Financing My First Rental Property: Step-by-Step Guide

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The Financing Journey for Your First Rental Property

Acquiring your first rental property is an exciting project that requires methodical planning on the financing side. In Quebec, the process is governed by several regulatory bodies: the AMF for mortgage brokers, OSFI for fédéral institution lending criteria, CMHC for mortgage insurance, and the CCQ for the notarial process. Here is the complete timeline, from your first call to a broker through to fund disbursement.

Step 1: Mortgage Pre-Qualification (Week 1): Contact an AMF-certified mortgage broker. They will gather your financial information (income, debts, assets) and perform a preliminary calculation of your borrowing capacity. This step gives you a realistic budget for your search and identifies adjustments needed (debt repayment, increased down payment) to maximize your purchasing power.
Step 2: Property Search and Purchase Offer (Weeks 2-6): With your budget in hand, search for properties matching your investment criteria. Analyze the income and expenses of each property. When you find the ideal building, submit a purchase offer (promesse d'achat in Quebec) including conditions for financing, inspection, and lease review.
Step 3: Formal Financing Application (Weeks 6-8): Your broker assembles the complete file and submits it to the most advantageous lenders for your situation. The file includes proof of income, your notice of assessment, account statements, the purchase offer, existing leases, and the professional appraisal ordered by the lender.
Step 4: Approval and Conditions (Weeks 8-10): The lender analyzes the file, orders the appraisal, and renders its decision. Approval may come with conditions (additional documents, insurance confirmation, etc.). Your broker guides you through satisfying each condition within the required timelines.
Step 5: The Notarial Process (Weeks 10-12): Once financing is confirmed, the notary prepares the deed of sale and mortgage deed in accordance with the CCQ. They perform verifications (titles, taxes, encumbrances) and coordinate fund disbursement with the lender. On signing day, you officially become the owner.

OSFI Qualification Criteria

The Office of the Superintendent of Financial Institutions imposes strict criteria on federally regulated financial institutions for granting mortgages. These criteria, set out in Guideline B-20, apply to all borrowers, including real estate investors. The qualification stress test requires borrowers to qualify at the higher of the contract rate plus 2% or the 5.25% floor rate. Debt service ratios must meet the 39% threshold for GDS and 44% for TDS.

Financing With or Without CMHC Insurance

If you will occupy one of the units in your building (1 to 4 units), you can benefit from CMHC mortgage insurance with a down payment as low as 5%. The insurance premium (from 2.8% to 4.0% of the loan amount) is added to the mortgage balance. The main advantage is preserving your liquidity for unexpected expenses and benefiting from mortgage rates that are generally lower than for conventional loans. For a non-owner-occupied property, the minimum is 20% down without insurance.

Documents to Prepare

Valid identification (2 pieces of photo ID)
Proof of income: recent pay stubs, employment letters, T4s and Relevé 1s from the last two years
Fédéral and provincial notices of assessment from the last two years
Statements for all bank accounts and investments (last 90 days)
Statements for all existing debts (current mortgage, loans, lines of credit, credit cards)
Signed and accepted purchase offer
Existing leases for the property and income/expense statement
Proof of down payment (statements showing 90-day accumulation or documented gift)

Frequently Asked Questions

How long does the financing process take for a rental property?

From the start of pre-qualification to possession, allow 60 to 90 days. Pre-qualification takes 1 to 3 days, the property search varies by market, formal mortgage approval takes 5 to 15 business days after complete file submission, and the notarial process requires approximately 2 to 4 weeks.

Should I go through a mortgage broker or directly to my bank?

An AMF-certified mortgage broker has access to roughly twenty lenders and can compare offers to find the best terms. Their service is generally free for borrowers as they are compensated by the lender. For a rental property, a broker's expertise is particularly valuable because qualification criteria vary significantly from one lender to another.

How is rental income factored into qualification?

Lenders use rents shown on existing leases or a market rent estimate for vacant units. They typically retain between 50% and 80% (depending on the lender and property type) to add to your income when calculating GDS and TDS debt service ratios.

What conditions should I include in my purchase offer?

For a rental property, include at minimum: a financing condition (10 to 15 business day deadline), a professional inspection condition, a condition for review and satisfaction of existing leases, and a condition for obtaining an up-to-date certificate of location. In Quebec, the purchase offer (promesse d'achat) is governed by the CCQ.

Is a lender property appraisal mandatory?

Yes, in the vast majority of cases. The lender orders a professional appraisal to confirm that the property's market value justifies the loan amount requested. The cost ($300 to $500 for a small property, more for a commercial building) is borne by the borrower. If the appraisal comes in lower than the purchase price, the lender bases the loan on the lower value.

Can I get financing for a property that needs renovations?

Yes, several options exist. Some lenders offer purchase-renovation mortgage products that release renovation funds in stages. CMHC also offers the Energy-Efficient Improvements insurance program with favourable conditions. Your AMF-certified mortgage broker can guide you toward the product best suited to your situation.