27 Nov

How Is Income Qualified When Applying for a Loan?

General

Posted by: Jack Dawson

When determining the size of a loan a lender will fund, it’s not only the amount of income that a homebuyer takes in that makes the difference but how it’s qualified. Income can come in many forms, so here’s a quick guide as to what to expect to show when applying for a mortgage.

Occupation Income

If you’re employed, your income is based on regular guaranteed hours or salary, confirmed by a letter of employment, as well as a recent pay stub. For overtime, bonuses, or commissions, your income is based on the average of the last two years, then added to your base income.

If you’re in a business sole proprietorship, the average of your last two years are used as income, given the more recent year had higher earnings. This can be grossed up at 15%. If lower earnings were reported in the most recent year, only that year will qualify income.

If you’re incorporated, the average of your last two years are used as income, given the more recent year had higher earnings. If lower earnings are reported in the most recent year, then just that year will be used. This could be in the form of dividends or a T4, whether either or both are used. T4 income can be grossed up by 15% if income is higher in the most recent year.

Rental Income

If the property you’re buying has a second suite as a mortgage helper, a portion of this up to 100%, varying between lenders, can be considered part of your qualifying income if your down payment is lower than 20%. If your down payment is 20% or higher, a portion of the rental income can offset the mortgage payments when qualifying, having an even more pronounced effect. As per usual, a mortgage agent will use the lender in your best interest.

Retirement Income

Regular monthly retirement income, such as CPP payments and payments from employer pension plans, can be applied directly to qualifying income.

Investment Income

Regular investment income, such as interest payments and dividends, can be used. Lenders generally want to see an average over the previous two years when using this to qualify.

Canada Child Benefit

If you’re a parent receiving Canada Child Benefit payments, 100% of that can add to your qualifying income. However, lenders typically only allow this only if your children are 12 and under.

Support Payments

If you’re receiving child support or spousal support, this can be applied to qualifying income. The required documents and history are subject to lender conditions.

Certain lenders could have different policies and exceptions, and there are other types of income that can be used at their discretion, but this is to be taken as a general guide.

20 Nov

Benefits Available for First-Time Home Buyers in Canada

Home Purchase

Posted by: Jack Dawson

There are several benefits available in Canada for home buyers, given the home buyers and subject property meet the criteria required for each benefit. Below are the four means available to possibly help in the purchase of a first property.

 

Home Buyers’ Plan

Up to $35,000 can be borrowed tax-free from your RRSP to go toward the down payment. You have up to 15-years to repay, with minimum repayment periods starting the second year after the year when you first withdrew these funds, i.e., if you withdrew funds in 2021, your first year of repayment would be 2023. Any minimum amount not repaid during a repayment period will be considered taxable income. Further details here.

 

Home Buyers’ Amount

 A tax credit of $5000 can be claimed by a sole purchaser or between two co-purchasers. If eligible, this credit will provide up to $750 in federal tax relief. Further details here.

 

First-Time Home Buyers’ Incentive

The Government of Canada can loan 5% (or up to 10% if the property is new construction) of the value of your home and retain an interest in the same percentage of the value as it changes over time. The home must be owner-occupied, and after 25 years, or when you move or sell your home, the loan must be paid back in full in the same percentage of the current value of the home, i.e., if you received a $25,000 loan for a $500,000 home, $40,000 would have to be paid back if it sold for $800,000. The limiting factor for most people here is that the loan amount must be no more than four times your qualifying income, so a home buyer would need an income of $100,000 per year to take on a $400,000 loan. Further details here.

 

First Time Home Buyers’ Progam

If the property purchasing is valued at $500,000 or less, first-time home buyers can be completely exempt from paying property transfer tax. Partial exemptions can be in place for homes from $500,001-$525,000. Any home purchased above $525,000 is subject to full property transfer tax. Further details here.

 

As with any government program, it’s important to read each benefit’s specific criteria to ensure that you qualify beforehand.

13 Nov

Initial Costs Associated with Buying a Home in British Columbia

General

Posted by: Jack Dawson

When saving for a home, it’s important to understand all the out-of-pocket costs involved in the purchasing process. Below, I’ve highlighted costs to expect, although not all of them are always applicable.

