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How to Improve Your Approval Chances and Increase Your Home-Buying Power

Sean Cooper

Sep 01, 2021 6 min read

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How to Improve Your Approval Chances and Increase Your Home-Buying Power
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    Buying your first home may be the next big financial milestone you want to reach. It's a big step that involves getting a mortgage and saving up for a downpayment. A good credit score can help you qualify for the best mortgage rates, and a sizeable downpayment can help you reduce your regular mortgage payments. These areas, as well as certain legislations, can impact your purchasing power.

    With the new mortgage stress test coming into effect June 1, 2021, the average homebuyer saw their purchasing power cut by about 5%. That’s on top of the roughly 20% a homebuyer’s purchasing power was cut when the stress test was first introduced several years back. That begs the question: what’s a homebuyer to do?

    The obvious answer is to spend less on a home, but that doesn’t work for everyone, especially if you’re buying in a pricey real estate market like Toronto or Vancouver. Renting is an option, and credit score requirements for rentals are often easier to meet than the mortgage and downpayment requirements of buying a home. But if you're set on buying a home, you should know what options you have available to maximize your purchasing power.

    If you're buying your first home, there are first-time home buyer programs in Canada, including down payment programs, tax rebates, and other incentives and rewards. If you’re still looking to improve your approval chances on a more expensive home, here are five ways to increase your home-buying power.

    1. Saving a larger down payment

    2. Adding a co-signer

    3. Working with a credit union

    4. Working with an alternative lender

    5. Using a cashback mortgage

    Saving a Larger Down Payment

    The first and most obvious way to be able to spend more on a home is to save a larger down payment.

    Let’s say you want to spend $520,000 on a property. However, you only have $100,000 saved for the deposit and down payment, and you only qualify to borrow $400,000 in mortgage money, for a purchase price of $500,000. That means that you’re $20,000 short of your desired $520,000 purchase price.

    The simplest way to bridge the gap is to save $20,000 more. However, this is often easier said than done. Saving $20,000 extra could take quite a while. During this time, home prices could appreciate a lot higher than $20,000, leaving you with even more money to save.

    If you’d like to buy a home now rather than waiting, you could always make a withdrawal from the “bank of mom and dad.” This is just a fancy way of saying receiving gifted money from your parents.

    When you get gifted money from your parents, it has to be a gift, rather than a loan. Furthermore, it usually has to be from an immediate family member. That means that a parent, sibling and sometimes a grandparent is fine, whereas an aunt or uncle usually isn’t okay.

    If you can manage to save at least a 20% down payment, you can go with a 30 year amortization, which means you can qualify to spend even more on a property if you so choose. Some lenders don’t even ask you for proof of savings for closing costs when you save at least 20% (although you should still have the money saved or at least have an unsecured line of credit to cover them).

    Adding a Co-Signer

    The second way to qualify to spend more on a home is to add a co-signer to your mortgage application.

    If your parents want to help you purchase your first home, but they aren’t in the financial position to do so, they can still help you by being a co-signer on your mortgage.

    When someone co-signs on your mortgage, the lender uses the co-signer’s income to help you qualify for more. The ideal person to co-sign is someone with great credit, a solid income, and not a lot of debt.

    If your parents are still working and just have a small mortgage on their primary residence with no rental properties, they can be great candidates.

    Just remember that if someone co-signs for you, they’re equally responsible for the mortgage payments. If you were to run into trouble making your mortgage payments, not only would your co-signer be responsible, it could impact their credit scores should you miss or be late on some payments.

    Working with a Credit Union

    If the first two options don’t work for you, you might want to consider working with a credit union. But you don’t want to work with just any credit union. You want to work with one that’s provincially regulated.

    Why? Because federally regulated credit unions have to use the mortgage stress test, whereas provincially regulated ones don’t. This means that you could qualify to spend 25% more on a property just by going with a provincial credit union.

    However, this only applies if you’re putting at least 20% down on a property. If you’re putting less than 20% down, you’re still subject to the stress test, even at a provincial credit union.

    Working with an Alternative Lender

    Credit unions usually only like to lend in areas where there’s a branch nearby. If you’re buying in an area not covered by a provincially regulated credit union, you might consider an alternative lender. In order to qualify at an alternative lender, you need to have at least a 20% down payment saved.

    Alternative lenders generally come with higher rates, although it can be worth it, especially if an alternative lender means the difference between buying now and hoping to buy later. There is usually also a lender fee of 1% or 2%.

    Alternative lenders sometimes allow you to have extended amortization periods and debt ratios, helping you qualify to spend even more on a property.

    Using a Cashback Mortgage

    A cashback mortgage is a lot like a cashback credit card. Except instead of receiving cashback for your spending, you receive cashback based on the size of your mortgage. Cashback mortgages tend to range from 1% to 5% of the mortgage amount, depending on the lender.

    You may be asking yourself why everyone doesn’t take cashback mortgages. That’s because there’s a catch. There’s no such thing as a free lunch in personal finances. This saying holds true with cashback mortgages. In exchange for the cashback, you’ll usually pay a higher mortgage rate. This can be worth it depending on your circumstances.

    For example, if you’re just managing to save the minimum down payment and struggling to come up with the closing costs, the cashback can be used to help cover your closing costs. It can mean all the difference between buying and not buying a home.

    There are limitations to what you can use the cashback towards. While you can use the cashback towards closing costs, the cashback cannot be used towards your deposit or down payment.

    Also, if you end up needing to break your mortgage for whatever reason, the cashback will almost always be clawed back. This means that in addition to paying your mortgage penalty, you might have to pay the cashback back out of pocket if you’ve already spent it, making breaking your mortgage even more costly.

    Final Thoughts

    Not sure which of these ways make the most sense to you? Reach out to a mortgage professional who can help you figure out the best way to move forward.

    Sean Cooper
    Sean Cooper
    Author & Mortgage Professional
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    Sean Cooper is the bestselling author of the book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense.

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