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First Time Home Buyers Insurance Tips

First Time Home Buyers Insurance Tips


David Doe

Published in

Real Estate

21 Dec 2021

Purchasing a new home is a significant achievement, but the process can be complicated. The mere thought of making a down payment on a home can make your heartbeat a little faster. It's completely understandable !

Do you want to buy a house but don't have enough money for a down payment ? Do you know what mortgage loan insurance is ? Or are you looking for first-time home buyers insurance ? The option may enable you to buy a home with a down payment of at least 5% of the purchase price. Check how it goes !

mortgage loan insurance

What is Mortgage Loan Insurance ?

It's insurance that protects lenders (banks) while allowing buyers (like you) to purchase property with as little as a 5% down payment. What is the purpose of it? Because banks can require your loan to be insured by a third party if you cannot provide a down payment of 20% or more of the property's price !

If you have mortgage loan insurance, your bank will be able to recover the money they loaned you if you default on your payments. When you apply for a mortgage, this reduces some of the risks !

What Companies Provide Mortgage Loan Insurance ?

The Canada Mortgage and Housing Corporation (CMHC), a government-owned corporation, is the primary provider of mortgage loan insurance in Canada. However, private lenders such as Sagen (formerly known as Genworth) and the Canada Guarantee Mortgage Insurance Company offer this type of insurance policy !

Who is This Type of Insurance For ?

You may be eligible for this program if you only have a 5% down payment, but there are other factors to consider before deciding if you're a good candidate !

  • The cost of the property: The minimum down payment required to qualify for mortgage loan insurance is determined by the home's purchase price ! For example, if the home costs less than $500,000, the tax rate is 5 percent. If the home costs more than $500,000, you'll need a minimum down payment of 5% on the first $500,000 and 10% on the rest; mortgage loan insurance is not available for homes costing more than $1,000,000 !

  • Credit Score: You must have a minimum credit score as determined by the CMHC to be eligible. Eligibility criteria, including those based on your credit score, are subject to change at any time. That is why we advise you to do your homework before applying !

  • Your debt-to-income ratio: The CMHC has also lowered the ratios that lenders use to determine the maximum amount they can lend you – namely, the gross debt service ratio (GDS), which is the percentage of your gross income that goes toward housing fees for the home you want to buy, and the total debt service ratio (TDS), which includes your future housing fees as well as your other debts. Again, you're better off double-checking the organization's requirements, as they can change at any time !

Finally, future homeowners will no longer be able to borrow money for their down payment using unsecured personal loans or lines of credit under the new rules. Are you considering purchasing a rental property? Please note that whether you're an owner-occupant or not, the CMHC offers mortgage loan insurance for this type of property !

Benefits & Drawbacks of Mortgage Loan Insurance

If you're a renter, mortgage loan insurance could help you transition from renting to owning, and it won't affect your financial situation. Furthermore, because it lowers the risk for banks, some of them may be able to offer you better borrowing terms and rates !

But, before you sign up for mortgage loan insurance and become a homeowner, do the math. There are numerous other costs associated with purchasing a home. Don't forget about the home's setup costs and fixed expenses in addition to your mortgage. You must also ensure that your budget is reasonable and that you can save for other objectives, such as emergencies and retirement !

Cost of Mortgage Loan Insurance

You'll have to pay a premium for mortgage loan insurance, of course. This premium is based on your down payment and is calculated as a percentage of the mortgage. Your premiums will be lower the larger it is. For example, if you pay $375,000 for a home and put down $18,750 as a down payment, your mortgage loan insurance premium will be $14,250 !

Similarly, a 10% down payment of $37,500 will result in a premium of $10,463. The most important thing to keep in mind is that this type of insurance is not free. Take this into consideration before purchasing real estate !

How To Save on Mortgage Loan Insurance Costs ?

There's only one way to increase your down payment: find another source of financing, such as a non-refundable cash donation from a family member. If you're a first-time buyer, you can also borrow money from your RRSP to put toward your down payment through the Home Buyers' Plan !

There are also government programs to assist first-time homebuyers, such as the Government of Canada's First-Time Home Buyer Incentive, which provides a percentage of the home's purchase price toward the down payment. Take the time to learn about the eligibility requirements and read the small print !

Mortgage loan insurance and mortgage loan life, disability, and critical illness insurance:

Mortgage loan insurance should be distinguished from mortgage life, mortgage disability, and mortgage critical illness insurance. If you want to cover your loan in the occurrence of death, disability, or a critical illness, you should sign up for these types of insurance policies !

What happens to your mortgage loan insurance on buying or selling of home ?

It's not uncommon for a first-time buyer to decide to purchase a new home after a few years because their family has grown, they've moved, or they simply want to invest in real estate. Regardless, a new mortgage will almost certainly be required. What would you do in this situation ?

Most mortgage loan insurance companies allow you to transfer your premium to a different mortgage loan. Your situation largely determines the eligibility criteria and options available to you after purchasing another property, the amount of your loan, the premium you pay, and how much you've paid off. Clients are encouraged to call organizations like the CMHC for more information !

Don't be afraid to seek advice from a professional. Contact Guglu Homes, a renowned attorney. We'll walk you through the details of first-time home buyer insurance and help you weigh the benefits and drawbacks of getting mortgage loan insurance, complete with calculations. Our experts can assist you in making an informed decision. We're here to help you with your inquiries !

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