Down Payment

This is the well-known primary cost, but many people aren’t aware of the specifics involved. If the home is not owner-occupied, or the purchase value is $1,000,000 or more, a minimum 20% down payment will be required. If the home is owner-occupied, and the purchase value is less than $1,000,000, then it can be a high ratio mortgage. This means that a minimum down payment is now 5% of the first $500,000 and 10% of the remaining value up to $999,999. High ratio mortgages must be insured by one of three institutions: CMHC, Sagen, or Canada Guaranty. There will be premiums associated with insured mortgages, although these will be built into the remaining balance and won’t affect your down payment or upfront costs. e.g., if you put $25,000 toward the minimum 5% down payment on a $500,000 property, you’d have a mortgage balance that will begin at $494,000 instead of $475,000 to adjust for insurance premiums.

Property Transfer Tax

This is generally the highest upfront cost after the down payment, but the good news is that qualifying first-time homebuyers are exempt from this tax if their property has a $500,000 purchase value or less. A partial exemption also exists for first-time homebuyers on a sliding scale from $500,001-$525,000. If the property or the buyers don’t meet the qualifications for the First Time Home Buyers Program, the tax rates for property transfer are the following and are based on the fair market purchase price:

  • 1% on the first $200,000
  • 2% on the portion greater than $200,000 and up to $2,000,000
  • 3% on the portion greater than $2,000,000
  • if the property is residential, a further 2% on the portion greater than $3,000,000

i.e., If a qualifying first-time homebuyer purchased a qualifying property for $500,000, there wouldn’t be any transfer tax associated with the initial cost. If the buyer or the property did not qualify, the transfer tax on a $500,000 property would be $8,000

Legal Costs

A lawyer is needed to close the transaction and ensure all legal and financial conditions are met. This is a relatively small initial cost, generally $1000-$1500. If a client does not have a lawyer in mind, a mortgage broker or real estate agent can usually recommend a great one, considering they deal with them often in their work.

Property Appraisal

If a home purchase is insured, meaning the down payment was less than 20%, an appraisal is not required. However, when an appraisal is required, it’s a relatively low cost for the buyer, generally ranging from $300-$600.

Property Inspection

For the buyer’s benefit, a home inspection is a strongly recommended condition in a Contract of Purchase and Sale. This cost should be similar to an appraisal.

Insurance

This is also a relatively small initial cost, generally being less than $1000 per year, although as property complexity and coverage increases, so does the cost of insurance. The lender will want you to be insured before closing, although this can be broken up into monthly payments.

Property Tax Adjustment

In British Columbia, property taxes for the calendar year are due on July 1st. This means that if the buyer purchased a property with an adjustment date after July 1st in a given year, a pro-rated share of property taxes would have to be paid between that date and the adjustment date, which would be listed in the Contract of Purchase and Sale. Property taxes vary between cities and municipalities and generally run several thousand per year. This cost can be included in the mortgage payments.

Of course, additional costs could always arise depending on personal circumstances, such as moving expenses. If all of the costs listed here are considered beforehand, the home buyer should be well financially prepared for the process.

 

6 Nov

Why It’s in Your Best Interest to Work With a Mortgage Broker

General

Posted by: Jack Dawson

A mortgage broker is a licensed professional who can secure financing for clients. Their role is to act as an intermediary between a client and a lender. Their services don’t cost anything for a client, since they run on referral fees paid by the lender after a mortgage closes. At the same time, they generally have access to much lower interest rates than banks, since they work with a multitude of mortgage lending institutions with much lower overhead.

Access to Lenders

Mortgage brokers are a one-stop-shop for clients. They have many potential lenders available with only one credit inquiry affecting your score. Because of the wide range of lenders, they could access financing that would otherwise be difficult for certain clients to qualify for. They can also generally qualify clients for much lower rates.

Flexibility

Mortgage brokers are often very flexible with meetings and communication. Many are available after business hours, on evenings and weekends, and are willing to communicate through text, email, or video calls. E-signatures are almost universally accepted now, so if the client wishes, the whole mortgage process could be completed without even stepping foot in the office!

Higher Chance of Getting Financed

Under more complex financial circumstances, mortgage brokers can work with less traditional loan sources, such as B-lenders and private lenders. They can structure deals with details of each unique case, rather than relying on numbers alone. Alternative financing may come with higher interest rates or additional fees and terms, but it can also be a stop-gap until a client qualifies for A-lender financing.

Above all, mortgage brokers are specialists, licensed and regulated to operate in your best interest. With the benefit that comes with choosing a broker over the bank, it’s no wonder why they’re gaining an increasing share of the market in Canada.