|
Frequently Asked Questions
Down Payment
Affordability
Key Mortgage Terms
Mortgage Tips
Privacy Concerns
How much can I afford to
pay for a home?
To determine 'affordability' you will first need to know your taxable
income along with the amount of any debt outstanding and the monthly
payments. Assuming it is your principal residence, you are purchasing;
calculate 32% of your income use toward a mortgage payment, property
taxes, and heating costs. If applicable, half of the estimated monthly
condominium maintenance fees will also be included in this calculation.
Second, calculate 40% of your taxable income and deduct all of your
monthly debt payments, including car loans, credit cards, lines of
credit payments. The lesser of the first or second calculation will be
used to help determine how much of your income may be used towards
housing related payments, including your mortgage payment. These
calculations are based on lenders' usual guidelines.
In addition to considering, what the ratios say you can afford, make
sure you calculate how much you think you can afford. If the payment
amount you are comfortable with is less than 32% of your income, you may
want to settle for the lower amount rather than stretch yourself
financially. Make sure you don't leave yourself house poor. Structure
your payments so that you can still afford simple luxuries.
back to top 
How much mortgage can I
afford?
The amount of a mortgage for which one can qualify is generally
founded in what are known as qualification ratios: Gross Debt Service
ratio and Total Debt Service ratio, or "GDS" and "TDS". Lenders evaluate
one's monthly income, as well as their monthly debt obligations, to
determine a fair and feasible amount of mortgage available to the
prospective borrower. This figure is calculated via their GDS and TDS
guidelines. Generally, lenders will have an acceptable Gross Debt
Service ratio ranging from 28-32%. In other words, 28-32% of one's
monthly household income can be reasonably set aside for one's mortgage
payment, in the eyes of the lender. Furthermore, most lenders will have
an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40%
of one's monthly household income can be reasonably set aside for one's
total debt obligations, including their impending mortgage payment. To
calculate exactly how much you may borrow, please refer to our
CALCULATOR available by clicking on the HOME tab above. Make sure that
you incorporate the proper interest rate, as this can have a profound
effect over the life of a mortgage. NOTE: As part of this calculation,
you also need to estimate and include the property taxes, homeowner's
insurance, and CMHC fees (if applicable) you might need to pay.
back to top
How does bankruptcy affect
qualification for a mortgage?
Depending on the circumstances surrounding your bankruptcy, some
lenders will not consider providing mortgage financing.
back to top
How will child support
affect mortgage qualification?
Where you pay child support and alimony to another person, generally
the amount paid out is deducted from your total income before
determining the size of mortgage you will qualify for.
Where you receive child support and alimony from another person,
generally the amount paid may be added to your total income before
determining the size of mortgage you will qualify for, provided proof of
regular receipt is available for a period determined by the lender.
back to top
What is a down payment
Very few homebuyers have the cash available to buy a home outright.
Most of us will turn to a financial institution for a mortgage. However,
even with a mortgage, you will need to raise the money for a down
payment.
The down payment is that portion of the purchase price you furnish
yourself. The amount of the down payment (which represents your
financial stake, or the equity in your new home) should be determined
well before you start house hunting.
The larger the down payment, the less your home costs in the end.
With a smaller mortgage, interest costs will be lower and over time,
this will add up to significant savings.
back to top
How much do I need for a
down payment?
According to the guidelines of the Canadian Mortgage and Housing
Corporation (CMHC), one must have a minimum down payment of at least 5%
of the total cost of the prospective property. With a down payment
between 5 - 19.99%, one's mortgage is deemed "high-ratio". A high ratio
mortgage is subject to a CMHC premium in accordance with the following
schedule:
With a down payment of 20% or greater, the mortgage is deemed
"conventional". A conventional mortgage is not subject to any CMHC fees.
Thus, a larger down payment represents a two-fold advantage to the
prospective homebuyer. First, the prospective homebuyer will avoid CMHC
premiums with 20% down payment. Secondly, a larger down payment will
relate into smaller monthly payments, or a shorter amortization; both of
which lead to interest savings over the life of the mortgage.
back to top
What is the minimum down
payment needed for a home?
A minimum down payment of 5% is required to purchase a home, subject
to certain maximum price restrictions.
Regardless of the amount of your down payment, at least 5% of it must
be from your own cash resources or a gift from a family member. It
cannot be borrowed.
back to top
Can I use gift funds as a
down payment?
