How To Get A Mortgage With Low Income In Canada

February 28, 2024

How To Get A Mortgage With Low Income In Canada - Featured Image

Navigating the real estate market and securing a mortgage on a low-income in Canada can seem daunting. This article aims to demystify the process of acquiring a mortgage for those with limited financial resources and guide you through the necessary steps to enhance your eligibility.

However, with the right strategies and understanding of your available options, homeownership can be within reach. From government programs to various financial planning tips, we’ll explore how to get a mortgage with low income in Canada and turn your dreams of owning a home into reality.

Unraveling the Mysteries of Mortgages

Before you dive into homeownership, it’s crucial to grasp the concept of a mortgage. In its essence, a mortgage is a loan secured against a property. It’s typically paid back over a specific period with set mortgage payments, with standard mortgages spanning typically 25 years. Mortgages for low-income individuals may have varied terms, and it’s in these nuances that we begin to find opportunities for inclusion and provision.

First-time homebuyers are often unaware of the diverse mortgage options at their disposal. By charting a course through the labyrinth of mortgage products — ranging from Variable- or Fixed-Rate, Open and Closed Mortgages, to specialized government initiatives such as the First-Time Home Buyer Incentive (FTHBI) in Canada — you can match your unique financial position with the ideal product.

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The Crucial Role of Your Income

When seeking a mortgage with a low income in Canada, your income is not just a measure of your earnings; it’s a critical factor that lenders will scrutinize to assess risk and eligibility. A steady income instills confidence in lenders, as they seek assurance that borrowers can uphold regular payments. Borrowers should be prepared to provide comprehensive proof of income, which may include employment pay stubs, tax returns, or documentation of any additional income sources.

While a high income can make securing a mortgage loan more straightforward, low-income individuals are not without options. They can explore various avenues such as opting for a longer amortization period, seeking co-signers, or tapping into programs designed for low-income buyers, which helps to counterbalance the earning aspect in the eyes of lenders.

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Conquering Credit Scores

Your credit score is akin to a financial footprint, offering a glimpse into your past and present fiscal behaviour, and it’s a critical determinant in the mortgage approval process.

A strong credit score can immensely enhance your appeal to lenders, as it indicates a history of responsible credit management.

Conversely, a lower credit score could raise concerns about your ability to manage debt, which would include mortgage payments.

Understanding and improving your credit score could not only increase your chances of being approved for a Canadian mortgage but also potentially garner more favourable loan terms. In this section, we will delve into the significance of credit scores for low-income earners seeking mortgages, and offer practical steps on how to conquer and improve this crucial aspect.

Understanding the Impact of Credit Scores on Mortgage Approval

Your credit score is another vital element that lenders evaluate when you apply for a mortgage, especially if you’re dealing with a lower income. In Canada, credit scores range from 300 to 900, with higher scores indicating stronger creditworthiness. Lenders typically prefer a score of 680 or above for mortgage approval, but having a lower score doesn’t automatically disqualify you.

For lower-income earners, a robust credit score can compensate for the lack of financial heft, acting as a testament to your ability to manage debt responsibly. To this end, it’s essential to review your credit report, rectify any errors, and consistently pay off existing debts on time to bolster your credit history before approaching lenders.

Strategies to Enhance Credit Scores Before Mortgage Applications

Improving your credit score is a strategic move towards qualifying for a mortgage on a low income. Start by paying your bills on time, maintaining low balances on your credit cards, and limiting the number of new credit inquiries. Consider using credit-building products, such as secured credit cards, if your credit history is scant or non-existent.

Take a look at the video below for some ways you can improve your credit score: 

Though the path to enhancing your credit score may require patience, the results can significantly influence the terms of your mortgage, potentially securing you a more favourable interest rate and making homeownership more financially feasible. A history of prudent credit use and consistent debt management practices can powerfully offset the income-related challenges faced by prospective homeowners.

Deciphering Your Down Payment

The down payment is perhaps one of the most challenging aspects of purchasing a home for those with a lower income. In Canada, the minimum down payment is 5% for homes costing up to $500,000. For homes priced between $500,000 and $999,999, you’ll need 5% on the first $500,000 and 10% on the remainder. A minimum down payment of 20% is required for homes at or above $1 million, which also exempts the buyer from needing to pay a mortgage loan insurance premium.

Low-income buyers often struggle to amass a larger down payment. However, there are strategies and programs specifically designed to assist them. Saving for this initial investment could be facilitated through high-interest savings accounts, Tax-Free Savings Accounts (TFSAs), or even through a Registered Retirement Savings Plan (RRSP) under the Home Buyers’ Plan – which allows you to borrow up to $35,000 tax-free for your first home down payment if you meet certain conditions.

