Mortgage loan

Important Rules and Documents Required for Mortgage Loans in Canada

Buying a home in Canada is no less than an achievement. Home ownership in Canada is not only related to financial transactions and finding desirable properties. Instead, it is about knowing the rules, qualifying conditions, and interest rates of various mortgage loans available for home ownership. There are many options available for mortgage loans like first time home buyer mortgage, second mortgage and self-employed mortgage loan. All these loans have different set of rules and conditions associated with them. Want to know them? Just read below to know about the rules and documents required for different mortgage loans in Canada. Mortgage rules for first time home buyer- The Canadian government has some rules for the first time buyer and the home that he wishes to buy. If they both qualify all the rules, then the government provides some amount of the purchase price as the first time home buyer incentive. You can get 5% or 10% of your purchase price in this incentive, according to the following rules-

• A new construction can get 5% or 10% of the net value of the property.

• A re-selling home can get 5% of the net value of the property.

• The mobile or manufactured homes, new as well as re-selling, can get a 5% of the net worth of the property.

Rules for a home to qualify for first time buyer- The property i.e. home that you have chosen for first time buying should satisfy the below-listed conditions to qualify for ownership-

1) A single family home

2) It is either a duplex, triplex, or fourplex

3) It has condominium units

4) A mobile or a manufactured home

5) A town house

6) It can be a semi-detached home.

7) Available for full time, owner occupied, and year round occupancy.

8) Located in Canada

Rules for a first time home buyer- A first time home buyer should abide by the below mentioned rules for first time home buyer incentive-

1) Household income should be less than $ 120,000- Not only the income from your job(s), but the money earned from rents and investments also comes under household income, which should not be more than $ 120,000.

2) Minimum down payment- If you wish to buy a home below $ 500,000, then you have to save for a 5% down payment. And for any home of more than that value, your down payment would be 10% of the purchase amount. Moreover, you need to put down less than 20% of your home purchase amount.

3) Net borrowing amount- As a first time home buyer, you can borrow less than four times of your qualifying income. The maximum qualifying income is $ 120,000, so a qualifying borrower can ask for $ 480,000 and this amount is inclusive of the mortgage, mortgage insurance and the incentive too.

Rules for first time home buyer in Toronto, Vancouver or Victoria- If you are willing to become a first time home buyer in Toronto, Vancouver or Victoria, be ready to abide by the following rules-

1) Household income should be less than $ 150,000- Toronto, Vancouver and Victoria are the three most expensive markets of Canada. So, the government revised its first time home buyer incentive rules in these places in 2021. The maximum qualifying income for buying a home in these three places is $ 150,000.

2) Minimum down payment- The rules for minimum possible down payment remain the same as for other places in Canada.

3) Net borrowing amount- At these three places, the borrower can ask for 4.5 times of his qualifying income. The maximum qualifying income is $ 150,000, so a borrower can get a maximum of $ 722,000. Again, this will be inclusive of the mortgage amount, mortgage insurance and the incentive.

Documents required-

• Purchase Agreement

• Deed

• Deed of trust or mortgage

• Seller’s affidavit or affidavit of title

• Transfer tax declaration

• Loan application

• Bill of sale

• Certificate of occupancy

• Homeowner’s insurance proof

First mortgage rules for home ownership in Canada-

Rules for first mortgage loan-

1) Credit score- Previously, the credit score required for home ownership was 600. But, according to the new rules, the buyer must have a credit score of 680. Even if someone wishes to purchase a home with his/ her partner, one of them must have a credit score of 680.

2) Qualifying rate- According to the new rules from CMHC (Canadian Mortgage and Housing Corporation), the debt percentages have been lowered for borrowers and that too with a default mortgage insurance. Now they can spend a maximum of 35% of their gross income on home ownership. They can borrow 42% of their gross income with other loans included. These percentages were 39% and 44% previously.

3) Minimum down payment- You cannot use your borrowed funds for home buying now. According to the new rules, home buyers can use their personal money only for buying a home. If they have a down payment less than 20% of the home price, they can opt for mortgage default insurance.

4) CMHC and CREA projections- Because of the pandemic and disturbances in economy, there was a 9% to 18% decrease in housing prices, according to CMHC. But then the CREA (Canadian Real Estate Association) predicts an increase in this percentage in 2021.

5) Stress test- Stress test requires a bank to check whether a borrower can still make his payments at a rate higher than he would actually need to pay at. This was initiated from January 1, 2018. Homeowners need to qualify this stress test to be able to apply for a mortgage loan.

6) Income percentage towards mortgage- According to the rules, a home buyer can spend 28% of his monthly gross income on financial expenditure during buying. This is termed as the 28% rule and to find out that how much income you can spend on home buying, just multiply your gross income with 28%.

