The ABCs of Mortgages
So you’re interested in getting a mortgage. This is exciting and a solid investment, but there are things you need to know before you start looking. This page will give you a quick primer to get you started.
- Down Payment: All home purchases require a down payment of at least 5%. In most cases, it can be a gift from your parents or other immediate relative. Lenders will also want to see the source of the down payment as well as a 30-90 history of the funds.
- Down Payment Less Than 20%: Mortgage insurance (not mortgage life insurance) is required when the down payment less than 20%. The insurer (CMHC, Genworth, or Canada Guaranty) guarantee the mortgage for the lender but a fee for this service is added to the mortgage. The insurance fee for 5% down is 3.6% of the mortgage amount and decreases as the down payment increases.
This is mandated by law and all regulated Canadian lenders must have mortgage insurance when the down payment is less than 20%.
- Income: Lenders understandably want to make sure that you have a steady source of income. Salaried employees with steady jobs typically require a recent pay statement and job letter (written by your HR department or manager) to confirm details. Clients with commission, part time, or self-employed income need more confirmation. Lenders will often want at least 2 years on such income supported by tax returns and Notices of Assessments.
- Debt Ratios: Lenders require that clients adhere to two key debt ratios:
- Gross Debt Service Ratio (GDSR): per cent of gross income that goes to the proposed mortgage payment, heat, and property taxes. The maximum allowed is typically about 36%.
- Total Debt Service Ratio (TDSR): per cent of gross income that goes toward all monthly payments, including the proposed mortgage payment. The maximum allowed is typically about 43%.
These ratios are strictly adhered to and dictate the size of mortgage that a client will qualify for.
- Credit Score: The major credit bureau organization, Equifax, tracks all types of credit and provides both a report summarizing balances, limits, and repayment history as well as a Beacon Credit Score. Your score tells lenders how you handle your credit. Equifax does not reveal the formula for the score but clients with consistent, on-time repayment and smaller balances will have higher scores.