Whether you’re already shopping for your next home or just getting started with your research, one of the very first things you should do before you start looking at homes is talk to a lender so you know exactly how much home you can afford.

The last thing you want to happen when you do find your dream home is discover you can’t afford it or get beat out by another offer because you didn’t have a pre-approval letter from a lender.

There are many lending institutions, beyond traditional banks, that offer a variety of mortgage products. Financing options and rates can vary widely, so it is important to do your research and shop around to ensure you get the mortgage that best meets your needs at the best price.

1. Preparing Your Budget to Buy Your Dream Home

Determining your budget and what you can realistically manage can be stressful. Where do you even begin to answer such a loaded question?

First, you can start by passing a mortgage stress test. This stress test will help you prepare when qualifying for a mortgage loan at a lender.

The mortgage stress test will help you set a realistic goal and show you what your payments would be at a qualifying interest rate. These interest rates are typically higher than the actual rate in your mortgage contract, which is something you need to keep in mind when planning your budget.

The qualifying interest rate your lender will use for the stress test will depend on whether you need to get mortgage loan insurance. If you need mortgage loan insurance, the bank must use a higher interest rate.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

• the Bank of Canada’s conventional five-year mortgage rate
• the interest rate you negotiate with your lender

If you don’t need mortgage loan insurance, the bank must use the higher interest rate of either:

• the Bank of Canada’s conventional five-year mortgage rate
• the interest rate you negotiate with your lender plus 2%

3. Understanding Your Budget

Now that you have a rough understanding of how lenders see you from a finance perspective, you can now understand your budget a little better.

Don’t worry if you did not pass the stress test; there are additional lenders and Credit Unions that are not federally regulated and do not need to use the mortgage stress test.

4. The Ontario Land Transfer Tax

When also planning your budget, be sure to calculate the Land Transfer Tax. This is based on the purchase price of the property. If you want to see what the cost of this could be, use our Land Transfer Tax Calculator below.

Credit Score

It is a measure of your financial health, and it shows the lender if there are any risks associated with lending you money.

Down Payment

In Canada, the minimum down payment is 5% of the home’s purchase price. If you decide to put down less than 20%, you will need to acquire a mortgage default insurance to help protect your lender in case your loan defaults.

Debt Service Ratios

These are two calculations that lenders use to determine the largest monthly mortgage payment you can afford; this is based on your current monthly income, debt, and expenses.

Documentation

A list of documentation you may need to provide is your identification, length of time with an employer, proof of income, proof of down payment and information on other debts.

Buying your first (or next) home can be stress inducing and exhilarating all at the same time, we’re here to make the process as smooth as possible.

Take a look at our Mortgage Rates Calculator, Ontario Mortgage Payment Calculator & Ontario CMHC Insurance Calculator. Feeling overwhelmed? We’re here to help, contact us today and we’ll be happy to work with you!

If you have any questions or need assistance, feel free to reach out to our team today.