Some home-buying advice is one-size-fits-all—like getting a mortgage pre-approval. No matter who you are or what your circumstances, it’s always a good idea to arrange your financing ahead of time so you know how much home you can afford. Some groups of buyers, however, face specific challenges that need more targeted strategies.
Single or self-employed borrowers, for instance, often have a harder time qualifying for a mortgage than dual-income couples with full-time employment. First-time buyers can be at a disadvantage because they haven’t yet built up any equity and may not have a large enough down payment. Parents-to-be and downsizers, on the other hand, could face potential changes in income due to maternity/parental leave or retirement that could affect their ability to make payments or borrow money.
We asked real estate and mortgage professionals across Canada about the unique obstacles facing five different types of home buyers and the strategies you can use to get past them.
If you’re single/divorced
Unless you’re a top earner, qualifying for a mortgage on a single income can be tough. But it’s not impossible.
“If you don’t qualify to purchase the home you want, you may want to ask a family member to co-sign your mortgage application,” says Christian Moretuzzo, a sales representative with EXP Realty Brokerage in Oakville, Ont.
Because the lender determines borrowing eligibility on the total income of all the applicants, having a parent or another relative to co-sign can help you get a larger mortgage. Of course, any co-signer is on the hook to make your payments if you can’t, so it’s a huge ask that co-signers should only agree to if they have the financial means to help.
It’s also critical for buyers with a single income to keep all their other borrowing in check so their total debt service ratio (TDS) does not exceed 44% of their annual earnings.
“A vehicle loan can kill a mortgage,” says Kristi Hyson, a mortgage associate with Axiom Mortgage Solutions in Calgary, noting that a monthly car payment of $700 can quickly take a buyer out of range on a home purchase. “If a client is looking at buying a new vehicle, I always say hold off and purchase your home first.” Generally, a car loan is easier to obtain, because the amount being borrowed is much smaller.
Finally, the more you can put toward the down payment, the easier it will be to get a mortgage approved. If you have equity from a previous sale, consider not only increasing the percentage of your down payment, but also the size of your deposit when making an offer, says Moretuzzo. “Upping the deposit beyond 5% shows sellers that you are a serious buyer who is financially qualified with liquid assets. That can tip the scales in your favour.” So, if you’re making an offer of $800,000, you’ll want to include a deposit of more than $40,000.
If you’re self-employed
Lenders like a sure thing, which is why permanent full-time employment is the gold standard for mortgage applicants. “Banks want to see two to three years of strong, consistent income,” says Moretuzzo. “Otherwise, they won’t even touch you.”
Unfortunately, self-employment income can often be erratic, with strong earnings one year and lower earnings, or even losses, the next. And if you’re newly self-employed, lenders have no way of gauging your longer-term income prospects.
If you don’t have those two or three years of strong earnings—and the tax returns to prove it—a co-signer can be very helpful. In this situation, you may even be able to remove the co-signer from the mortgage as soon as you have those requisite tax returns, assuming your income is high enough to qualify without assistance.
Alternative lenders, such as private mortgage investment corporations or trust companies, are also an option. “If you have a good credit score and a large enough down payment, alternative lenders may take a chance on you even if you’re newer in the business that you’re operating,” says Moretuzzo. “You’ll probably pay a higher interest rate than with other types of lenders, but it can make the difference between buying or not buying a house.”
Indeed, even with today’s rock-bottom interest rates where a borrower with good credit may qualify for a 5-year fixed rate under 2% from a traditional lender, an alternative lender will likely charge double-digit interest. Because of these higher rates, and the fact that not all private lenders are reputable, it’s important to do your research, says Hyson.
“The private market can be dangerous—they could even recall your mortgage,” she says, adding that it’s best to consult with a mortgage broker you can trust and who is dedicated to weeding out unscrupulous lenders.
Unless you have a very large sum to put down, it’s also worthwhile to speak with a mortgage professional, regardless of the type of lender you use. That’s because self-employed buyers face different down payment requirements. “It’s an entirely different beast when you’re self-employed, especially if you want an insured mortgage,” says Hyson.
