Understanding if you do, or do not, qualifying for a 5% down payment is easy. First and foremost, established credit is crucial, and good credit is a must. What’s the difference? Established credit means that your report must show that you have had revolving credit for a given period of time, typically for 2-3 consecutive years. Revolving credit can be a credit card, line of credit, car loan, etc. With many lenders, one of the criteria is to have at least 2-3 active trades (as they refer to them) that show good repayment history. It is possible to have great credit, but very thin credit. In other words, you may have good credit but this does not mean the bank will automatically lend you the money. Often times, having only one active trade is not sufficient in qualifying a client for a mortgage and as previously mentioned, the banks refer to this as ‘thin credit’. More importantly, good credit is the number one factor that will tell you instantly whether a client is an A client (bank approved) or B client (alternative lending institution). Though each bank has its own minimum beacon requirements, the realistic range needed to qualify for a 5% down payment is between 640 to 680. With a score like this, you are considered to have ‘good credit’ but not automatically approved. Like the previous scenario, your credit score may be good for the time being, but your repayment history is something the banks will also consider. If you have previously been late with payments, or perhaps have missed payments entirely, your credit score won’t instantly be impacted with regard to your score, but your report will definitely show the last 90 days of history. To sum up credit requirements, there are 3 things to remember when wondering if you qualify for a 5% down payment; Do you have enough active trades? Does you score meet the minimum requirements? Is your report clean of any delinquencies within the last 90 days? If all answers are yes, you’re definitely in the ranks for a 5% down payment approval.
Aside from credit, income is also very important. GDS and TDS (two measurements of income vs. debt) are used in qualifying the application. Both must be below a certain percentage for the application to be approved with no difficulty. In simpler terms, you must make enough money to offset the new mortgage debt and all other common household expenses. Once again, each bank has a different guideline as to what these maximums can be and a broker will be able to determine which bank is the best suited. In addition to these ratios, longevity of your current employment is very important. 2-3 of consecutive work (can be multiple jobs within 3 years) is important for the banks to feel comfortable with your ability to service this new debt. If you are self-employed, certain documentation will be necessary to validate your income. If you are employed, a standard job letter and recent paystubs will usually suffice.
These are just the basics to give you a better understanding of whether or not you qualify for a 5% down payment on a new or existing purchase. Many more calculations are involved, and a broker can help ease the difficulty in having to understand completely the regulations that the banks abide by. At Canadian Mortgage Services, we have been helping our clients with 5% down payment approvals since 1988. With the right strategy and positioning of the application, it is very likely that you can qualify for a 5% down payment mortgage as well.