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Buying your first home is exciting. It’s also one of the biggest financial decisions you’ll make, which is why a little preparation can go a long way.
Many first-time buyers start looking at homes before they know what a lender will actually approve them for. Mortgage qualification starts with three key pieces of your financial picture:
- Your income
- Your credit and debt
- Your down payment
Understanding these three mortgage basics before you start house hunting can help you avoid surprises, set a realistic budget, and put you in a stronger position when you’re ready to make an offer.
Pillar 1: Income
Your income is one of the biggest factors lenders evaluate to determine how much home you can afford.
But lenders look at more than just the number on your paycheque. They may consider your employment history, the stability and type of your income, and how much of that income is already committed to debts and housing expenses.
If you’re salaried, self-employed, earn commissions, or have multiple sources of income, the way your income is calculated can also vary between lenders.
That’s one of the reasons it can be helpful to speak with a mortgage professional early in the process. We can help you understand how lenders may view your income and whether there are any steps worth taking before you start seriously shopping for a home.
Pillar 2: Credit & Debt
Your credit history gives lenders an idea of how you’ve managed borrowed money in the past, while your existing debt affects how much additional debt you may be able to comfortably take on.
A strong credit profile can help improve your mortgage options, while poor credit or excessive debt can limit your borrowing power.
Some of the most common mistakes we see from first-time buyers include:
- Carrying high balances on credit cards
- Taking on new vehicle loans or other financing before buying a home
- Missing or making late payments
- Co-signing a loan without understanding how it could affect your own borrowing power
- Applying for new credit products while preparing to buy
Even with a strong income, significant monthly debt obligations can reduce the mortgage amount you qualify for.
If buying a home is a goal for the next year or two, you don’t have to wait until you’re ready to make an offer to start preparing. Paying bills on time, keeping credit balances manageable, and being thoughtful about taking on new debt can all help put you in a stronger position.
And if your credit isn’t perfect, homeownership isn’t automatically off the table. We encourage you to talk to a mortgage professional first, as there may be options available or steps you can take now to work toward your goal.
Pillar 3: Down Payment
Your down payment is the portion of the home’s purchase price that you contribute upfront.
In Canada, the minimum down payment depends on the purchase price of the home:
- $500,000 or less: Minimum 5% down
- More than $500,000 but less than $1.5 million: 5% on the first $500,000, plus 10% on the portion above $500,000
- $1.5 million or more: Minimum 20% down
If your down payment is less than 20%, you’ll typically need mortgage default insurance. There are circumstances where a lender may require mortgage insurance even with 20% down, so it’s important to look at the requirements for your specific mortgage.
Just as important as how much you have for your down payment is where that money is coming from.
Depending on your circumstances and the lender’s requirements, eligible down-payment funds may include:
- Personal savings and investments
- A First Home Savings Account (FHSA) – check out our blog on who can qualify for this account and the benefits of utilizing it.
- Funds withdrawn from an RRSP through the Home Buyers’ Plan (HBP)
- A Tax-Free Savings Account (TFSA)
- A gift from an immediate family member
- Other eligible sources
Start Planning Before You Start Shopping
If you’re planning to use one of these programs, it’s important to understand the rules well before you need the funds rather than waiting until you’ve already found a home. The earlier you start planning, the more time you have to build a strong financial picture and understand the mortgage options available to you.
You don’t need to have everything figured out before you talk to us, either. If buying your first home is on your radar, our team can take a look at where you are today, answer your questions, and help you build a plan for getting from “I’d like to buy a home” to “I’m ready to make an offer.”