Support Systems for Low-Income Home Buyers

For low-income families, several supportive programs exist to make the down payment more accessible. The aforementioned First-Time Home Buyer Incentive (FTHBI) is a shared-equity mortgage with the Government of Canada where the government offers 5% or 10% of the home’s purchase price to put toward a down payment.

This support eases the strain on immediate savings, with the caveat that this amount must be repaid upon the sale of the home or after 25 years. Additionally, various provinces offer grants or forgivable loans to assist with a down payment for low-income earners. It’s imperative to research and take advantage of these programs, as they can significantly ease the financial burden and make the step into homeownership a tangible reality for low-income Canadians.

Can You Borrow A Down Payment?

Borrowing the down payment for a home purchase is a question that many low-income buyers in Canada may consider. While borrowing for a down payment is not traditional or broadly recommended due to the increased debt load it imposes, there are circumstances under which it might be possible, such as using a flex-down mortgage product offered by some lenders, where the down payment comes from a credit line or loan.

However, this approach requires that the borrower has strong credit and the ability to manage the additional payments of both the borrowed down payment and the mortgage itself. It’s also important to note that the cost of borrowing could increase the overall cost of purchasing a home. Buyers must carefully evaluate the terms and risks before proceeding with borrowing to fund a down payment.

Embracing Government Programs

Navigating through the landscape of government programs for low-income home buyers in Canada reveals a commitment to bolstering affordability and accessibility. One of the pivotal programs is the National Housing Strategy, which includes the Affordable Housing Innovation Fund (AHIF), aiming to create affordable housing and support buyers through financial contributions and land deals.

Additionally, the Canada Mortgage and Housing Corporation (CMHC) offers the Seed Funding program that helps cover some costs related to developing affordable housing. These programs work symbiotically to reduce the barriers to entry into homeownership for those with limited financial resources, representing crucial instruments in fostering inclusive, sustainable housing ecosystems.

Alternative Mortgage Routes

For those low-income home buyers in Canada seeking alternative paths to homeownership, considering unconventional mortgage routes can be a game-changer. One such alternative is the ‘rent-to-own’ program, where a portion of each rental payment goes towards a future down payment on the property.

Another innovative option is to look into credit unions or smaller lenders who might offer more flexible mortgage products tailored to those with unique financial situations. Peer-to-peer lending platforms also open doors for prospective buyers by connecting them with private investors willing to finance their mortgages under negotiated terms. These alternatives require careful research and due diligence but can present viable solutions for low-income earners aspiring to own a home.

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Engaging with Mortgage Brokers

In the complex terrain of real estate financing, particularly for low-income home buyers in Canada, forging a relationship with a mortgage broker can significantly streamline the home-buying journey. Mortgage brokers have a wealth of industry experience and access to a wide array of lending products that may not be directly available to consumers.

They work as intermediaries between potential buyers and financial institutions, providing personalized service to find the best mortgage rates and terms suited to individual financial situations.

Especially beneficial for low-income earners, brokers can negotiate on their behalf, often securing approvals for those who might otherwise face challenges due to their income levels. Leveraging the expertise of a mortgage broker can demystify the financing process, uncover opportunities for savings, and guide low-income buyers through the intricacies of mortgage procurement, making the dream of homeownership more attainable.

Your Final Steps Toward Homeownership

The journey towards homeownership for low-income earners in Canada may seem daunting, with a seemingly endless array of barriers and obstacles to overcome. However, by taking proactive steps to improve credit scores, seeking out government programs and alternative mortgage routes, and enlisting the support of professionals like mortgage brokers, low-income home buyers can turn their aspirations into reality.

Though the path may not be easy, with perseverance and determination, homeownership is within reach. So don’t let financial limitations discourage you from taking the first step towards purchasing your dream home – there are resources and support available to help you achieve this significant milestone in your life. With careful planning and strategic use of available tools, low-income earners can embrace the satisfaction of owning a home and building a strong financial foundation for their future. So start exploring your options, and soon you too can join the ranks of proud Canadian homeowners. Happy house hunting! 

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About the Author:

At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers. It is through our uncompromising commitment to our customers that we proudly deliver the Sterling Advantage – that’s why each and every home we build includes a 10-year home warranty, a completion guarantee and new home warranty excellence rating. Our Advantage is our pledge that, when you build your dream home with Sterling, we will deliver a timely, well-built home you’re sure to enjoy for years to come.

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