What First-Time Buyers Worry About When Applying For a Mortgage
Are you feeling anxious about borrowing hundreds of thousands of dollars for a new home? You’re not alone. Applying for a mortgage can be stressful. Buying a home is the largest purchase you’ll ever make, especially if you’re a first-time buyer.
Here are a few things that many first-time buyers worry about when applying for a mortgage:
Having a Big Enough Down Payment
The higher your down payment, the lower your monthly payments will be. For example, if you buy a new condo in Toronto for $400,000 and put $80,000 down, then you’ll need a mortgage of $320,000. If you put down more than $80,000, then you’ll borrow a lower amount.
We chose this down payment figure because it’s 20% of the home price. This is where things can get complicated. If you put down less than 20% of the home purchase price, you are required to have mortgage insurance, which is added to your mortgage. So, not having a large enough down payment equals higher carrying costs, and this can lead to difficulties with getting approved.
The Mortgage Stress Test
Now add the mortgage stress test on top of your original concern about not having a large enough down payment. The stress test is applied to insured and uninsured mortgages. You basically need to qualify at a rate approximately 2% above your contracted rate in order to prove you can afford your mortgage.
In the Toronto Real Estate Board’s Market Year in Review and Outlook report, it was discovered that buyers applying for a mortgage had to qualify at an average of $700 more than they actually needed to per monthly payment due to the stress test. So, be wary. If you’re already pushing it (like if your projected monthly shelter costs equal substantially more than 30% of your before-tax income), then the stress test could be the thing that pushes you over the edge, preventing you from qualifying.
When to Apply For a Mortgage
If you bought a new condo, there’s a chance you’ll be moving into your new home before the building registers, at which time you’ll be paying the developer interim occupancy fees. You’re basically paying rent to the developer until the building registers because you can’t apply for a mortgage until the building is registered with the municipality.
It can take anywhere from a month or two to six months for a condo building to be registered, depending on the size. We’ve seen it take even longer. So, when does it make sense to apply for a mortgage?
Most builders and developers will give you a notice when your final closing is approaching, usually about a month before. We recommend getting all your paperwork together right after you take occupancy. You should also start shopping around with different lenders to ensure you’re getting the best rate possible. Then when the time comes, you’ll be ready to make your decision.
Self-employment has been steadily rising in Ontario. When applying for a mortgage, you need to provide a reliable source of income to prove you’re making sufficient money to afford the payments. But what happens when the reliable source of income is you?
Any major bank or lender will likely request to see two years of business financials. They want to see that your business is making money so they feel more confident that you can steadily pay yourself.
If you have a low salary but a lot of money in the business, that could be a red flag. But it could also be a red flag if you have a high salary and not much money in the business (or low profits/no profit). It’s a delicate balancing act. If you’re self-employed, we recommend booking an appointment with your bank branch in order to learn more about how your business financials may affect you when it comes time to apply for a mortgage.
And that goes for all of the above worries and concerns. If you’re thinking of buying a new home, your bank will be more than happy to discuss your options and give you an idea of how to get your finances in order to apply for a mortgage (and also a pre-approval).
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