Mortgage Qualification Guidelines
This section will give you an idea of what to expect based on traditional mortgage qualification guidelines. Remember that these are just guidelines and everyone’s situation is unique.
To pre-qualify or get pre-approved for a mortgage, there are three essential components: your income, your equity and your down payment amount. As a mortgage professional I’m here to help you reach your home ownership goals.
If you have any questions about this section, please reach out to me and I’d be happy to help.
What is classified as income for qualifying purposes?
Some forms of income that represent revenue to your household may not count as income for qualification purposes.
Here are some of the many sources of income and some of the guidelines for using them to qualify for a mortgage. The important thing when it comes to income is to demonstrate consistency and sustainability.
If you are an employee of a company or corporation, the basic guideline for income eligibility is that you have been employed for one year with the same employer or at least one year in the same line of work with no probationary period on the new employment.
If you are self-employed, you can still qualify, but most lenders will require a track record of consistent income. The standard is a two year average of your net taxable income.
Seasonal income is acceptable, but you will likely be required to demonstrate sustainability by providing a two or three year track record. Usually, an average of income over these years will be used for qualifying purposes.
If you want to use overtime for your qualifying income, most lenders will want
to see a consistent history; typically, a two or three year track record of your overtime income.
Guaranteed pension incomes are usually acceptable sources of income.
Child tax credit
The child tax credit may be considered by some lenders. Ask me for more information if this is income you would like to have considered with your mortgage application
A down payment is the amount you can immediately contribute towards the cost of your home purchase. Since the majority of people do not have enough savings to purchase a home outright, the gap between your down payment and the purchase price of your home is made up with a mortgage loan.
Down Payment + Mortgage Loan
= Purchase price of your new home
If you have a down payment of 20%, you would be borrowing 80% of the home’s value.
The minimum down payment to buy a home in Canada is 5% of the purchase price. For example, to buy a home that costs $250,000, you will need a minimum of 2,500 as your down payment.
If you have under 20% down payment, you will need Mortgage Default Insurance.
If you have over 20% down payment, you quality for a conventional mortgage which generally does not require Mortgage Default Insurance.
Mortgage Default Insurance
Mortgage Default Insurance (sometimes called Mortgage Loan Insurance) protects the mortgage lender in case you are not able to make your mortgage payments.
Your mortgage costs will be slightly higher if you need to get Mortgage Default Insurance.
The premiums you pay for your Mortgage Default Insurance are typically combined and rolled into your mortgage payments.
Mortgage Default Insurance is only available for high-ratio mortgages if the purchase price of the home is less than $1 million.
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Mortgage Rate Stress Test
Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced a stress test on mortgage lending in October 2017. This rule, which requires all Canadian buyers borrowing from a federally regulated lender to pass the stress test, came into effect as of January 1, 2018.
Traditionally, the minimum amount of down payment required to purchase a home has been 5% of the purchase price.
Recent innovations in Mortgage Loan Insurance have allowed lenders to give home buyers the opportunity to cover the requisite down payment by borrowing the funds from an alternate credit source such as personal line of credit or credit card.
If you do not fit the stringent credit criteria for these programs, the 5% down payment must come from your own resources and can’t be borrowed. Here are some examples of equity sources which can be used towards your down payment.
Sale of another property
If equity is to come from the sale of another property, verification of this equity must be obtained. The lender will require a formal statement of outstanding balance for any existing financing on that property.
Funds from your savings account can be used towards your down payment.Most lenders will require three months of bank statements showing the accumulation of funds.
Registered Retirement Savings Plan (RRSP)
An RRSP is a personal savings plan that allows you to save for the future on a tax sheltered basis. You will need to provide a recent statement from your financial institution that identifies you as the account holder and the current value of the account.
Gifted down payment
The lender will require a gift letter stating that the funds are a gift and are not repayable, and a deposit slip showing the gifted funds deposited into the borrower’s account prior to closing.
GIC, mutual fund or term deposit
GIC: A Guaranteed Investment Certificate is a secure investment that guarantees
100% of the original amount that you invested. Your investment earns interest, at either a fixed or a variable rate, or based on a pre-determined formula.
Mutual fund: A mutual fund is a portfolio of bonds, stocks, or other investable
assets like money market products, that are selected and managed by a professional on behalf of many investors.
Term Deposit: A term deposit is a cash investment held at a financial institution for an agreed interest rate over a fixed term.