How to fine-tune your finances for a mortgage
The combination of low interest rates, limited housing supply and a growing pool of buyers has created an overheated real estate market characterized by bidding wars and properties selling far above their listing price.
In times like these, buyers need to get their finances in shape to avoid house-buying hiccups that could either derail a deal or force them to pay more than they can afford, says Rosa Bovino, a mortgage broker with Invis and Mortgage Intelligence in Winnipeg.
“What we’ve seen this past year has been incredible with people not fully understanding the process … only to run into problems,” she says.
Experts say that new mortgage rules and the potential for rising interest in the coming months have made it even more critical for buyers to be in tip-top financial shape.
Here are some ways to fine-tune your finances for a mortgage:
Make sure you can afford it
Buying a home requires a down payment of at least 5 per cent of the home’s price, and often higher depending on how expensive the property is.
Buyers also need mortgage insurance from the Canada Mortgage and Housing Corporation (CMHC) or one of Canada’s two private-sector insurers if their down payment is less than 20 per cent of the purchase price of a home.
A good credit score, which is a measure of their creditworthiness, is also needed, says Chase Belair, co-founder and principal broker at Nesto Inc., an online mortgage broker.
In July, CMHC lowered the minimum credit score required to qualify for its mortgage insurance, to 600 instead of 680, reversing tougher rules imposed a year earlier. Still, lenders prefer the higher score of 680 “to ensure there are no obstacles” to getting financing, Mr. Belair says.
Scores between 600 and 679 can make getting a mortgage more challenging, says mortgage broker Marc Crossman, managing partner and mortgage broker at Mortgage Alliance Lending Advisors in Edmonton.
In some instances, he says lenders may decline the application, even if the score is above 600. “If your score is under 620, for instance, typically that’s a no-go,” Mr. Crossman says.
The CMHC also changed the rules to allow buyers a higher ratio of expenses relative to their income. It said a borrower’s gross debt-service ratio – the share of monthly household income used to pay the mortgage and other housing costs – can go up to 39 per cent instead of 35 per cent, while the total debt-service ratio – the percentage of monthly household income that covers housing costs and any other debts – can go up to 44 per cent instead of 42 per cent.
It means if your household income is $100,000 your GDS can’t exceed $39,000 and your TDS can’t exceed $44,000.
The change realigns the CMHC with the country’s two private mortgage insurers, Canada Guaranty Mortgage Insurance Co. and Sagen MI Canada Inc., which didn’t match the federal housing agency’s tougher rules imposed in the summer of 2020.
What is the stress test and do you pass?
Another key metric borrowers must meet is the stress test, which is designed to ensure they can make higher mortgage payments if interest rates rise.
As of June 1, the minimum qualifying rate for uninsured mortgages changed to the contracted rate plus two percentage points or 5.25 per cent — whichever is higher. Previously, the stress test had been either the higher of 4.79 per cent, or 2 per cent higher than the offered rate.
The Office of the Superintendent of Financial Institutions (OSFI) said the change “will help support financial resilience should economic circumstances change” and said it would review the rate “at least annually.”
Mr. Belair says the change could have an impact on buyers who have other debts.
“Now a monthly car payment can get in the way of qualifying the way it couldn’t before,” he says.
Getting preapproved for a mortgage is another critical step because it helps buyers stay in the ballpark of how much they can borrow before they go house hunting, Mr. Crossman says.
“It lets you know what your price point is,” he says.
A preapproval will also determine if a borrower qualifies based on the stress test and debt-servicing ratios, since it involves the lender reviewing personal and financial information, including income and down payment and credit history.
When seeking preapproval, transparency is important because lenders and mortgage insurers will likely uncover problems affecting creditworthiness, Mr. Crossman says.
Some clients “are not upfront” about past debts, he adds — even small ones that went to collection agencies, or they may not mention they recently started a new job. Either situation can affect a borrower’s ability to qualify for a mortgage amount, he says, and at a desirable interest rate.
Once preapproved, prospective borrowers should stay within their loan comfort zone, even if they’re told they can go higher, which Mr. Crossman says is often the case.
“[Then], instead of sticking to the price they had in mind, they often buy within 5 per cent of their maximum” of the preapproved amount, he adds, which can be financially risky.
“It’s not necessarily financially responsible,” Mr. Crossman says, “because they’re overextending themselves beyond where they were comfortable with financially in the first place.”
Ms. Bovino often gives clients two preapproval amounts: One is based on their comfort level, which is typically much lower than the amount preapproved by a lender, and the other being the actual maximum preapproval amount they can go if there’s a bidding war.
”That way, they’re not having to call me 20 times if they get in a bidding war to find out how high they can go,” she says.
Sit tight before spending more
Once you have preapproval, curb any big spending to keep it, Mr. Belair says.
“Any substantial new monthly payment affects income, which could hurt mortgage affordability,” he says, since financing is not finalized until an offer on a home is accepted.
Any change in finances, including a job change, could also negatively impact your borrowing rate, Mr. Crossman adds.
“Once preapproved, do not make any major financial decisions without speaking with your mortgage professional,” Mr. Crossman says.
- JOEL SCHLESINGERSPECIAL TO THE GLOBE AND MAILPUBLISHED NOVEMBER 6, 2021
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