Conventional mortgages: What you need to know

The benefits of conventional mortgage and how you can qualify

Conventional mortgages: What you need to know

A conventional mortgage is a mortgage with a down payment of at least 20% of the purchase price of the home (and can be as high as 35%). Among the major benefits of a conventional mortgage is that you have more home equity and a lower monthly payment. When speaking of conventional mortgages, it is important to note that lenders need to undergo multiple steps while determining your eligibility. Those steps—plus other frequently asked questions related to conventional mortgages—are as follows.

What is a conventional mortgage?

A conventional mortgage is an uninsured residential mortgage wherein you make a down payment of 20% of the property value and require a loan for the remaining 80% of the total purchase price of the property. That ratio—20% to 80%—is also known as an LTV, or loan-to-value ratio. Depending on your loan-to-value ratio, there are multiple regulations on the mortgage you get. For instance, a mortgage where the lender gives you a 65% LTV differs from a lender that provides you with 95% LTV.

An example of a conventional mortgage down payment is if the property you want to purchase is $500,000, you would already have the $100,000 payment and would need to borrow $400,000.

Additionally, a conventional mortgage means you do not have to buy mortgage insurance through Canada Mortgage and Housing Corporation (CMHC).

The benefits of conventional mortgage

The benefits of a conventional mortgage include the fact that you instantly have equity of your newly purchased property. Another benefit is that, with a conventional mortgage, financial institutions typically consider you less of a risk and are more likely to give you additional loans such as a home equity line of credit, or HELOC, due to the equity that exists in the property. Additional benefits of conventional mortgages include:

Lower mortgage payments. Compared to a high ratio mortgage, a conventional mortgage means that you borrow less money, which also means that your monthly mortgage payments will be lower during the same period, or term.

Emergency home equity. With a conventional mortgage, you can utilize your home equity for money in an emergency, because the higher down payment can be borrowed in the future. The important thing to note, however, is that that money should be saved for emergency situations only. You can utilize secured lending options like a second mortgage or a low-interest home equity line of credit.

Pay less interest. If you pay a higher down payment, you will end up paying less in interest during your mortgage term. It should also be noted that high-ratio borrowers are required to pay more for mortgage insurance, which can add up to 4% more onto your mortgage. With a conventional mortgage, you are not required to pay for this insurance.

How to qualify for conventional mortgage

To qualify for a conventional mortgage, you must prove to your lender that you can handle your monthly mortgage payments. To determine that your mortgage payments are not too high, your lender will use the gross and total debt service ratios. Lenders typically also conduct a mortgage stress test to make sure you will be able to afford a bump in mortgage interest rates. To qualify for a conventional mortgage, you will also be required to meet a minimum credit score. Lenders usually need to make sure you can also handle the down payment and other up-front expenses, like closing costs.

Read more: Closing costs in Canada: How much and who should pay for them?

Lenders usually ask for the following mortgage documents to make sure you can handle the monthly payment amount:

Proof of employment/income. For proof of employment and income, you can provide your employment position; a letter with your salary and hourly wage rate, such as a recent pay stub; the amount of time you have been employed by your current company; and, for self-employed workers, notices of assessment from the Canada Revenue Agency for the previous two years.

Assets. Lenders and mortgage brokers usually need to see recent financial statements from bank investments and/or bank accounts, which will help them determine if you have the money for a down payment. Where money has been received from family or friends, gift letters are required stating it is not a loan and therefore has no required repayment. Documents like that usually must be notarized.

Financial obligations or debts. Typical examples of financial obligations or debts include lines of credit, child or spousal support, credit card balances, student loans, car loans, or any other debts.

Other documentation. Lenders might ask for your social insurance number to check your credit score or a copy of your driver’s license for proof of identification.

How different is a conventional mortgage from a high-ratio mortgage?

A conventional mortgage usually means you can pay 20% or more of a property’s purchase price as a down payment and, therefore, you will need to borrow 80% or less of the property’s value. This arrangement also means you do not need mortgage insurance; however, a lender could still request mortgage insurance, even if you are putting more than 20% down, in which case the loan is known as a low-ratio mortgage.

A high-ratio mortgage, on the other hand, is when you pay less than 20% pf the purchase price of the property as a down payment. The minimum you can pay as a down payment is 5% on the first $500,000 and 10% on any price beyond that. A high-ratio mortgage is a higher risk for the lender and for you, the homebuyer. Because the mortgage will make up more than 80% of the purchase price of the home, you will need to acquire mortgage insurance.