How Can Young Canadians Prepare for A Mortgage?

Considering the current housing market situation, it has become increasingly difficult for young Canadians to buy a house. Furthermore, applying for a mortgage also becomes stressful for younger Canadians because it is a highly document-oriented process, and several factors must be considered before applying for a mortgage. So how can young Canadians prepare for a mortgage?

Before applying for a mortgage, it is essential for younger Canadians to understand the concept of mortgage. In simpler terms, a mortgage can be understood as a specific type of loan that is obtained from a lender, which is secured against real property. This loan is then used to purchase a primary residence or can also be used for the purchase of an investment property which can then be rented out to other tenants. Jessica Moorhouse explains, “It’s similar to lots of other types of debt products, but there’s probably a lot more paperwork because it’s a really big loan (and) it’s probably the biggest amount of debt that you’ll ever take on as an individual,”.

The most common documents that are required by mortgage lenders are the net worth, current debts, income of the individual, available assets, and the current credit score of the borrower.

For young Canadians to apply for mortgages, there are several key factors that need to be kept in mind. Some of them are discussed as follows.

1. Mortgage Prequalification and Mortgage Preapproval Are Different

Before confirming a purchase on a house, mortgage prequalification and mortgage preapproval are two steps that are carried out by many borrowers. However, they are not the same thing. A mortgage prequalification allows borrowers to be knowledgeable of the amount of money that can borrow based on their income, employment, and credit history.

Mortgage preapproval is the process of gaining an approval from a lender, who will analyse all the finances of the borrower in a detailed manner. Mortgage preapproval is obtained after mortgage prequalification period. However, one key factor to keep in mind is that gaining preapproval does not guarantee that a borrowing will receive a mortgage, but if all the important factors remain the same, they are very likely to get a full approval for the mortgage.

2. Minimum of 20% Down Payment is Recommended

Experts have encouraged buyers to ensure that they can pay at least 20% of down payment before they apply for a mortgage. This is because the larger the down payment is made; the smaller will be the mortgage and the less interest will be paid by the borrower. On the other hand, there are several options for those who have a small down payment of even 5%.

3. Mortgage Fees Should be Considered as Well

Most buyers focus only on saving their income for a down payment. As a result, they forget that there are several other fees involved as well when applying for a mortgage. Young Canadians must keep in mind that other fees such as broker, appraisal, application, insurance, land transfer tax and closing costs will be incurred as well.

4. Higher Credit Score is Better and Job Stability is Important

Since the mortgage crisis of 2007, lenders have become highly cautious of lending money to prospective borrowers. This has led to the credit score of a customer being highly valuable when applying for any form of loan. Buyers who have a low credit score receive higher interest rates, while buyers with higher credit score will be eligible for a lower -interest mortgage.

Credit scores can be boosted by paying any outstanding debts such as credit card balances and personal loans, and making all payments on time, every time. It is also essential to highlight that, lenders value job stability as well. Before applying for a mortgage, it is recommended for young Canadians to remain at their current job if possible.