What You Should Know When Buying a Home in Canada

Are you considering buying a home in Canada? Lining up a real estate agent and scheduling showings shouldn’t be first on your list. You’ve got work ahead of you.
Buying a home involves patience and planning. It’s an activity filled with financial requirements and unexpected expenses. Understand what lies ahead, so you aren’t caught unprepared.

Examine Your Financial Health
What is your gross monthly income, and how does it compare to your monthly expenses? Do you pay your bills on time? Do you have large debts? Lenders take your debt-to-income ratio to heart.

In an effort to prevent people from taking on too much, The Office of the Superintendent of Financial Institutions instituted a so-called “stress test.” In essence, it’s a way for lenders to determine if a home buyer can comfortably afford mortgage payments, and these calculations aim to keep people from taking on too much debt when buying a house.

When was the last time you viewed your credit score? According to TransUnion, home loan approval can be difficult if you have a credit score of less than 600. Thus, the higher your score, the nicer you look to a financial institution and the better rates you will receive.

Make a Down Payment
To buy a house in Canada, you’ll need to put down a minimum 5 percent down payment. It’s the minimum amount required to get a house. However, a 20 percent down payment will help you save thousands of dollars on default insurance premiums. It can also open up your financial options.

Additionally, a 20 percent down payment lets you turn to private lenders and qualify for a greater assortment of loans. If you live in a large city like Toronto, you can cast a wider net. It’s easier to compare Toronto mortgage rates across financial institutions.

These include interest-only mortgages, non-prime financing, home equity lines of credit and then some. The resulting lower payments can provide continued financial security down the road.

Learn About a HELOC
You may be familiar with mortgages. While it’s certainly the most popular home-buying option, there is an alternative. A HELOC is a flexible financial option. It’s usually used when a homeowner has paid off a large part of their mortgage.

Yet, some new homeowners turn to a HELOC as a cushion in case of an emergency. In this case, a HELOC is used as a secondary mortgage for an emergency fund. You won’t have a payment until you use the funds.

Add Mortgage Insurance
If you’ve been pinching pennies to save for your down payment, you’re off to a good start. But, you should try to keep saving until you have at least 20 percent for your down payment. If you have less, you can still be approved, but you’ll need to add mortgage loan insurance to your “must buy” list.

What is mortgage loan insurance? This type of insurance safeguards the mortgage lender in the event you can’t make your mortgage payments. It’s sometimes referred to as mortgage default insurance. Sometimes, even with 20 percent down, you will need to add on mortgage loan insurance.

Plan Your Next Move
Where does your credit score and debt-to-loan ratio fit in? Take the time to look over your financial health so you can later qualify for a home loan. Speaking with a financial adviser can help you see where you stand — and where there’s room for improvement.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.