How to Get A First-Time Homebuyers Loan

A step-by-step guide to obtaining your first mortgage, as well as a breakdown of some of the best incentives in Canada.

By Emily Southey | 14 minute read

Acquiring a mortgage is a vital step in purchasing your first home. But obtaining a homebuyers loan is easier said than done ⸺ especially for first-time buyers. Knowing where to begin and the steps you must take to be approved for a loan can feel overwhelming. Luckily, we outline the entire first-time homebuyers loan process below, providing buyers with a step-by-step guide to obtaining their first mortgage, as well as a breakdown of some of the best incentives in Canada.

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Guide to getting a loan as a first-time homebuyer

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1. Save for a down payment

The first step in obtaining a loan as a first-time homebuyer is to save for a down payment. Ideally, you should begin saving for a down payment several years before you plan to buy a home. The larger your down payment, the lowest your interest rates will be, so saving up for a sizable one is crucial. Plus, there are down payment requirements in Canada. For homes under $500,000, a 5% down payment is required. For homes between $500,000 and $1,000,000, a 10% down payment is required. Lastly, for homes priced over $1,000,000, a 20% down payment is mandatory. It’s also worth noting that if your down payment is less than 20%, you will be required to take out mortgage loan insurance, which is another expense to be prepared for. Mortgage loan insurance aims to protect homebuyers who default on their mortgages.

2. Check your credit score

The second step to obtaining a loan as a first-time homebuyer is to check your credit score.  In the eyes of mortgage lenders, a credit score is a reliable indicator of your overall financial health. Mortgage lenders will require a full credit report, including your credit score, when deciding whether to approve your mortgage application and what interest rate to offer you.

Before applying for a mortgage, find out your score. Doing so will help you determine whether you should wait to buy a home until you can improve your credit score, or whether your credit score is in good enough standing to buy a home now. To check your credit score, visit Equifax Canada, RateHub, Borrowell, or TransUnion Canada. It is recommended to obtain a credit report from multiple credit bureaus as data might differ between bureaus. Credit score categories vary but are roughly as follows:

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• Excellent: Credit scores between 760-900
• Very good: Credit scores between 725 – 759
• Good: Credit scores between 660 – 724
• Fair: Credit scores between 560 – 659
• Bad: Credit scores below 560

If your credit score is below 660, you may not qualify for a mortgage from a traditional lender. In that case, you may wish to hold off on buying a home until you can build your credit score. If postponing your home purchase isn’t an option, you might have to apply for a bad credit mortgage from a private or subprime lender.

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3. Research the different types of mortgages

Not all mortgages are created equal. In fact, traditional mortgage lenders in Canada offer a wide range of mortgage options. Before applying for a mortgage, research the pros and cons of each type. This will help you determine if you want a fixed mortgage, variable-rate mortgage, closed mortgage, or open mortgage, and what mortgage term you are most comfortable with. Researching mortgages will also give you an idea of what the average mortgage costs and what interest rate you can expect to pay. Be sure to consider the qualification requirements, loan options, interest rates, and additional fees available at each mortgage lender. If you need help researching mortgage lenders, you may wish to consult with a mortgage broker in your area.

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4. Contact a mortgage lender and get pre-approved for a mortgage

The next step is perhaps the most important and it is to contact a mortgage lender and get pre-approved for a mortgage. A mortgage is a type of loan homebuyers use to purchase a home or another type of real estate property. When you take out a mortgage loan, your lender (which might be a bank, credit union, or other financial institution), can take possession of the home if you fail to repay your loan on time. Typically, mortgage loans are sizeable, designed to be paid off for many years or even decades. 

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Getting pre-approved for a mortgage is the first step in the mortgage approval process. Mortgage pre-approval is when a mortgage lender confirms that you qualify for a mortgage loan based on the information and documentation provided. Your pre-approval will specify a term length, interest rate, and principal amount. Mortgage pre-approvals come with plenty of benefits. First, it will give you a realistic idea of what you can afford to spend on a home, which can instantly narrow down the house hunting process (specifically, you can use the principal amount a lender pre-approves you for to determine your budget). Second, if you are already pre-approved for a mortgage when you make an offer on a house, your offer might be more attractive to sellers, increasing your odds of getting your dream home. 

