6 Tips to Obtaining a Mortgage Approval for Your Canadian Vacation Home

You can invest in a second home or vacation home in Canada from just five percent down. To qualify for vacation home financing requires the same criteria as when investing in your first home. You need good credit, along with sufficient income for the mortgage payments and any other financial obligations.

There are various choices and options with regards to financing, which depend on your circumstances, some of which we?ll go into detail on below. Let?s begin with three strategies.

Buy with five per cent down from savings. Finance the rest

If you have enough cash to make a five percent down payment, look to a mortgage lender to finance the remainder of your vacation home. As mentioned above, you need good credit and an income that covers your monthly credit obligations and your mortgage (includes heating the property and property taxes).

Reface your current home to access 20 per cent or more down, and then buy

It may be that you have enough money to make a down payment of at least 20 per cent on your vacation home. However, that could be in the form of equity in your current home, as opposed to cash.

If this is the case, you could establish a home equity line of credit behind your current mortgage to access equity up to 80 percent of your home?s value. You could also refinance your current home up to 80 per cent of its value. Each option will result in you getting the cash to contribute to a down payment on your vacation home.

Refinance your current home. Buy your vacation home with cash

If you have a lot of equity in your existing home, you may be able to establish a mortgage or line of credit in that home. A Canadian bank can?t finance a foreign property. If you want to buy a home in New Mexico, a Canadian bank wouldn?t be able to finance that home. You could take out financing on your principal home, however, in order to secure sufficient equity to buy your New Mexico home with cash.

Know the qualifying criteria for financing a vacation home

This is the same criteria as when buying your current home. Having good credit is obvious, which is over 650. Standard Canadian criteria includes the GDS (Gross Debt Service ratio) and TDS (Total Debt Service ratio) calculations.

Lenders look at your TDS number. They work out your financial obligations, including your credit card payments and loan payments, property taxes, and mortgage payments. These payments are then divided by your income. Ideally, your total payments shouldn?t exceed 44 per cent of your income.

Know the difference between rental property financing and some financing

There?s a key difference between the two. Rental property financing has higher interest rates because the risks are greater between these two property types. Not only that, but you?ll also need more down to buy a rental property.

You can finance a vacation home from just five percent down. The interest rates are at best rates. You can get the best rates available with good credit.

Rental income can?t be included when financing a vacation home. The criteria requires that the property be used for six months or more in the year. It doesn?t have to be continuous, however, so you can feel free to come and go.

Know the requirements for making a down payment on a second home

The five per cent minimum down payment for buying a vacation home is an insured program, which means that mortgage default insurance is added to the mortgage amount. The default insurance for mortgage is at the same premiums as purchasing a principal residence.

You can put more money down to finance your home, as many people do. If you finance with 20 per cent or more down to buy a vacation home, then you won?t need default insurance.

You?d need default insurance for any property purchase in Canada if you put down less than 20 per cent. However, properties like a vacation home, such as a cabin, may need default insurance, regardless of how much you put down.

Speak to a mortgage lender

Ultimately, you'll need to speak to a mortgage lender you feel comfortable with, and who you trust, to give you accurate advice on buying your second home. A mortgage lender like Altrua Financial will be able to guide you on securing your dream home, and are just a phone call away.