If you plan on obtaining for a mortgage for an investment property, there are several factors that should be taken into consideration.
1-Planning and organization
You should know exactly what your long-term investment objectives are and how many properties you’re interested in buying and in what locations. Once you’ve decided how many properties you’d like financing for and where, you will need to determine the length of time you’d like to pay off the mortgage. If you’re clear on exactly what you’d like to achieve then you’ll be able to answer any questions lenders may throw at you.
2-Credit rating and history
Possessing a good credit rating and history goes a long way in helping property buyers obtain top of the line institution mortgage financing. If you can prove that you pay other creditors on time and aren’t in the habit of missing payments, you‘ll certainly look better in the eyes of the lender. It’s always recommended that you obtain a copy of your current credit rating to make sure there that it does not contain any errors. Many potential home buyers visit Equifax.ca to obtain their credit scores. You’ll have a better chance of receiving the best mortgage product possible if your credit rating is at least 650. However, if your score is lower than this, you may still be able to obtain institutional financing with a variety of alternative institutional lenders that may simply charge a slightly higher interest rate.
3-Prove your income
Mortgage lenders will want to see proof of your annual income and you should have this ready for them. They need to be assured that you can pay off the mortgage by bringing in a steady paycheque. They require proof of income via recent pay stubs, employment letters, T1 Generals, and/or notice of assessments. If you happen to be self-employed or work for commission you can prove your income with financial statements related to your business, notice of assessments, and income tax returns. In addition, you’ll likely need to show proof that you own the business via a business license.
If you are purchasing an investment property and plan on renting it out, you’ll need to come up with a down payment of a minimum of 20 per cent of the purchase price. The mortgage lender will want to know the source of the funds via proof of deposit cheques and your last 3 months bank statements. If the funds for down payment come from a Home Equity Line of Credit, this must be fully disclosed to the lender as it will only result in issues on the closing date otherwise. show the lender how much money was advanced and how much you still owe on your current mortgage. If you plan on selling a property to fund the down payment, you’ll need to show documentation regarding the sale along with a mortgage statement which shows your current balance in order for the lender to determine the equity that will be available following the sale.
5- Closing costs
After you’ve taken care of the down payment, you will have to prove that you have the funds available in order to cover the closing costs of the transaction, typically amounting to 1.5 per cent of the purchase price. In addition, it’s recommended that you have an emergency fund set aside just in case any unexpected expenses rear their head. Many property buyers opt to put a Home Equity Line of Credit (HELOC) in place just in case of costs that may arise from emergency.
6-Details of any existing property
If you happen to own any existing properties, the lender will need a copy of an up-to-date property tax bill and mortgage statement. If the properties are rented, then you’ll be asked to provide the lease agreements, and possibly even your tax returns to prove the amount of rental income earned annually. If the properties don’t provide you with a positive cash flow based on the lenders calculations, then you’ll need to show that you can afford the ongoing mortgage payments, taxes and heating costs.
A mortgage lender will ask to see any applicable waivers for your new investment property to go along with a fully executed agreement of purchase and sale, MLS listing, appraisal report, and lease agreements. This will provide them with a good idea of how much income you’ll be receiving from the new property, and ultimately if they will extend you an approval.
To be sure that your search for a mortgage for an investment property goes as smoothly as possible, you should work hand-in-hand with a professional and experienced mortgage broker, property insurance broker, real estate agent, home inspector, accountant, and lawyer. Most mortgage brokers will be able to recommend other professionals within their network.
If you would like to learn more about mortgage financing for investment properties in Toronto or anywhere in Ontario, you can contact us today for a free consultation and evaluation of your potential investment property purchase.