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It’s important to note that getting pre-approved for a mortgage does not mean you are obligated to apply for a mortgage with a specific lender. In fact, homebuyers can apply for pre-approval with multiple lenders to compare their offers and ensure they’re getting the best deal. Mortgage pre-approvals also do not guarantee that you will be approved for a mortgage in the amount specified. Rather, they show you the maximum amount you may be approved for. The exact amount will ultimately depend on the value of the property you buy and your down payment. 

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Documents needed to get pre-approved for a mortgage

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Before entering into the mortgage pre-approval process, first-time homebuyers must prepare the necessary documentation. Most mortgage lenders will require you to submit the following information for mortgage pre-approval:

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• Personal identification: This may include a government-issued ID, such as a driver’s licence, or a Canadian passport. 
• Proof of assets: To calculate your net worth, mortgage lenders will require proof of all major assets (cars, leisure vehicles like boats, or secondary properties, such as a cottage). 
• Proof of income/employment: To reassure mortgage lenders that you can make your mortgage payments on time, you will need to show proof of income/employment in the form of pay stubs, a letter of employment, or recent notices of assessment from the Canada Revenue Agency (CRA).
• Information about your debt or financial obligations: Provide information about any outstanding debts, such as student loans, car loans, credit card balances, lines of credit, or child support. 
• Proof you can afford the down payment and closing costs: Homebuyers can prove this by providing the mortgage lender with recent bank or investment statements.

5. Explore first-time homebuyer incentives

The fifth step in obtaining a homebuyer loan is to explore the first-time homebuyer incentives available to you. Canada’s provincial and federal governments offer several incentives and assistance programs to homebuyers, especially first-time homebuyers. Below are a few of the most prominent incentives available throughout Canada and Ontario. These incentives can alleviate the financial constraints that come with buying your first home. 

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Home Buyers’ Plan

The Home Buyer’s Plan (HBP) is a federal program that allows Canadian homebuyers to withdraw funds from their Registered Retirement Savings Plans (RRSPs) to buy or build a qualifying home. More specifically, first-time homebuyers can withdraw up to $35,000 from their RRSPs, entirely tax-free, so long as they are putting it towards a home purchase. Under the HBP, buyers have 15 years to pay back the withdrawn funds. To be eligible for the Home Buyers’ Plan as a first-time homebuyer in Canada, you must meet the following criteria:

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• The RRSP funds you borrow must have been in your account for a minimum of 90 days before withdrawal;
• You cannot have owned a home in the last four years;
• If you’re buying a home with a spouse or common-law partner who is not a first-time homebuyer, you cannot have lived in a house that they owned for more than four years;
• You must have entered into a written agreement to buy or build a qualifying home;
• You must plan to live in the home you purchase within one year of buying it and it must be your primary residence;
• If you have used the Home Buyers’ Plan before, you cannot have any outstanding balance due;
• You must withdraw the money from your RRSP within 30 days of taking title of the property;
• You must be a Canadian resident.

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Home Buyers’ tax credit

Another incentive available to first-time homebuyers in Canada is the Home Buyers’ tax credit, also known as the Home Buyers’ amount. This is a non-refundable income tax credit of up to $5,000 available to first-time homebuyers. Eligible first-time homebuyers can claim this $5,000 income tax credit on a qualifying home, resulting in a tax rebate of up to $750. To be eligible to claim the Home Buyers’ tax credit you must meet the following criteria: 

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• You buy a qualifying home registered in your (or your spouse’s or common-law partner’s) name. It can be an existing property or one currently under construction and includes all kinds of homes, including single-family structures, townhouses, condominium units, and more;
• You are a first-time homeowner, meaning that you did not previously reside in a property that you or your spouse or common-law partner owned in the last four years;
• You are buying a qualifying home that will become your principal place of residence and you plan to live in the home within one year of buying it or one year of construction being completed (in the event you’re buying a pre-construction home).

