How do I begin to plan my financing?
House hunting begins at home… with planning. Before you grab the road maps and hit the streets, you need to know how expensive a house you can afford to buy. Knowing your affordable price range will bring your house hunting into focus.
How much will I need for my initial investment in my new home? You’ll need a combination of a down payment and closing costs.
The money that you pay up front for a house is the down payment. These payments typically range from 5 to 25% of the total value of the home. The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own.
While it is possible to buy a home with as little as 5% down, the amount of your down payment will determine whether you will have a conventional mortgage or an insured, high-ratio mortgage.
What’s the difference?
- Conventional mortgage: Your down payment is at least 20% of the purchase price.
- High-ratio mortgage: Your down payment is less than 20% of the purchase price and must be insured by CMHC or GEMI. An insurance premium will apply.
For high-ratio or insured mortgages, the mortgage provider requires the borrower to demonstrate his or her ability to cover closing costs in the amount of 1.5% of the value of the property. Closing costs can be as high as 3% of the value of the property being purchased and can vary widely depending on:
- The property being purchased
- Services required
- Applicable insurances
- Whether the home is new or old
- Closing dates affecting interest adjustments
- The balances of any prepaid expenses
What is my credit rating?
There are a number of steps to getting mortgage financing. A particularly important step – and one many people don’t give much thought to is the credit check. As a routine part of the application process the lender will order a copy of your credit history.
Your personal credit history is compiled by credit bureaus that collect information from various sources including banks, retailers, and other public records, creating a credit report. Information such as what credit and debit cards you have, the types of accounts you have at various financial institutions, information about personal loans, mortgages, student loans, etc., is all part of the report. The report shows the creditors’ names, account numbers, the date accounts were started, the current balance, as well as a detailed payment history (for example, how many times you were over 30, 60, or 90 days late in paying bills). Generally, credit reports show information going back six to seven years.
Because the report contains information about you, you have a right to inspect a copy of it. Equifax, one of Canada’s largest credit bureaus, will mail consumers a free copy of their personal credit file upon request. The request can be made by mail, fax, or online. Certain information must be supplied with the request. For more information, call Equifax at 1-800-465‑7166, or visit the Equifax website.
How do lenders assess how much I can afford per month?
Generally, lenders calculate that the homebuyer shouldn’t pay more than 30 to 32% of gross income for principal, interest, taxes, and insurance (PITI), or 40 to 42% for both PITI and monthly debts combined.
The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.
Two lender formulas:
30 to 32% formula Total monthly housing costs (PITI) = 30 to 32% (or less) gross monthly income
40 to 42% formula PITI + all monthly debts = 40 to 42% (or less) gross monthly income
How Much Can I Afford
House hunting begins at home... with planning. Knowing your affordable price range will bring your house hunting into focus.
How much house you can afford depends on two things: how much you can afford for the monthly mortgage payment, and how much you can invest in the down payment. Monthly payments include the principal and interest on the mortgage loan and property taxes and insurance against fire and other hazards. These four costs are often abbreviated PITI.
The key items are the size of the down payment, the amount of the mortgage and the term – or length – of the loan.
Why should I apply for a mortgage pre-approval? Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest rate increases while you look for your new home.
To request a mortgage pre-approval, call 1.204.888.4663 or apply on-line with Vertuity Mortgage. Your mortgage specialist will answer your questions and help you determine which financing terms and options are right for you.