The Canadian housing finance system has made it possible for you to buy a home in Canada even if you are not able to save enough for the down payment. Better yet, it allows purchasers to purchase a mortgage with a 5% down payment, but will be able to get an interest rate as if you made a 20% down payment.
What makes this possible? The obligation of purchasing loan insurance on the amount borrowed makes it possible for this to happen. While you are able to get a home without paying the entire down payment, the mortgage company is able to reduce the risk of a default loan.
Are There Requirements?
However, not everyone will be able to get loan insurance; there are some requirements to qualify.
The first requirement is the residence must be in Canada. The buyer must make a down payment of at least 5% on single-family and two-unit residences and 10% on three- or four-unit residences. The money down needs to come from your own resources, but it is acceptable for an immediate relative to donation you the money.
Also, the total monthly housing costs that include principle, interest, property taxes, heat, the yearly site lease in case of household tenure, and 50% of applicable condominium fees should not represent more than 32% of your gross household earnings.
Moreover, no more than 40% of your gross household income can be put towards debt.
The amount of closing expenses and fees can also play a part in deciding your eligibility for mortgage insurance.
How much does it cost?
The lender pays the insurance premium to obtain loan insurance. The cost will get passed on to you, but it is the mortgage company who pays the initial insurance premium.
Does loan insurance cost a lot? There are various answers to that question. The amount of the mortgage is directly correlated with the price of the insurance. The less you are lended, the less your insurance will cost. This helps those who pay more for a down payment.
You can even pay the insurance premium in different ways. You can bind the insurance premiums into your mortgage and pay them monthly or pay them up front in a lump sum.
You are not safe just because you purchased loan insurance if your mortgage is defaulted. Insurance for the borrowed loan reduces risk for the mortgage company. The good news for you is that you were able to buy a property you probably could not have purchased.