With mortgage interest rates at historical lows, it is a wonderful time for first time home buyers to take the leap into the market. But there are some considerations and preparations to be made before starting the process.
A higher level of bank scrutiny has come into play now that the governance of CMHC has been shifted to the Office of the Superintendent of Financial Institutions (OSFI). The banks have been jumping through hoops to meet stricter lending policies and so must potential mortgage borrowers.
Mortgage rule changes that came into effect in July 2012 shortened the maximum allowable amortization on mortgages from 30-years down to 25-years. This has made it more difficult for buyers to meet debt-servicing requirements of lenders due to the higher monthly payments of the shorter repayment structure.
These two components of the lending landscape have put First Time Buyers in the hot seat. Most young people are newer to both the employment game and the credit world and have had limited time to build up their own savings for the down payment.
Canadian mortgage insurers (CMHC and Genworth) have minimum credit requirements of two years’ history on at least two credit accounts with a good repayment record. While potential borrowers may think it responsible not to overextend themselves with credit, they can be negatively affected by “under extending”. Paying on time on at least two accounts, such as a credit card or loan, demonstrates credit responsibility because these types of accounts report to the credit bureaus, a third party, and demonstrate a borrower’s credit responsibility.
Avoiding credit means there is no third party record of how credit is handled, leaving financial institutions lacking the tools to assess how a potential borrower will handle repayment of such a large loan. While it’s not advisable for young people to apply for credit everywhere, it is a good idea to establish two different credit accounts as soon as possible to create a strong credit history.
Because many first time home buyers are young people with limited employment history, there is a very good chance they have not saved up the minimum 5% down payment yet. Direct relatives, such as parents, can “gift” the down payment to their adult child to help them buy the home. There must be no requirement for re-payment and they should have no vested interest in the property being bought.
Keep in mind though that if the first time home buyer has limited credit and their down payment is being gifted, they are really not bringing much to the equation as far as their own personal risk, so many lenders are requiring co-applicants to bring some strength to the deal. If there is the potential for a purchase in the near future, it may be a good idea for the parents to put the gifted funds into their child’s personal bank account. As long as the money is in their name for at least 90-days, those funds are now considered their own and no longer gifted.
We here at Dominion Lending Centres are always available to help you – contact us today!
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