7) Income percentage towards debt- Your total monthly debt should not be more than 35% of your pre-tax income. Moreover, it should not be more than 45% of your monthly gross income after tax.

Documents required-

• Recent paystubs

• General tax forms

• Notice of Assessment

• Employment letter

• T4 and T4A

• Business license

• Articles of incorporation

• Bank account information

• Assets and investment information

• Credit reports

Second mortgage loan rules in Canada-

Second mortgage allows you to arrange for your emergency expenses even while having a first mortgage on the same property already.

Rules to qualify for second mortgage loan-

1) Equity built up for home- Second mortgage loan amount is given according to the equity built up for your home. Home equity amount is the difference between the net worth of your home and the pending balance of your first mortgage loan. Your lender will offer second mortgage loan amount against this difference i.e. this home equity only.

2) Good credit score- Borrowers who wish to get a second mortgage loan need to have a good credit score. Usually, lenders prefer a credit score more than 620 for potential second mortgage loans.

3) High interest rates as compared to first mortgage loans- The second mortgage lender is taking a higher risk for his money as compared to the first mortgage lender because in case of re-payment failure, the primary mortgage lender will get the priority while paying him back. So, the interest rates for second mortgage loan are higher than the first mortgage loan.

4) Maximum loan amount- A homeowner can apply for a maximum of 80% of his home equity value. Second mortgage lenders usually examine the property and then decide the home equity value. They allow to give up to 80% of this value so that there is still some equity left (20%) with the home.

5) Continued payment for first mortgage loan- While paying back the second mortgage loan, you have to continue paying off your first mortgage loan amount too.

6) Other accountable parameters- Second mortgage lenders also look for the details of your-

a. Income and its sources,

b. Valuation and primary mortgage balance,

c. Unpaid bills and debts,

d. Debt to income ratio, etc.

Documents required-

• Social insurance number

• Employment letter proof

• First mortgage documents

• Bank statements

Mortgage rules for self-employed individuals- You are highly mistaken if you think that self-employed individuals cannot apply for a mortgage loan in Canada. The Canadian government has special mortgage rules for self-employed mortgage loans also. Read below to know about them.

Income verification rules for self-employed mortgage loan-

Income verification is a very important part of applying for mortgage loans. The borrower needs to state the security of his income in some or the other way. Three different kinds of income verification are-

a. Traditional income verification- Employment income needs to be verified with the help of tax return documents. This traditional income verification indicates towards the least risks involved and thus has the least interest rates.

b. Non-traditional income verification- The non-traditional income verification is done with the help of financial statements of your business and the bank statements. This non traditional income verification will lead towards a bit higher interest rates as compared to the traditional income verification.

c. Stated income- If you are not able to verify your income in any case, then you can choose this stated income mode. Because of the lack of verification, there will be higher risks involved and thus the interest rates and the down payment requirements will be higher than the traditional and non-traditional income verification modes.

Other rules to qualify for a self-employed mortgage loan-

1) High interest Rates as compared to traditional mortgage loans- Because the self employed or business owners in Canada do not have a secured income source, that is why the lenders are at a higher risk for their money. Higher the risk, higher are the interest rates. So, the interest rates for self mortgage loans are higher as compared to traditional mortgage loans. Besides this, if you have a bad credit score or pending debts, then these interest rates will be even higher.

2) Deciding the net amount of mortgage loan- Depending upon the income verification mode, different lenders will offer different interest rates and different mortgage loan amounts. So, it is always advisable to reach out to different lenders well in advance to crack the best possible deal for you.

3) Minimum possible down payment- The stated income mode will lead towards a much higher down payment requirement, which is usually 20%. But with ‘A’ lenders, this down payment requirement can be as least as just 10%. So, it is advisable for you to stay updated and save for the required down payment well in advance to get the mortgage approval on time.

4) Self-employed insurance from CMHC (Canada Mortgage and Housing Corporation)- The Canadian Mortgage and Housing Corporation requires a proof of income verification from self-employed or business owners too. In case, you verify your income successfully, then the CMHC treats you in the same way as other borrowers. It only wants you to ensure that you are running your current business for at least the last two years. You would also need to provide your credit reports, Notice of Assessment, GST returns, and other financial statements for getting the CMHC self-employed mortgage insurance.

Documents required-

• Business registration number,

• Account number of GST/ HST

• Articles of incorporation, if incorporated,

• Notice of Assessment from past 2-3 years,

• Business license,

• Financial statements, and

• Bank statements, etc.

Different lenders or brokers might ask you to show different documents for the mortgage approval. So, it is damn better to stay updated in advance and ask about the required documents from them only so as to get the approval on time.