You will get the best potential rates with a minimum of 5% down payment from your own resources (not putting on a credit card) or that from an immediate relative. There are products available that don’t require a down payment, or allow you to put it on a credit card; however, the rate will be higher because the risk to the lender is higher.
Anything less that 20% down is termed a high ratio mortgage and must have either CMHC (Canada Mortgage and Housing Corp) or Genworth mortgage insurance. This is paid by the borrower for the benefit of the lender. In case of default where the lender cannot recoup their money from the borrower through sale of the home; the lender will get their money from one of the above mentioned corporations. The cost graduates from 2.75 % of the value of the mortgage for 5% down to 1 3/4% of mortgage value for those that put down 15%. The insurance premium can be added to the mortgage and doesn’t have to be an out of pocket expense. There is also a .2% increase for each five year period added to the amortization.
Traditional lenders work with two equations. The first is 32% of the family’s gross income for those that are T-4’d. For those that may be self employed, it is of their net income. For example, if a couple’s income is 60,000 then 32% of this would be $19,200. This is the maximum allowed and covers the mortgage payment (principal and interest), property taxes, heat, (minimum of $600 annually and up depending on the size of your house), and ½ of any applicable condo or strata fees.
The next equation is 40% and above. This leaves 8% for the other debts such as loans and credit card payments. Again based on a household income of $60,000, this would amount to $24,000. Let’s say you have a personal loan and you are paying $200 a month for it ($2400 annually) and a car loan of $350 per month ($4200 annually) and have $10,000 of credit card debt with minimum payments of 3% or $300 per month ($3600 annually). These debts add up to $10,200 which must be deducted from your $24,000 allowable. This leaves $13,800 (instead of $19,200) to pay for your mortgage, heat property tax and applicable strata fees.
If you have very good credit (score of 680 or higher), you may disregard the 32% and use a TDSR (total debt service ratio) or 44%. This would encompass your entire debt load.
There are non traditional lenders that will allow higher debt service ratios, however, as the risk increases, so does the rate.
There are many programs available for those that are in business for themselves or run a business on the side. Some of them don’t require the borrower to prove their income and are called “stated income” mortgages. This means the borrower can purchase just about anything they wish. All that is needed is a minimum of 5-10% for a down payment. Again, the downside is the rate is slightly higher than with provable or verifiable income.
Traditional lenders require the borrower to have 1.5% of the value of the property in their bank to cover closing costs (such as legal fees, the property transfer tax if applicable, interest and tax adjustment to name a few). 1.5% often isn’t enough to cover all the closing costs but that’s all the lenders require you to have. This means that coming up with 5% as a down payment is a little misleading. It would be better to say 6.5%
It is important to note that almost all mortgages are not the same. Lenders all have their particular idiosyncrasies and surely every borrower is different. Don’t be afraid to talk to me to find out exactly where you stand. I’ll explain to you all of the options open to you and if you can’t get the mortgage you want today, I’ll offer suggestions on how to improve your situation for a future application.
Dominion Lending Centres Kelowna
Toll Free: 1-866-862-5040
Why use a Kelowna Mortgage Professional
There are hundreds of products available to consumers. Let me do the shopping for you. I can often get you a better rate than you at your own bank. Best of all (except in the most challenging of circumstances), my services are free to the client.