After clearing your debt, you will need to wait until your credit report is updated to get a mortgage. Every lender reports to the credit bureau at different times, but the general timeline is 30 to 60 days.
If you are under a tight timeline, you can get a mortgage and provide proof of paying off your debt. For example, if you have thirty thousand dollars in credit card debt and are applying for a mortgage, you can pay off the debt and keep the proof of payment. You can provide your mortgage lender with a copy of the proof of payment to show that the debt is settled.
Depending on your situation, the mortgage lender may require you to pay off your debt in order to qualify for a certain amount of mortgage. This would occur when your debt-to-income ratio is higher than it should be.
There are different credit bureaus and agencies that are available to financial institutions to check your credit score and history. The credit agencies used by different lenders are not public knowledge. If you want to make sure that your credit report is updated and correct across the board, you will need to check your credit report with the following agencies:
When you review your credit report, you will be able to see that your credit cards, loans, or lines of credit are paid off.
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Should You Be Debt-Free Before Buying a House
Although it is best to be debt-free before buying a house, it is not required. Your debt-to-income ratio is most important and should be below the lender’s maximum threshold. However, you will be required to pay off some or all of your debt if your debt-to-income is above the threshold.
Nowadays, with rising interest rates – the Canadian stress test is pushing homebuyers to extreme limits. With fixed interest rates hovering around 5.5% and variable rates around 3.8% – it can be challenging for some homeowners to qualify for a mortgage in places like Toronto, Montreal, and Vancouver.
A convenient way to ensure you can qualify for a larger mortgage is by paying off your debts so that you can lower your debt-to-income ratio. However, this can have an impact on your downpayment – as the funds used to pay off your debt will come from your downpayment.
One way to get around this is by receiving a gift from a family member such as your parents. If your own funds go towards paying down debt, and you need additional funds for the downpayment – you can ask your parents to gift the funds to you (provided they can). Your lender may require your gifter to provide a gift letter.
A common question we see from many first-time homebuyers is can I borrow money from my parents to buy a house? The answer is yes – it is possible to buy a house with money borrowed from your parents.
Today, many first-time homebuyers are using money from their parents to purchase their first home. If parents do not have access to immediate cash, there are ways to unlock cash from an existing property.
How to Get Money Out of Your House Without Selling
If your parents have equity in their home and are looking for a way to unlock the equity or cash out some money, there are a few ways to do it. Nowadays, there are several ways a lender will let you get money out of your house without selling. In a real estate market that is appreciating every year, it is always wise to hold onto your primary residence.
Additionally, keep in mind that these strategies let you cash out your home equity without paying any capital gains tax – because you are not selling your home.
Mortgage Refinance
A mortgage refinance will allow you to borrow the equity in your home. Most homeowners will refinance their mortgage to consolidate debt, invest in a second home, or for renovations. After a refinance, your mortgage payments will likely increase, depending on the interest rate and amount.
There are a few advantages and disadvantages to choosing a mortgage refinance to unlock the equity in your home.
| Disadvantages | Advantages |
| Increased monthly payments | Cash-out 80%-90% equity in your home |
| Increased time to pay off mortgage | Possible low interest, and lower interest cost |
| Lender may charge additional fees | Consolidate high-interest debts |
| Increased mortgage balance | Ability to invest in a second property |
| Required to re-qualify with the lender | Ability to private lend your funds for a profit |
Chip Reverse Mortgage
A reverse mortgage is a financial product ideal for homeowners over the age of 55 looking to cash out money in their home, without selling. Similar to the previous example, this is a tax-free way to unlock the equity in your home. With a reverse mortgage; you maintain control of your home and stay on the title as the owner.
There are no payments on a CHIP reverse mortgage because the lender receives the money you borrow when the home is sold. When you sell your home, the proceeds from the sale will be used to pay off your reverse mortgage. The remaining balance from the proceeds of the sale, if any, will be provided to you.
This type of mortgage lets you borrow up to 55% of the home’s appraised value. In most cases, the lender will pay for the home appraisal. A Canadian homeowner aged 55 and over who maintains ownership of their primary residence will qualify for a reverse mortgage.
Home Equity Line of Credit
A home equity line of credit allows you to gain access to the equity you have built up in your home. There are some mortgage products that are linked to home equity line of credit (HELOC) products, whereby the amount of money you can borrow increases, as you pay down your mortgage. A typical HELOC will allow homeowners to borrow up to 80% of the equity in the home.
It is important to note that with a HELOC, you will only pay interest on the amount you borrow. If you have an approved HELOC for $95,000, and only borrow $15,000 – you will only accrue interest on the borrowed $15,000. The monthly payments are interest-only on an interest-only HELOC.
Second Mortgage
A second mortgage is exactly what you may think it is – it is a second lien on the title. Your first mortgage will be considered the primary lien holder, or in the first rank. A second mortgage will be in the second rank.
If foreclosure were to occur on a property, the lender in the first position will get paid first. The second lien holder will get paid next, provided there are funds remaining from the sale of the property. For this reason, some second mortgage lenders only lend up to 70% to 80% of the equity in your home.
A second mortgage differs from a mortgage refinance because you are taking on an extra mortgage payment. Your first and second mortgage may be from two different lenders if you choose so. If you have two mortgages on one property, you can use a mortgage refinance to combine the payments – and possibly save money on interest.
Private Lender Mortgage
A private lender mortgage is a mortgage offered by someone other than an institutional lender. A private lender will typically not be covered by mortgage default insurance, increasing the risk for the lender. This is an option for borrowers that may have a hard time borrowing from a big bank or credit union.
With private mortgages, the borrower will often pay a percentage of the amount being borrowed – this fee is called the lender fee. Typically, this lender fee ranges from one to two percent.
Interest rates for private mortgages are also higher than the big banks, as these lenders take on additional risk when lending money. There is still a lien that is registered on the property for a private mortgage, so other lenders can see this lien.
This type of mortgage can be interest-only, that is, you will make interest-only payments for a specified term. Once the term is completed, the borrower will need to pay off the mortgage or renew the lending agreement (will typically incur a lending fee again). You may also choose to have a payment plan with a pre-payment plan, which lets you pay down some of the principal. However, keep in mind private mortgages do not have long amortization periods, as most are less than three years.
With these creative ways to access cash from an existing property, you can clear the debt before buying a home. This can be very beneficial in today’s real estate market – where home prices remain high, with higher interest rates. In 2023, the real estate market is expected to slow down, but the prices are not expected to fall tremendously.
Applying for a mortgage can be a scary experience for the first-time homebuyer – especially because you do not want to get denied – as this can hinder your application approval with the lender in the near future.
Can I Get a Mortgage with Paid Collections
If you have an account in collections, it can impact your chances of qualifying for a mortgage. Your lender may require additional information, such as the reason for the collections, when it was paid, and if you are able to pay it off now.
A credit or billing account that has gone into collections indicates that you are not paying your bills on time – or not at all. This is considered a red flag for most lenders – especially one that will be funding you for a mortgage. A mortgage lender will take collections seriously because they do not want to end up in a similar situation.
An account that is in collections will remain on your credit history for seven years and can impact your credit score. A mortgage lender will typically require a minimum credit score of 680. The last thing you want is to have your credit score affected by an account in collections, which you could have taken care of ahead of time.
Once you pay off your collections item, your credit report will be updated to show paid collections.