Buying your first home is an exciting milestone, but navigating the mortgage process can feel overwhelming. Getting the best mortgage starts long before you apply. With a little preparation, you can set yourself up for success and save thousands over the life of your loan. Here are some actionable steps to take, along with insights into recent changes to mortgage rules for new home buyers.
1. Understand Your Credit Profile
Your credit score is one of the most important factors lenders consider. Here’s how to get your credit in shape:
Check Your Credit Report: Request a free copy of your credit report and review it for errors. In Canada, services like Borrowell and Credit Karma offer free credit monitoring and access to your credit report. You can also request a report directly from Canada’s major credit bureaus, Equifax and TransUnion. Reviewing these reports regularly ensures accuracy and helps you spot potential issues early. Correcting mistakes can improve your score.
Pay Down Debts: High credit utilization (how much of your available credit you’re using) can hurt your score. Aim to keep it below 30%. For example, if your total available credit across all accounts is $10,000, try to keep your balance below $3,000.
Make Payments on Time: Late payments can significantly impact your score. Set up reminders or automate payments to stay on track.
A strong credit score not only increases your chances of approval but also qualifies you for lower interest rates, potentially saving you thousands.
2. Save for a Larger Down Payment
Recent changes to Canada's mortgage rules have affected down payment requirements, particularly for higher-priced homes. Here's an updated overview:
Minimum Down Payment Requirements:
Homes up to $500,000: A minimum down payment of 5% is required.
Homes priced between $500,000 and $1.5 million: The down payment structure remains unchanged, requiring 5% for the portion of the purchase price up to $500,000, and 10% for the portion between $500,000 and $1.5 million
Homes above $1.5 million: A minimum down payment of 20% is required.
These adjustments aim to reflect current housing market realities and help more Canadians qualify for a mortgage with a down payment below 20%.
3. Understand Your Debt-to-Income Ratio (DTI)
Lenders use your DTI to assess your ability to manage monthly payments. This is the ratio of your total monthly debt payments to your gross monthly income. Aim for a DTI of 35% or lower. Reducing outstanding debts before applying can improve this ratio. Debts include credit card balances, car loans, student loans, and any other monthly payments that show up on your credit report. Gross monthly income refers to your total earnings before taxes and deductions, such as salary, bonuses, or rental income. In addition to DTI, lenders may also evaluate your Loan-to-Value (LTV) ratio, which measures the amount you’re borrowing compared to the home’s value, and your credit utilization rate to ensure you’re a reliable borrower.
4. Get Pre-Approved
A mortgage pre-approval gives you a clear picture of how much you can afford and locks in an interest rate for a set period. To get pre-approved:
Gather documents like proof of income, tax returns, and bank statements.
Shop around with different lenders to find the best rates and terms.
Pre-approval shows sellers that you’re a serious buyer and can give you an edge in competitive markets. You should know that a pre-approval is a formal process where you go over your finances and employment history with a professional. While online calculators are great at providing a surface-level snapshot, filling them out and having a number in mind does not mean you’re qualified.
5. Familiarize Yourself with Recent Mortgage Rule Changes
In Canada, recent updates to mortgage rules have made homeownership more accessible:
Stress Test Removal: The federal stress test, previously required to qualify borrowers at higher interest rates, was phased out in late 2024, making it easier for buyers to qualify for mortgages.
30-Year Amortizations for First-Time Buyers: Lenders are now offering 30-year amortizations, reducing monthly payments and improving affordability for first-time buyers.
First-Time Home Buyer Incentive: This program was discontinued as of March 2024. If you are looking for alternative support for first-time homebuyers, consider exploring programs like the Tax-Free First Home Savings Account (FHSA) or provincial grants and incentives. Speak with a mortgage broker or visit your local government’s website to learn about current options that may apply to your situation.
Tax-Free First Home Savings Account (FHSA): New in 2023, the FHSA allows first-time buyers to save up to $40,000 tax-free. Contributions are tax-deductible, and withdrawals for a home purchase are tax-free.
These changes aim to make homeownership more attainable and sustainable for new buyers.
6. Work with a Knowledgeable Realtor and Mortgage Broker
Navigating the mortgage process can be complex, but you don’t have to do it alone. A trusted Realtor and mortgage broker can help you:
Identify the best neighborhoods within your budget
Recommend lenders and mortgage products tailored to your needs
Advocate for you during negotiations
Overcome obstacles like poor credit, recent employment changes and challenges you may face as a small business owner
7. What Not to Do After Mortgage Approval
Once your mortgage is approved, it’s crucial to avoid actions that could jeopardize your financing. Here are some common pitfalls to steer clear of:
Don’t Buy a Car or Take on New Debt: Any significant new debt could alter your debt-to-income ratio and make lenders reconsider your approval.
Don’t Change Jobs: Stability is key during the mortgage process. Changing jobs could delay your closing or make lenders re-evaluate your application.
Avoid Large Purchases: Even if it’s for your new home, wait until after closing to make big-ticket purchases like furniture or appliances.
Don’t Miss Payments: Keep up with all existing financial obligations to maintain your credit score.
Avoid Closing Credit Accounts: This can lower your credit score by reducing your available credit and altering your credit utilization rate.
Staying financially consistent from approval to closing ensures a smooth transition to homeownership.
Ready to Get Started?
Whether you’re preparing to buy your first home or need personalized advice on securing the best mortgage, I’m here to help! As a trusted Realtor with experience in Edmonton’s housing market, I can guide you every step of the way. Contact me today to get started!
📞 Call or Text: 780-232.2064
📧 Email: mike@pabianrealty.com
🌐 Visit: PabianRealty.com