Most lenders will accept down payment funds that are gifted from
family as an acceptable down payment. A gift letter signed by the donor
is usually required to confirm that the funds are true gift and not a
loan. Mortgages with less than 20% down must have mortgage loan
insurance provided by CMHC, Genworth, or AIG.
back to top
How can you use your RRSP
to help you buy your first home?
Today, about 50% of first-time homebuyers use their RRSP savings to
help finance a down payment. With the federal government's Home Buyers'
Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple)
to help pay for your down payment on your first home. You then have 15
years to repay your RRSP.
To qualify, the RRSP funds you are using must be on deposit for at
least 90 days. You will also need a signed agreement to buy a qualifying
home.
Even if you have already saved for your down payment, it may make
good financial sense to access your savings through the Home Buyers'
Plan. For example, if you had already saved $20,000 for a down payment -
and assuming you still had enough "contribution room" in your RRSP for a
contribution of that amount you could move your savings into a
registered investment at least 90 days before your closing date. Then,
simply withdraw the money through the Home Buyers' Plan.
The advantage? Your $20,000 RRSP contribution will count as a tax
deduction this year. Use any tax refund you receive to repay the RRSP or
other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home
sooner, it can also mean missing some tax-sheltered growth. So be sure
to ask your financial planner whether this strategy makes sense for you,
given your personal financial situation.
back to top
What is mortgage loan
insurance?
Mortgage loan insurance is insurance provided by Canada Mortgage and
Housing Corporation (CMHC), a crown corporation, and Genworth, an
approved private corporation. This insurance is required by law to
insure lenders against default on mortgages with a loan to value ratio
greater than 80%. The insurance premiums, ranging from .50% and up
depending upon your down payment & amortization, are paid by the
borrower and can be added directly onto the mortgage amount. This is not
the same as mortgage life insurance.
back to top
What is a Mortgage Agent?
A Mortgage Agent is an independent Real Estate financing professional
who specializes in the origination of residential and/or commercial
mortgages. Typically, they do not fund or service the loan itself, but
instead, they act as an Agent or Manager for capital sources who act as
loan wholesalers.
A Mortgage Agent is also an independent contractor working, on
average, with 40 lenders at any one time. By combining professional
expertise with direct access to hundreds of loan products, a agent
provides consumers the most efficient and cost-effective method of
offering suitable financing options tailored to the consumer's specific
financial goals.
back to top
What is a pre-approved
mortgage?
A pre-approved mortgage provides an interest rate guarantee from a
lender for a specified period of time (usually 60 to 90 days) and for a
set amount of money. The pre-approval is calculated based on information
provided by you and is generally subject to certain conditions being met
before the mortgage is finalized. Conditions would usually be things
like 'written employment and income confirmation' and 'down payment from
your own resources', for example.
Most successful real estate professionals will want to ensure you
have a pre-approved mortgage in place before they take you out looking
for a home. This is to ensure that they are showing you property within
your affordable price range.
In summary, a pre-approved mortgage is one of the first steps a
homebuyer should take before beginning the buying process.
back to top
What is a fixed rate
mortgage?
The interest rate on a fixed-rate mortgage is set for a
pre-determined term - usually between 6 months to 25 years. This offers
the security of knowing what you will be paying for the term selected.
back to top
What is a variable rate
mortgage?
A mortgage in which payments are fixed to bank prime rates, which can
fluctuate several times a year. If interest rates go down, more of the
payment goes towards reducing the principal; if rates go up, a larger
portion of the monthly payment goes towards covering the interest.
back to top
What are closing costs?
On the day one actually purchases their new home they are required to
pay certain costs associated with this endeavor. In addition to one's
down payment, the prepaid property tax and homeowner's insurance
premiums there will be other fees to consider:
- Survey Charges.
- Land Transfer Taxes.
- Attorney Fees and Disbursements.
- Garbage Disposal Fees.
- Title Insurance.
- Fire Insurance.
Your real estate transaction may be subject to GST! Check with your
real estate agent for this.
back to top
What is the difference
between Pre-approval, Pre-qualification, and Mortgage Commitment?
If you are just getting started in the hunt for a new home, it is
important to know the difference between pre-qualifying, pre-approval
and a loan commitment. It is not enough to simply begin looking for the
home of your dreams. It is critical that you determine the price range
that you can afford, get qualified for a loan, and understand all of the
steps to assist you in securing that perfect property when you find it.
