How to Get a Mortgage in BC: A Step by Step Guide

Step one: know what you can borrow before you look

Lenders look at two ratios. Gross debt service, which is your housing costs (mortgage payment, property tax, heat and half the strata fee) as a share of gross income, usually capped around 39 percent for insured mortgages. Total debt service adds your other debts, car payment, student loan, credit cards, and is usually capped around 44 percent. Then they apply the stress test: you have to qualify at the higher of your contract rate plus two percentage points or 5.25 percent, even though you will pay the lower contract rate. That is why a pre-approval amount is lower than people expect.

The practical steps: pull your credit report and fix any errors, stop taking on new debt, and gather two years of income documents if you are self-employed. If you are salaried, a letter of employment and recent pay stubs will do.

Step two: the down payment rules

For an insured mortgage, the minimum down payment is 5 percent on the first $500,000 of the price and 10 percent on the portion above that, up to a purchase price of $1.5 million. Above $1.5 million you need 20 percent down and the mortgage is uninsured. With less than 20 percent down you pay a mortgage default insurance premium, typically between about 2.8 and 4 percent of the loan, added to the mortgage rather than paid in cash.

First-time buyers and buyers of newly built homes can take a 30-year amortization on insured mortgages, which lowers the payment and raises what you qualify for. Down payment can come from savings, an FHSA, the RRSP Home Buyers' Plan, or a documented gift from family. Lenders will want to see ninety days of history on the account the money sits in.

Step three: get pre-approved and hold a rate

A pre-approval is a lender saying, on paper, how much they will lend you at what rate, and holding that rate for a period, usually 90 to 120 days. It is not a guarantee, because the property has to qualify too, but it tells you your real budget and it makes your offer credible. In a multiple-offer situation, a seller will take a pre-approved buyer with a slightly lower price over an unverified one with a higher number. I have watched it happen.

Broker or bank? A mortgage broker is licensed by the BC Financial Services Authority and can place your file with dozens of lenders, including ones that do not have branches. Your own bank knows you and may move quickly. I usually suggest both: get a quote from your bank, then let a broker try to beat it. On a $700,000 mortgage a quarter point is real money over five years.

Step four: the offer, the appraisal and the approval

When you find the home, your offer should include a financing subject, even with a pre-approval. The lender will order an appraisal and review the property. On a strata, they look at the depreciation report and the contingency fund. On a detached home, the appraisal has to support the price. If it comes in low, you make up the difference in cash or renegotiate, which is why the subject matters. Typically you have seven to ten business days to get the firm approval and remove the subject.

Step five: subject removal to keys

Once subjects are removed, the deposit is paid, usually around 5 percent, and the lender sends mortgage instructions to your lawyer or notary. Over the next few weeks you provide any final documents, arrange home insurance effective on the completion date, and sign the mortgage and transfer documents a few days before completion. On completion day your lawyer registers the transfer at the Land Title Office and pays the seller, property transfer tax and the adjustments. Possession, and the keys, usually follow a day or two later.

Mistakes I see most

• Buying a car or opening a credit line between pre-approval and completion. Lenders re-check.
• Letting the rate hold expire during a long subject period.
• Moving down payment money between accounts right before the lender asks for statements.
• Forgetting that closing costs are cash, not part of the mortgage. Use the closing cost estimator.
• Treating the maximum pre-approval as the budget. Leave room to live.

If you want a sense of where you stand before talking to a lender, the affordability calculator applies the stress test for you. And if you want a broker who works the Peninsula and returns calls, I am happy to introduce you to the ones my clients have been happy with.