Saving For a Down Payment

Provided by Genworth Financial Canada

If you are considering Home Ownership but have questions about the down payment, this article will clarify some of the commonly asked questions.

How Much Money do You Need to Make a Down Payment?
You can buy a house for as little as 5% down, but remember that the larger the down payment, the easier the other expenses will be to manage. We encourage you to calculate what you can afford to work out what's best for you. Once you're ready to put an offer on a property you'll need part of your down payment as a deposit, so remember to keep some funds easily available and accessible.

Will the Size of Your Down Payment Affect the Type of Mortgage You Get?
If you make a down payment of 25% or more, of the lending value, you may qualify for a conventional mortgage. If you are making a down payment of less than 25%, the mortgage must be insured. The insurance protects the lender against borrower default. Your lender will arrange for mortgage default insurance.

How Will You Save Enough Money for a Down Payment?
Saving enough money to buy a home can seem overwhelming, but you may be able to get your down payment faster with a savings or investment plan.
1. Personal Bank Accounts
Open a bank account and set aside money specifically for your new home. Make a habit of paying into this account on a regular basis, just as you pay your monthly bills. Remember that you will need cash (or a certified cheque) for the down payment and the closing costs associated with buying a home.
2. Investments
As the money in your bank account grows, or if you already have money set aside, you may want to invest.
3. Using RRSPs towards your Down Payment
Registered Retirement Savings Plans are a good way to secure your financial future while enjoying tax benefits today. You may also be able to use your RRSP savings towards the purchase of a home. The current Home Buyers’ Plan permits the first-time homebuyer to withdraw up to $20,000 from their RRSP to buy or build a home. The amount withdrawn is treated as a loan and must be repaid within a 15-year period, commencing in the third year after the withdrawal.

Additional information is available from Genworth Financial Canada (formerly GE Mortgage Insurance Canada) at http://www.genworth.ca.

Applying for a Mortgage Loan

Provided by Genworth Financial Canada

Does applying for a mortgage seem too complicated? Knowing how your application will be evaluated will better equip you to evaluate your financial strengths and weaknesses. Having all your documentation ready will make the approval process much quicker and easier.

Lenders look at six key factors when evaluating an application – your identity, your income, debts, employment history, credit history, and the value of the property.

Your Identity
In order to protect against mortgage fraud, the lender or their lawyer will require picture identification to ensure you are the individual you represent yourself to be. In addition, you may be asked questions regarding your credit history to verify information on record at the credit bureaus.

Your Income
The lender will measure your income level against the amount of the mortgage payments, property taxes and condo feeds, to decide whether you can comfortably afford a home. Your lender will compare your current housing expenses to the expense you'll have if you buy a home. The smaller the increase, the stronger your application looks. Usually a guideline of 30% of your pre-tax income is used to determine your maximum payment level.

Your Debts
The lender will look at your debts, including your anticipated house payment, as well as all loans, credit cards, child support and any other payments that you make each month. The ratio of the payments on these debts to your gross monthly income results in a total debt service ratio. The generally accepted total ‘debt service ratio’ for all housing and other obligations is 40% of your pre-tax income.

Your Employment History
Mortgage lenders are more likely to lend money readily to people who have a history of steady employment. You will need to provide a letter or pay stub from your employer and the lender may further verify your employment by contacting your employer. If you're self-employed or have been at your job less than two years, they may ask for other documentation, such as business financial statements or federal income tax returns.

Your Credit History
Good credit is very important in qualifying for a loan. A mortgage lender will look at your credit record to see how well you've paid your loans and other debts in the past. If you've never had a loan or a credit card, you can still demonstrate a good record by showing timely payment of utility bills and rent. It's a smart idea to review your own credit report and score before applying for a loan. For a small fee, a credit bureau will provide an instantaneous, complete online credit report and credit score that details your current debts and payment history. They also detail what your score level means, how you compare to others, and provide tips to improve your score. You also may receive your credit report (without the credit score) by mail for free by contacting the credit bureau.

The Property's Value
When purchasing a property, you should be comfortable the price you are paying is reasonable and will be acceptable to the lender. You can usually confirm the value is reasonable by obtaining an appraisal from an accredited appraisal professional or from the realtor who is representing you in the purchase. Some purchasers may also obtain a property inspection to confirm the property’s condition and identify any items that may require repairs.

Lenders also tend to evaluate your application against the following guidelines:
• A housing expense ratio no greater than 32% (the lower the ratio, the better)
• A debt-to-income ratio for all debts no greater than 40% (the lower the ratio, the better)
• The home buyer has steady income - ideally, the same job for two years or longer
• The home buyer has good credit (bills have been paid on time)
• The house is worth the price the buyer is paying

Additional information is available from Genworth Financial Canada (formerly GE Mortgage Insurance Canada) at http://www.genworth.ca.