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The cost of a home is usually much more than an average Canadian is able to cover in all-cash transactions. So, how should one get a house in Canada? By getting a mortgage loan.
But, getting a mortgage is a long and difficult process. You need to find a mortgage lender who is willing to loan you these funds. And in order to be eligible for a mortgage, you must meet certain requirements set by the lender.
Continue reading to find out what it takes to get approved for a mortgage in Canada, and what you really need to do when dealing with a lender.
Requirements To Be Eligible For A Mortgage
Needless to mention that mortgage lenders do not hand their hundreds of thousands of dollars to anyone who comes to them for a loan. Rather, an applicant has to go through certain criteria before a loan is approved. Lenders usually look at several aspects of a financial health before the application for a mortgage goes through.
Below are the requirements that a Canadian must meet in order to secure a mortgage in Canada.
One of the most important things about securing a mortgage is the credit score. When an applicant applies for a mortgage loan, he is asked to display his credit score. In Canada, the credit score ranges from 300 to 900, and lenders generally accept a minimum credit score of anywhere between 650 and 680.
Your income will need to be adequate enough to cover the mortgage payments every month. Additionally, all of your bills that you are responsible for paying, and the debt you owe, your lender will see everything. The lenders will look at your debt-to-income ratio, which tells how much of your gross monthly income is dedicated to paying off debt. The lower the debt-to-income ratio, the better.
It may be more difficult for you to comfortably afford an additional loan obligation in the form of a mortgage if your debt burden is already sky-high. In this instance, you may need to wait a while before applying for a mortgage to pay off your debt.
To get a traditional mortgage, you’ll need to put down a percentage of the home’s purchase price as a down payment. The bigger the down payment, the lower your entire loan amount will be, lowering our loan-to-value ratio, which is a measure of the loan amount compared to the property’s value.
Different lenders may have different down payment requirements, and your financial situation will also influence the amount you must put down. However, in general, a down payment of 5% of the home’s buying price is required.
Mortgage Down Payment Rules In Canada
As previously said, you will need to come up with a down payment in order to acquire a mortgage, and the minimum amount required is often 5% of the home’s buying price. However, you’ll need at least a 20% down payment to avoid incurring mortgage default insurance (which protects the lender in the event you default on your loan). Mortgage default insurance is automatically required if the down payment is less than 20%.
The cost of this insurance coverage is calculated as a percentage of the home’s purchase price. Mortgage default insurance normally costs between 2.80 per cent and 4.00 per cent of the home’s purchase price and is integrated into monthly mortgage payments. Even though it is an additional cost, it allows Canadians who would not otherwise be able to access the real estate market to do so.
Should I Get A Mortgage From A Bank Or A Mortgage Broker?
There are advantages and disadvantages to working with either a bank or a mortgage broker.
Working with a Financial Institution/ Bank
When it comes to applying for a mortgage, many homebuyers turn to the bank with which they do their day-to-day banking. While that may be good, it’s vital to remember that banks can only provide their own mortgage packages to their customers. They’re fundamentally constrained in what they can give, which limits the options available to borrowers.
Using the Services of a Mortgage Broker
It’s a little different working with a mortgage broker. Mortgage brokers deal with a variety of lenders in their network rather than representing a single financial institution. A mortgage broker acts as an intermediary, negotiating with a number of lenders on your behalf to get the best loan for you.
Your mortgage broker will do all the legwork for you rather than you going out and comparing different lenders. You’ll fill out a single application, and they’ll contact many lenders to see what they have to offer before deciding on one. The lenders often pay mortgage brokers a referral fee, so you’ll never see a charge for their services.
What Is The Amortization Period?
You can choose between a short-term or long-term amortisation period, which refers to the overall amount of time you have to pay off your loan. Both have advantages and disadvantages.
You’ll be able to pay off a loan amount faster with a short-term amortisation period, such as 15 years, which means you’ll be debt-free sooner. This also implies that you’ll save a lot of money on interest. However, in order to attain this aim, your monthly mortgage payments will have to be significantly higher.
With a long amortisation time, such as 25 years, you’ll benefit from lower monthly mortgage payments, making the loan more reasonable. However, you’ll pay a lot more in interest over the course of the loan, and you’ll be trapped with this debt for a lot longer.
Should You Get A Mortgage Pre-Approval?
Before looking for a home, it’s common practice for buyers to get pre-approved for a mortgage. Getting pre-approved has a lot of benefits. It will determine how much you can afford to spend on a home. That way, you may focus just on properties that fall inside your price range, saving you time and disappointment.
Being pre-approved will also help you stand out in a competitive market, particularly if you’re in a bidding war. Sellers are more likely to look favourably at buyers who have been pre-approved.
Further, pre-approval will help move the initial mortgage approval process along faster once you find a home you love and an offer is reached. The majority of the paperwork has already been completed, and all that remains is to submit the purchase agreement to the lender for final clearance.
Just keep in mind that pre-approvals have a 90-120-day expiration period. As a result, once that date passes, the pre-approval letter will no longer be valid.
The Bottom Line
At Lionsgate, we specialize in helping people get the extra cash they need, obtain funding for private mortgages, as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, fill out the form below. Or, You can leave us a message and we will try to connect you with local lenders and sources that best meet your needs.
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