Mortgage readiness checklist: prepare before you commit to buy vs rent

Why get ready before you decide

Mortgage readiness answers the first practical question in buy vs rent: could you buy at all, and on what terms? Your approved amount, down payment and rate shape the monthly cost, and those feed straight into the comparison.

MITEY’s calculators are educational tools. MITEY is not a lender, mortgage broker or financial adviser, and nothing here is a mortgage offer or personal advice. The checklist helps you arrive prepared so that a licensed professional can give you information specific to you.

Documents to gather

Lenders verify income, employment, debts and your down payment. Having documents ready speeds things up and avoids last-minute scrambles. Requirements vary by lender and by how you earn your income, so treat this as a starting list and ask what is needed for you.

• Government photo identification
• Recent pay stubs and an employment letter, or business financial statements if self-employed
• Notices of assessment and tax returns for the most recent years
• Statements for savings, investments and registered accounts that will fund the down payment
• Details of debts: credit cards, car loans, student loans, lines of credit
• For a specific property, the purchase contract and any listing information

Check your credit report

Your credit history affects whether you are approved and the rate you are offered. Request your credit reports and read them for mistakes, old accounts you do not recognize or late payments. Fixing errors can take time, so look early.

Keep balances low, pay on time and avoid opening new credit just before applying. Large changes in debt or employment between pre-approval and closing can affect your final approval.

Down payment and closing cash

The federal minimum down payment is 5% of the first $500,000 plus 10% of the portion from $500,000 to under $1.5 million, and 20% at $1.5 million or more. With less than 20% down you need mortgage default insurance, with a premium of 4.00%, 3.10% or 2.80% of the loan depending on your down payment, usually added to the mortgage.

For an illustrative $600,000 home in Alberta, the minimum down payment is $35,000. At that level the engine estimates a default insurance premium of about $22,600 added to the loan, a larger monthly payment of about $3,252, and a buy vs rent break-even of about 8.9 years, compared with about 5.7 years at 20% down. Closing costs of roughly $4,990 are extra.

Common sources include savings, a first home savings account (FHSA), the RRSP Home Buyers’ Plan and a TFSA. Gifts from family usually need documentation. See down payment sources and CMHC insurance. Remember that renters can use the same registered accounts, so compare buying with renting and investing, not with doing nothing.

Understand the stress test

Lenders must check that you could still afford the mortgage at a higher rate. The qualifying rate is the greater of your contract rate plus 2 percentage points or 5.25%. A 4.5% contract rate is therefore tested at 6.5%, and a 3% rate at 5.25%.

In practice, you might qualify for less than you would like, or you might qualify comfortably but not want to carry the payment. Pay attention to your own budget rather than the maximum approval. The affordability tool and the guide to the mortgage stress test explain more.

Pre-approval or pre-qualification

A pre-qualification is usually a quick estimate based on information you provide, and it is not a commitment. A pre-approval generally involves a lender reviewing your documents and credit and indicating the amount and rate it would likely offer, subject to conditions such as the property and your finances not changing.

Neither guarantees a final mortgage. Ask how long the pre-approval lasts, what could void it and what the final approval requires. Many pre-approvals include a rate hold.

Rate holds, terms and renewals

A rate hold keeps the quoted rate for a period while you shop, commonly for several months, though terms vary. Ask whether you get the lower of the held rate and the rate at the time of closing, if that is offered.

Also ask about the term, the prepayment penalty and renewal. The default scenario assumes a five-year term and the same rate at renewal, but your renewal rate could be higher or lower, so test both in the calculator. See mortgage renewal risk for the idea.

Bring it back to buy vs rent

Once you have the figures from your professional, update the main calculator with your real rate, down payment and closing costs. Compare the result at several time horizons and rates. If the comparison is close, renting while you save is a legitimate choice.

Questions to take into the conversation: What payment and rate would I get at different down payments? What are the penalties and renewal options? What documents does my situation require? What could change my approval?