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Ontario First-Time Home Buyer Incentive

The third program, which is exclusively available to first-time homebuyers in Ontario, is the Ontario First-Time Home Buyer Incentive. Through this incentive, the Government of Ontario offers a land transfer tax refund of up to $4,000 to first-time homebuyers in the province. This means that if you purchase a home of $368,000 or less, you would pay no land transfer tax whatsoever. If the purchase price is greater than $368,000, then you would receive the maximum refund of $4,000. The Ontario First-Time Home Buyer Incentive applies to resale homes, as well as new construction homes. 

Please note that Ontario utilizes a multi-tiered system based on the purchase price of a home to calculate land transfer tax (LTT). On a $500,000 home in Ontario (located outside the municipality of Toronto), 0.5% is paid on the first $55,000, 1% on the next $195,000, 1.5% on the next 150,000, and 2% on the final $100,000. This equals an LTT of $6,475. However, thanks to the Ontario First-Time Home Buyer Incentive, you would only owe $2,475 in LTT. 

To qualify for the Ontario First-Time Home Buyer Incentive, you must meet the following criteria:

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• You are a first-time homebuyer who has not previously owned a home anywhere in the world;
• Your spouse or common-law partner must also not have owned a home, and neither of you can have an interest or stake in a home (if one or more homebuyers is not a first-time buyer, you may still be eligible for a refund of your land transfer tax at a discounted rate. For example, if two individuals purchase a home but only one of them is a first-time buyer, then only 50% of the transfer tax refund can be claimed);
• You must be 18 years old; 
• You must be a Canadian citizen or a permanent resident (if you are not currently a Canadian citizen or a permanent resident, you have 18 months after your home registration to become one to qualify for the refund).
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Toronto First-Time Home Buyer Incentive

First-time homebuyers in Ontario have a second assistance program available to them in the form of the Toronto First-Time Home Buyer Incentive. The City of Toronto, like the Government of Ontario, also has a land transfer tax. Toronto’s tax is known as a municipal land transfer tax and the City offers a rebate on it for first-time homebuyers who purchase a home in Toronto. The maximum rebate is $4,475 and is available to buyers who purchase new construction or resale residential properties. To qualify for the Toronto First-Time Home Buyer Incentive, you must meet the same requirements as the Ontario First-Time Home Buyer Incentive program. 

It’s worth noting that first-time homebuyers in Toronto can take advantage of both the provincial and the municipal incentive programs since they are calculated separately. Therefore, if you are a first-time homebuyer in Toronto, you can receive a rebate of up to $4,475 off your municipal land transfer tax, in addition to a rebate of up to $4,000 off your provincial land transfer tax. This can add up to major savings for Toronto homebuyers. 

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6. Make an offer on a home and apply for a mortgage

The next step to getting a first-time homebuyer loan comes after you make an offer on a house. Once you find a house you love and you’ve made an offer that’s been accepted by the seller, it’s time to formally apply for a mortgage loan. As mentioned, the loan you are approved for ultimately depends on the purchase price and value of the home, as well as your down payment. Many first-time homebuyers make financing a condition of their offer. However, your REALTOR® can advise you on which contingencies to include in your offer. When you apply for a mortgage, you will need to provide the lender with the same documentation you provided during the pre-approval process, as well as information about the property you’re buying. Getting approved for a mortgage can take some time, as the mortgage lenders need to approve, underwrite, and process the loan. For this reason, first-time homebuyers usually require closing dates of at least 30 days from the offer being accepted. 

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7. Purchase mortgage loan insurance

The final step is to purchase mortgage loan insurance. While mortgage insurance is not mandatory by law in Canada, many lenders require it, especially if your down payment is less than 20%. Therefore, mortgage loan insurance is one closing cost that most first-time homebuyers must budget for. Typically, buyers apply for mortgage loan insurance directly through their lenders. The three main mortgage insurance companies in Canada are CMHC, Canada Guaranty, and SagenTM.