Sat, 01 Dec 2012 19:30:00 GMT | By Diana Cawfield, Bankrate.com

How to buy a home with less than 20% down

What you need to know about mortgage loan insurance, plus tips on buying what you can afford.


If you're keen on buying a home but are short on a down payment, you'll need to pay mortgage loan insurance in order to qualify for a mortgage. By law, if a prospective homeowner does not have a 20 per cent down payment required for a conventional mortgage (but has a minimum of five per cent) mortgage loan insurance needs to be in place.

We spoke to a representative with Canada Mortgage and Housing Corporation (CMHC) and an experienced mortgage broker to gain insights on mortgage loan insurance and tips on affording home expenses.

Mortgage loan insurance
The process starts when a prospective homeowner goes to a lender, such as a bank or trust company.

"Their lender will determine whether the available down payment constitutes less than 20 per cent," says Mark Salerno, a corporate representative with CMHC. The calculation is based on what are called “gross debt service” and “total debt service” ratios. Essentially, the calculations are determined by an equation based on your income and expenses. (Visit the CMHC website to access many helpful calculation tools.)

The lender chooses which of the various mortgage loan providers to go with. "Generally the rates are the same — very competitive," says Salerno. "From a homeowner's perspective, they're not going to see any difference."

How to qualify for mortgage loan insurance
These are some of the conditions to qualify for mortgage loan insurance through CMHC:

  • The home must be located in Canada.
  • You will typically have a down payment of at least five per cent of the purchase price of the dwelling, depending on the type of dwelling.
  • Your total monthly housing costs (including principal, interest, property taxes, heating), should not exceed 32 per cent of your gross household income.
  • Your total debt load should not be more than 40 per cent of your gross household income. (This total would include such expenses as a car loan and other personal loans.)

Salerno offers this illustration: "Say, for example, that you earn $6,000 a month. Thirty-two per cent of that, roughly one-third, or $2,000, needs to equal your mortgage, property taxes and your heating expenses."

Go green to save money
According to CMHC, more than 17 per cent of the energy consumed in Canada is used to run our homes. The choice to buy an energy-efficient home, or make energy-saving renovations, can offer substantial savings.

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