The topmost frequently asked questions by homebuyers

What’s the best rate I can get?

Your credit score plays a big part in the interest rate for which you will qualify. The riskier you appear as a borrower, the higher your rate will be. However, the rate is not the most important aspect of a mortgage. Many rock-bottom rates often come from no-frills mortgage products. Even if you qualify for the lowest rate, you often have to give up other things such as pre-payments, portability privileges and at times the highest penalties if you pay off your mortgage earlier. Therefore, it’s critical to focus on a mortgage with the best terms and rate. If not, it can end up costing you thousands more in the long run.

What’s the maximum mortgage amount for which I can qualify?

There are two calculations you will need to complete to determine the amount for which you qualify. The first is your gross debt service (GDS) ratio, which evaluates your proposed new housing costs (mortgage payments, taxes, heating costs and strata/condo fees, if applicable). Generally, this amount should be no more than 35 per cent to 39 per cent of your gross monthly income. For example, if your gross monthly income is $4,000, you should not spend more than $1,560 in monthly housing expenses. Second, you need to calculate your total debt service (TDS) ratio, which measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Your TDS ratio should be no more than 42 per cent to 44 per cent of your gross monthly income.

The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, get pre-qualified, so you can stay within your price range and view homes you can reasonably afford.

How much money do I need for a down payment?

The minimum down payment required is five per cent of the home’s purchase price. If the property is more than $500,000 and under $1 million, you will need to put down five per cent up to $500,000 and 10 per cent down on the balance. This is with properties that are priced less than $1 million. Properties priced more than $1 million require at least a 20 per cent down payment.

What happens if I don’t have the full down payment amount?

There are programs available that enable you to use funds for a down payment such as your savings, Registered Retired Savings Plan (RRSP), First Time Home Savings Account (FHSA), or a gift from a parent, grandparent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, to qualify, you have to be within the TDS ratios as mentioned above.

What will a lender look at when qualifying me for a mortgage?

Most lenders look at these five factors:
1. Income
2. Debts
3. Employment history
4. Credit history
5. Value and marketability of the property you wish to purchase

What credit score do I need to qualify?

Generally, you are a good candidate for a mortgage if your credit score is 650 and above. The higher the score, the better, giving you more options and advantages. These days, almost anyone can obtain a mortgage, but for those with a lower credit score, the options will be more limited and interest rates could be higher.

What happens if my credit score isn’t great?

There are several things you can do to boost your credit fairly quickly. Here are five steps to help attain a speedy credit score boost:

1) Pay down your credit cards. The number one way to increase your credit score is to pay down your credit cards to below 50 per cent of your limits.

2) Limit the use of your credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score.

3) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file.

4) Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off.

5) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If a cell phone bill is incorrect and the company will not amend it, dispute this by making the credit bureau aware of the situation.

How much will I have to pay for closing costs?

It is recommended that you put aside at least 1.5 per cent of the purchase price of the home (in addition to the down payment), to cover closing costs. You must have this amount but it doesn’t mean you are going to spend it. The following are some of the closing costs:

• Legal costs
• Property tax adjustments
• Strata/condo fee adjustments
• Home inspection
• Property and fire insurance
• Property/land transfer tax (if applicable)
• Cost to register property in land title office, etc.

You will need to have more than 1.5 per cent of the purchase price if you purchase a property over $500,000, as you will need to pay for the property transfer tax.

How much will my mortgage payments be?

Monthly mortgage payments vary based on several factors, including: The size of your mortgage; whether you are paying for mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.

To get more details about these and other questions, talk to a mortgage expert who can analyze your personal situation and provide you with more information, so you can make an informed decision on buying your home.