likely ever make? With that in mind, we’ve put together a checklist for the steps you must take to get funding for your next (or first) home.
Step one: The down payment
The first step to getting a mortgage – and definitely the most time-consuming – is to cobble together enough savings for a down payment.
How much you save will impact how much home you can afford and the type of mortgage you can get (either insured or uninsured. More on that later).
One common myth many Canadians still believe is that at least 20% of the purchase price is required as a down payment. However, a mere 5% is all that is required (though mortgage default insurance, often known as CMHC insurance, is required for any down payment of less than 20%).
Once you’ve got a sufficient down payment saved, you’ll have an idea of what purchase price you might be able to afford. Of course, the size of your down payment is only one factor that determines affordability; so too do your credit score, your income and your job situation. But more on that later.
To help you get an idea about how much mortgage you can afford, check out our handy Mortgage Affordability Calculator.
Step two: Determine a budget
It’s important to not get too attached to a budget at this juncture. As mentioned, there are several factors that impact affordability and it’s a good idea to speak to a mortgage professional before you commit to a particular home or price range.
Just for fun, though, let’s crunch some numbers.
Say you make $100,000 and you’ve got $40,000 saved for your down payment (that’s on top of additional costs involved with buying a home, including; taxes, closing costs, inspection costs, legal fees, insurance, and others. Yeah, buying a home is expensive). We’ll also assume 25-year amortization and a mortgage rate of 4.79%, the best available mortgage rate in Toronto on November 4, 2022.
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According to Ratehub.ca’s mortgage affordability calculator, you could afford a home that costs $495,340. Keep in mind, though, that at that price you would need to take out mortgage default insurance (which would cost $18,214). If you wanted to forego mortgage default insurance you would need to save up a larger down payment or adjust your budget to be able to make a 20% down payment ($99,068).
Play around with the mortgage affordability calculator to see what numbers you feel comfortable working with. If you wanted to specifically see how your monthly mortgage payments might be affected based on the duration of your amortization period, you can use our amortization calculator to generate amortization schedules under different amortization length scenarios.
So, now you’ve got a preliminary idea about what you can afford and are ready to figure out the financing side of the equation.
Step three: The pre-approval
Your next step should be getting a pre-approval from your mortgage broker or lender. Pre-approvals let you know how much mortgage you can qualify for, can help you estimate your monthly payments, and can help you lock an interest rate in for up to 120 days. A pre-approval will ensure that, in the case of a rate increase within the pre-approval window, you’re still guaranteed the pre-approved, lower mortgage rate. And that means lower monthly payments.
Keep in mind, though, that a pre-approval is just that. It’s not the final approval for your mortgage. Your broker or lender will finalize the approved mortgage details after you’ve completed another few steps in the process.
At this point, you’re likely itching to secure financing and ramp up your home search. While you can now commit to a broker or lender and finalize the mortgage process, you should make sure to have all your documents in order first – this expedites the mortgage approval process and cuts down on the time-consuming back-and-forth with your mortgage provider.
Step four: Get your documents in order
Order a credit report to ensure there are no inaccuracies. Knowing your credit score prior to speaking with a mortgage professional will better prepare you for the type of mortgage rate you can expect. After all, a high credit score will help you get a low mortgage rate.
You’ll also need to provide documents that prove your identification, employment, your ability to pay the down payment and closing costs as well as information about your assets and debts.
Your mortgage professional may ask for additional documents, including proof of salary and employment history, and a Canada Revenue Agency Notice of Assessment (NOA).
If it sounds like a lot, it is; after all, a mortgage is one of the largest financial commitments you will ever make.
Step five: Choose your mortgage
Amortization periods. Fixed and variable rates. Mortgage term.
These are just three major considerations when choosing a mortgage. But there are many others as well; what are the pre-payment penalties? Is your mortgage portable? These are things your mortgage will be able to help you figure out. It isn’t always a matter of just choosing the lowest rate available; depending on your plan (how long you plan on staying in the house you’re about to buy, whether or not you plan to use part of the home as a rental suite) there are other mortgage details to consider as well.
Once you’ve complete these (somewhat time-consuming tasks), you’ll be ready to get your mortgage and put an offer in on the home you want.
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