If you’re a first-time buyer
There are generally three factors that can make it tricky for first-time home buyers to get a mortgage, says Moretuzzo: insufficient income, a lack of credit history and a down payment that’s too low.
A co-signer, as described above, will solve the first two problems. If there isn’t anyone you can ask (or who is willing) to co-sign your mortgage, an alternative or “B” lender may still be an option if you have insufficient credit history—so long as the rest of your application is strong.
A small down payment, however, can be a deal breaker. If you don’t have the required minimum down payment (which starts at 5% for properties that cost up to $500,000 and goes up to 20% on homes of $1 million or more) you won’t qualify for a mortgage, even if you have stellar credit and a bountiful income. As a result, many first-time buyers turn to their parents for help. Indeed, according to a recent CIBC report, 30% of first-time buyers got a financial gift from their family in the past year, receiving an average sum of $82,000.
Obviously, that’s not an option for everyone. And while there are no simple solutions for hopeful first-time buyers in expensive markets, Moretuzzo does offer a few suggestions as to how they might be able to increase the size of their down payment.
For young adults: “Live at home as long as possible to save money faster and don’t splurge on a fancy rental—keep it simple if you must rent,” he says, adding that if a couple is already living together, they should consider getting rid of one car.
Of course, you can also borrow $35,000 per person ($70,000 per couple) from your RRSP under the Home Buyers’ Plan or pull money from your tax-free savings account (TFSA) or other investment accounts.
Finally, you may have to adjust your expectations. “Buy what you can with the down payment you have,” he says. “Start at the bottom of your property ladder and work your way up through building equity.” Sometimes it takes owning a few places to create equity before you end up with your dream home.
If you’re a parent-to-be
A dual-income couple who’s planning to start a family is likely facing a temporary decrease in earnings and/or a massive increase in monthly expenses, thanks to comparatively low parental-leave benefits and the high cost of childcare. As such, these home buyers must be extra careful not to become “house poor”—a situation in which most of a person’s income is spent on housing, leaving them with little money for other things—because when they’re determining your mortgage affordability, lenders don’t consider the cost of groceries, gas, daycare, diapers or any expenses beyond housing and debt service payments.
“Some clients get so excited about buying at the top end of the budget, they forget about everything else they have to cover in the run of a month,” says Hyson. “You have to look at all your expenses in total compared to what you bring in. If you’re running $1,000 short every month, can you maintain that?”
She recommends young couples and families “live their payment” before buying, by creating a budget that includes all these additional costs to get a better measure of what’s affordable.
It’s also important for young couples to realize that their first home likely won’t be their forever home. “Keep your expectations in check, get something to start building equity, and re-evaluate three to five years down the road,” says Moretuzzo. “You may earn more by then and can move up closer to your dream home.”
If you’re downsizing
While rapidly rising home prices can put downsizers in an enviable position, there are still some major pitfalls this group should watch out for.
It’s always best to reassess your financing before you retire, whether you plan to downsize or not. For example, you could use the equity in your property to apply for a home equity line of credit (HELOC), but you need sufficient income to qualify. If you’re already retired and on a reduced income before you apply, you may be out of luck.
“With a HELOC, once it’s approved, you have those funds available to you in the future, even in retirement,” says Hyson. That can help you renovate your home to be more accessible so you can age in place, or it could provide financing to purchase a smaller home or condo, even if you aren’t able to sell your existing home first.
On the latter point, Moretuzzo cautions downsizers that the more expensive their current property is, the longer it may take to sell. So, if they’ve got a bigger lot or a higher-end home, it’s important to understand the nuances of their micro-market.
“Whenever there’s any ebb in sales, those most expensive properties are affected first,” he says. “You need to look at how many homes at the same price point are selling in your neighbourhood, who you are competing against, and if you have the ability to carry two properties when deciding whether you should buy or sell first.”
Downsizers hoping to cash in on a city property, move to cheaper outlying areas and pocket the difference should also temper their expectations. Work-from-home arrangements are making it possible for city workers to live anywhere, which is putting pressure on housing prices across the board. “It used to be significantly cheaper the farther you moved out, but since COVID, that differential is definitely shrinking,” says Moretuzzo. “Moving farther out is not getting you as much as it used to.”