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1 – If you’re self-employed, file your income taxes.
No bank will give you a mortgage until they’ve confirmed that you don’t owe the Canada Revenue Agency (CRA) money. If you’re employed full time, the lender may want to see a history of your income and request your Notice of Assessments, so it’s a good idea to file your taxes too, though a T4, a paystub and an employment letter may be satisfactory.
2 – Make sure your credit report is error-free.
That Rogers bill that you delayed paying while you were in university? It might still be haunting you. And more than a few people have had their identities stolen or have incorrect information affecting their credit rating. Your credit score impacts your ability to get a mortgage as well as the interest rate you pay.
Your spouse’s credit score is important too -it’s shocking how many people only find out about their partner’s credit problems when they’re about to buy a home. You (and your spouse) can check your credit scores online for free at AnnualCredit Report.com.
Do this well in advance of buying a home, so if you do find errors, you’ve got time to get them fixed. It’s also a good idea to set your debts on pre-authorized payments so you don’t accidentally miss a payment between now and closing day.
Note: Your mortgage broker will also check your credit as part of the mortgage approval process – they’ll be looking at your ‘beacon score’ which is a much more in-depth and full-scale review of your credit history.
3 – Get your financial documents ready.
In order to apply for a mortgage, your bank or mortgage broker will require:
- Proof of income: letter of employment or T-4
- Notice of Assessment from the CRA (sometimes)
4 – Get pre-approved for a mortgage.
While online ‘how much can you afford’ calculators are helpful, you need to get pre-approved by a lender or better yet, a broker. They’ll look at your downpayment, credit, assets, liabilities and income and confirm how much you can afford. You’ll be given different mortgage length options, interest rates and terms, which will impact the amount you’ll need to pay each month.
A pre-approval does not mean you can go out willy-nilly and buy anything you see. A pre-approval is based on three things: Credit, Income and Down payment. Approval is based on four things: Those three PLUS the actual property you want to buy. It’s very important that you review the property you are interested in with your lender before making an offer.
5 – Make sure your deposit is readily available.
Within 24 hours of having an offer on a home accepted, you’ll need to produce a deposit – usually around 5% of the purchase price in Toronto. That deposit is paid by bank draft, certified cheque or transferred electronically and is held in the listing brokerage’s trust account, where it will be transferred to the seller when you take possession of the home (and thus forms part of your downpayment). If you find yourself in a bidding war, you should have that $$ available when you make your offer, so make sure you can easily access it.
6 – Make sure you qualify for bridge financing if you’re also selling your current home.
A bridge loan helps bridge the gap in finances when the closing dates don’t match up. For example, if you take possession of your new home on October 8th and your current home closes on October 15th, you won’t have the downpayment needed for the new home until you get paid for your current home on October 15th. Bridge financing is an advance from the bank to help you cover that period of time. Almost every bank approves bridge financing but if you have very little equity left from your sale (after your down payment), you may need to rely on other sources to cover your closing costs. Closing costs are usually not included in bridge financing. You can read more about bridge financing here.
7 – Protect your downpayment from stock market tumbles.
If your downpayment money is invested, consider moving it to a safe place. The last thing you want is for your 10% downpayment to suddenly decrease to 7% right when you need it.
8 – If you’re a first-time homebuyer, take advantage of the Home Buyer Plan (HBP).
The HBP is a program that allows you to withdraw money from your registered retirement savings plan (RRSPs) to buy or build a qualifying home. This money is not taxed as income as it would normally be, but you do have to pay it back. You have 15 years to repay the money, starting two years after the initial withdrawal. The maximum for such withdrawals is $35,000. Get more details about the HBP and other government programs here. If your downpayment is not already in an RSP and your buying time frame is 90+ days out, you may be able to flip your downpayment through an RSP and get the tax advantage.
9 – Find a REALTOR to represent you.
Having an experienced agent on your side – looking out for your best interests at all times – is critical. A Buyer’s Agent will educate you about neighbourhoods and the buying process, introduce you to properties, perform important due diligence on properties that interest you, guide you on price and offer strategy, negotiate and more. Think of them as the quarterback to your home buying experience. You can read more about the buyer agent’s role here. See also 10 questions to ask when hiring a buyer’s agent here:
10 – Make sure your expectations are realistic.
Does what you want to buy exist for how much you can afford? How flexible are you on size, location and finishes? What compromises are you prepared to make? Don’t forget that in Toronto, asking price is not a reliable barometer for sold price…bidding wars often result in much higher sold prices than what you see listed on realtor.ca. Talk to your REALTOR.