Besides visiting with a real estate agent such as myself, home buyers will also likely be making multiple trips to the bank. One of the most basic requirements when buying a home is getting qualified for the necessary financing, which is something I am not always involved with while working with clients. That being said, I wanted to know what my clients went through when they went to the bank looking for a mortgage loan, so I put on my fake moustache and made an appointment with a mortgage advisor. Okay, I didn't actually affix a moustache as part of a disguise, but I made an appointment with Sheryl Williams, a Mobile Mortgage Advisor with CIBC, and asked her to speak with me as if I had just come in to her office looking for a pre-approval.
I hope the following serves as a quick and easy guide to both first-time and seasoned home buyers, providing insight into what goes into your pre-approval calculation and how to maximize it. If you ace the basics of your financial picture, you may be surprised with how much more house you can afford!
To begin, you have to assess whether you are ready to purchase a home. The following lays out the multiple factors that go into this decision and what you can do to optimize them.
One of the most important things to consider if you are serious about buying a home is maximizing your current income source. This could be in the form of working more hours or increasing your output at work and asking for a raise, but it is definitely worth it when going into the pre-approval process. (Here is a great article that teaches you the best way to ask for a raise: https://www.forbes.com/sites/elanagross/2016/06/27/8-managers-share-the-best-way-to-ask-for-a-raise-and-get-it/#53afdfc74ff2)
Income is also the biggest reason why single people have trouble qualifying for a mortgage loan. If you are going into a transaction with a partner or spouse, the bank sees two things: Firstly, they will most likely see an increased household income due to the pooling of two incomes and, secondly, they will see that in the event that one partner loses their job or ability to work, there is still another income source available to make payments.
2. EMPLOYMENT HISTORY
Banks will assess your employment history over the past few years. They will be curious as to how long you have been with your current employer and your consistency throughout periods of time. If you are self-employed, they will look into whether or not you have been able to maintain successful operations over the last couple years.
Debt, although very common these days, is something you are going to want to try to minimize prior to looking into a mortgage loan. This is much easier said than done, but with a few months of dedicated budgeting with the help of a financial advisor, you will likely be surprised with how much progress you can make.
4. CREDIT HISTORY
Before a bank will lend you a substantial amount of money, they want to make sure you have done a good job of paying back other companies that have lent you money. Maintaining good credit by paying your car, student loan, and credit card payments on time is a must. (For younger readers, here's an article that lays out simple steps that can be done to start building good credit while still in school: https://www.creditcards.com/credit-card-news/help/10-ways-students-get-good-credit-6000.php)
Another important factor that is not always prioritized. Like most of the items on this list, building your savings account is something that can be drastically changed through a few months of dedicated budgeting. If you are passionate about buying a home at a specific price range, you must have a sufficient down payment to make that happen. (We talk about down payment amounts and percentages a little bit later on in the guide, so feel free to skip ahead if curious!)
The term 'pre-approval' gets thrown around a lot in the real estate industry, but unless you have provided a mortgage agent with the details of your career/pay stubs and signed off that they can review that information, your pre-approval may not be set-in-stone.
The mortgage agent will look at three primary things:
We have already talked about maximizing all of these factors, but you may be confused as to what ratios I am talking about. Your ratios are simply a comparison between your income and the amount of debt you have. If you have a high income level but still have a high amount of debt, that may not leave you with a lot of breathing room to consistently make mortgage payments. To improve your ratios, simply refer back to the paragraph about reducing debt.
In recent years, banks have started introducing the concept of a consumer 'stress test' into their approval process. This means that the bank will qualify you based on harsher criteria than what you will likely have to deal with in the real world, but it provides them with an increased level of lending security.
Down payments are capable of making drastic changes to the overall home buying process. To first understand how much house you can afford, one must realize how much money they need saved to initiate a purchase. You should aim have at least 5% of the purchase price of the home saved to be able to put down. For example, if you are looking at a first home of $300,000, you should aim to have $15,000 saved.
Keep in mind that meeting the 5% threshold doesn't get you free from mortgage insurance payments. For down payments less the 20% of the purchase price, the bank will consider it a high-ratio mortgage and require mortgage insurance from the borrowers. So, rather than the agreement being between you and the bank, the agreement is between you, the insurance company, and the bank. High-ratio mortgages must be insured by a mortgage insurer such as the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial Canada, or Canada Guaranty. This isn't something to be worried about, as mortgage insurance is very common and regularly required, but it is something to consider if you are capable of putting down more than 20% of the purchase price of a home.
Other than a down payment, there are still other costs associated with buying a home that should be considered when looking at your savings.
1. Home Inspection Fees
2. Legal Fees
3. Sales Tax (where applicable)
**This is something to discuss with your real estate agent. In an agreement of purchase and sale, you have to pay careful attention to the terms, "Included in", and , "In addition to". These terms dictate which party pays the sale tax in a transaction
4. Land Transfer Tax
If you were looking for a quick(ish?) overview as to how the pre-approval process goes down, then I hope I was able to help you out! I can't thank-you enough for taking the time to visit my website and read through my content. I would like to profusely thank Sheryl Williams for taking time out of her busy day to meet with me to help all of us out. She is one of the most enthusiastic people I know towards their career and she is an amazing person to talk to if you are starting your home buying journey.
Now, if you intend on getting a little bit of extra credit (no pun intended), then I included a few extra notes at the end of this article. Please feel free to use these resources as you see fit!
Professionals Involved in Your Home Purchase
- Mortgage Advisor
- Financial Advisor
- Home Inspector
- Land Surveyor
Appraisal is the determination of the value of the property for lending purposes. This value may or may not be the same as the purchase price of the home. Appraisal fees can be charged to either the seller or the buyer, depending on the transaction.
The closing date is when the ownership of the home is transferred to you, the buyer. It is also the day when you typically get the keys for your new home and can move in.
Banks can lock in a rate for you for a period of time so that you can shop for your home with peace of mind.
The period of time it will take to fully pay off the principal amount of your mortgage. This should not be confused with the term of the mortgage, which is usually shorter. The most common amortization period for a new mortgage is 25 years.
The period of time your mortgage agreement with the bank is in effect. A mortgage term is usually between 6 months and 5 years long. After the term expires, the mortgage can be renegotiated.
ABOUT THE AUTHOR
My name is Patrick MacDougall and I am a licensed REALTOR® based out of Tillsonburg, Ontario. I service the Oxford, Norfolk, and Elgin County areas and work everyday to bring as much value to others as I possibly can.