Do I Qualify?
Banks and other lending institutions look at three main factors to determine whether an applicant qualifies for a mortgage and how large that mortgage can be. The three key elements are income, credit history, and down payment.
Various types of income are acceptable to lenders and mortgage insurers. Acceptable sources include salary, pension, and guaranteed hourly income. Other sources of income such as part-time, contract, seasonal, self-employment and commission are also acceptable but lenders will require a two year average.
Good credit has become increasingly important in light of recent problems in financial and mortgage markets worldwide. Lenders look at credit scores and details obtained from two credit agencies in Canada (Equifax and TransUnion) to determine mortgage eligibility. Scores range from 300 to 900 and the higher the better. You will need a minimum credit score of 620 and one to two years of credit history showing on your credit bureau. Applicants with scores above 680 may be eligible for ‘cash back’ and ‘borrowed down payment’ mortgages.
If you don’t know your credit score, have damaged credit, or don’t have any credit, you should contact a qualified mortgage professional for assistance.
The minimum down payment for insured mortgages is 5% of the purchase price of the home. The amount of mortgage insurance decreases as the down payment increases. With a 20% down payment no mortgage insurance is required.
The Government eliminated 100% financing as an option for Canadian homebuyers. However, alternatives still do exist for buyers who haven’t been able to save enough for the minimum 5% down payment. The following down payment options offer solutions for those who qualify.
Gifted Down Payment
Lenders will allow the down payment to come from immediate family members (parents, grandparents or siblings) in the form of a gift. Parents or grandparents will often help a child or grandchild with their first home purchase without any expectation of repayment. The family member must fill out and sign a gift letter confirming that the funds are indeed gifted. If the money came from anyone else (ie: friend or co-worker), it would be treated as a loan since non-family members usually expect to be repaid at some point in the future.
Borrowed Down Payment
If the homebuyer has sufficient income and good credit, the lender may allow the down payment to be borrowed as long as the payment in included in the qualifying debt ratios. This option is only available through a mortgage broker since banks do not offer this type of mortgage.
With Cash Back mortgages the home buyer must come up with a down payment in the traditional manner – saved or gifted. The lender then gives them a predetermined sum of money (2 to 7% of the mortgage amount) after the mortage closes. This money can be used to cover housing related costs such as furniture and appliances, or renovations. The interest rate is higher so that the lender can recoup the extra cash back amount over the term of the mortgage.
City of Kingston Down Payment Assistance Program
From time to time the City of Kingston offers down payment assistance programs designed to help first-time homebuyers with their down payment. Applicants must be buying a home in the city of Kingston or the County of Frontenac. They must have a mortagge pre-approval and there are restrictions on purchase price and income. Details can be found on the City of Kingston website when available.