Last week, we launched our first video series with friends at The Loop by Sympatico.ca. Together, we decided that the most commonly misunderstood part of buying a home is the calculations that go along with it. As a result, Mortgage Math was planned and produced for homebuyers at any stage in the buying process.
One of the first steps in buying a home is finding out whether or not you qualify for a mortgage loan from any lender. Mortgage Broker James Laird, from True North Mortgages, agreed to star in our first video, to help you see what lenders look at before deciding how much they are willing to lend you and at what rate.
When you’re ready to buy a home, one of the first things you’ll have to think about is whether or not you can qualify for a mortgage. Lenders will look at three things: your credit score, your down payment, and your debt servicing ratios. We’ve brought in mortgage broker James Laid to walk you through each in more detail.
The first factor that we’re going to discuss is credit scores. Credit scores in Canada range from 300 to 900. Ideally, you’d find yourself in the category between 680 and 900. Canadians who find themselves in this category would satisfy any lenders’ credit requirements.
The next group is the range between 600 and 680. This group has average credit so, depending on the rest of the details on their mortgage application, they may qualify for a prime mortgage or they may not.
The final group is those Canadians who find themselves with a credit score below 600; they will still qualify for a mortgage, however, it will be with a B-level lender at a higher rate.
So now let’s discuss what determines your score on this range. And there are two main factors. The first one is fairly simple: simply making sure that you pay your monthly bills on time. And the second one is insuring that your credit balances are low in comparison to their limits.
For example, if you have a $5,000 credit card then you should make sure that your balance stays below $2,500, or 50 per cent of that credit limit. This is what determines your score on this range.
The second factor for qualifying for a mortgage in Canada is down payment. And to help us explain this, we are going to assume that a Canadian has just purchased a home for $300,000.
If this person plans on occupying the home, the minimum down payment is 5 per cent. Using our example of a $300,000 value, that would equal $15,000.
If that person wants to avoid paying CMHC insurance, or if this is an investment or rental property, then the minimum down payment goes up to 20 per cent. So, again using our example of a $300,000 home value, that would increase our down payment to $60,000.
So these are the minimum down payments required for qualifying for a mortgage in Canada, depending on the specifics of the property you’ve purchased.
The third and final factor that lenders look at when determining if you qualify for a mortgage is debt servicing ratios. And to help us understand this concept, let’s look at an example.
So we have a household where Mary is earning $60,000 and her husband John is earning $45,000. So this household has a total annual income of $105,000. The lender will then compare this income to the monthly expenses that the household incurs.
They likely have existing expenses such as their car payment of $400 and maybe some student debt that’s still leftover from when they went to university. The lender will look at the income, look at those expenses, and then determine is there enough income leftover to service a purchase of a home, because the household would then have a mortgage payment and also have to pay the monthly property taxes.
We’ll go into detail about how this ratio works specifically, in a later video. But at a high level, a lender needs to determine that the household income is enough to service all existing debt and mortgage-related debt due to a home purchase.