22 Dec Differences in Financing Various Types of Properties
When it comes to financing, the rules vary based on the real estate you are buying. Today, let’s take a look at some of the differences in financing various types of properties.
Townhomes, Bungalows and Other Freehold Homes
Buying a freehold home for you and your family is the simplest of all real estate to finance. Freehold properties can include townhomes, semi-detached, bungalows and two story homes – any real estate house and land that is fully owned by the buyer.
To qualify for a mortgage for this type of property, the first requirement is proof of income. Lenders use these numbers to calculate how much a buyer can afford to borrow. If refinancing an existing loan, mortgage brokers can also finance based on equity in the home.
The second requirement is a down payment. Home buyers in Canada now need a minimum of 5 per cent of the purchase price. Lenders may also ask for other supporting documentation like a property evaluation or proof of home insurance.
Condos and Apartments
With their lower purchase prices, condos are a great way to enter the housing market.
Financing a condo isn’t any harder than a freehold, but the guidelines are a little different. First of all, condos are often the least expensive housing option, which means a smaller mortgage. However, when calculating how much a buyer can afford, the formula is not the same. That means you may qualify for a mortgage of $300,000 for a bungalow, for example, but only $250,000 for a condo.
Why the difference? Simply because the condo comes with monthly condo fees, which are taken into account when calculating how much mortgage a buyer can afford. Since these fees are mandatory and can be quite high, they end up reducing how much a buyer can spend on a condo.
Before issuing a mortgage for a condo, lenders might also need to see other financial documents. You may be asked to provide the condo corporation’s status certificate so the bank can assess their reserve fund, annual operating budget, property management contracts and insurance.
Rental and Commercial Properties
Lending rules are strict for real estate that isn’t owner occupied, such as rental properties. Most lenders will require a minimum 20 per cent down payment in order to qualify for a mortgage. This is mostly due to the fact that rental properties aren’t usually covered under CMHC insurance – which increases the risk for banks. Lenders can also require a copy of the property evaluation, proof of rent rolls, utility costs and other expenses. In addition, some require the buyer to have a certain net worth, usually a percentage of the purchase price, to qualify for financing.
Financing a commercial space comes with complex rules since the loan amounts are large. Before buying commercial real estate, it’s a good idea to consult with a lawyer and mortgage specialist.
Not sure which financing rules apply to your situation? We’re always happy to answer your questions! Contact one of our mortgage experts at 416-639-0786 for a free consultation, or see our homepage found here.