Pre-Qualification
Pre-qualification does not mean that you have been approved for a
loan, but it is an important component of the home buying process. You
have to know what you can afford before you look. Pre-qualification will
save you time and ultimately money.
A mortgage professional can help you determine your qualification.
You should candidly discuss your financial situation with him or her and
not withhold any information. Most likely, your mortgage consultant will
want to know your yearly household income as well as your assets and
liabilities. If you can discuss your finances candidly and determine
what you can reasonably qualify for a loan, then no one's time will be
wasted. Otherwise, your agent may end up being a tour guide, showing you
beautiful houses that you will never be able to get a mortgage for
rather than helping you find an appropriate property to make an offer
on. However, pre-qualification does not mean that much to sellers. It is
more of a tool to help potential buyers figure out their price range.
Pre-Approval
Pre-approval is a firmer commitment that is based on more information
than pre-qualification. A mortgage broker or lender will need to do a
thorough credit investigation and it is particularly important that you
disclose all financial information that is requested. The amount that
you are approved for will be the amount that the lender is committed to
loan for the purchase of a house. Getting pre-approval may give you more
bargaining power when you are negotiating the price of a home.
If the seller knows that you are approved for the loan, already you
may have more leverage. In fact, it is a good idea to plan to get
pre-approved. Some real estate agents will not waste their time showing
homes to potential buyers who do not have a pre-approval, especially in
a hot market. However, pre-approval does not necessarily mean that you
will ultimately get the loan. The final approval will still depend on
verification of the information provided and approval of the home you
wish to purchase.
Mortgage Commitment
A loan commitment is a letter that is issued by the lender that
states that they will fund your mortgage. This letter may include
details of your interest rate and the maximum amount of loan they will
offer. This sort of commitment requires that both you and the house be
approved. This means that the home will need to be appraised at the sale
price or higher and must meet the lender's guidelines.
Regardless of what stage of home buying you are in, it is very
important that you keep a few things in mind. Remember that just because
you are approved for a large loan, does not necessarily mean that you
should borrow at the upper limit of your loan approval. Homeownership
involves more expenses than renting and some properties need more work
than others need. Make sure you leave a financial cushion for repairs
and upgrades to your new home.
Once you are approved, do not make any big changes to your finances.
Changing jobs, banks and taking out other loans can lower your credit
rating, change your debt-to-income ratio and ultimately keep you from
getting the loan. Now is not the time to buy that new car, big screen
television or to take an expensive vacation. The mortgage company may
make one last credit check even if you have a loan commitment. If you
are educated and prepared, you may find that the home buying process is
easy and stress free.
back to top
What is title insurance?
Protecting purchasers against loss is accomplished by the issuance of
a title insurance policy, which states that if the status of the title
to a parcel of real property is other than as represented, and if the
insured suffers a loss as a result of title defect, the insurer will
reimburse the insured for that loss and any related legal expenses, up
to the face amount of the policy.
Title insurance differs significantly from other forms of insurance.
While the functions of most other forms of insurance is to guard against
future events (such as death or accidents or in the case of property,
fire or flood), the primary purpose of title insurance is to eliminate
risks and prevent losses caused by events that have happened in the
past. To achieve this goal, title insurers perform an extensive search
of the public records to determine whether there are any adverse claims
to the subject of real estate. Either those claims are eliminated prior
to the issuance of a title policy or their existence is exempted from
coverage.
back to top
What is a home inspection?
A home inspection is an examination of the structure and systems:
heating and air conditioning, plumbing and electrical, roof, attic,
insulation, walls, floors, ceilings, windows, doors, foundation, and
basement. If the inspector finds problems, it does not mean you cannot
sell your house, but you can be certain a buyer inspection will find
them too. Finding problems before you list your property can avoid
accusations of misrepresentation, low offers, and even lawsuits. A home
inspection can also help sellers comply with new, tougher disclosure
laws enforced in many states.
You may or may not want to make the repairs and you can always adjust
the selling price or contract terms if the problems are major. This
information will also help you determine what type of financing will or
will not be available for your home. You can find home inspectors under
Professional Services section.
back to top
What is an appraiser?
A real estate appraiser is an impartial, independent third party who
provides an appraisal -- an objective report on the estimate of value of
real estate. The appraisal is supported by the collection and analysis
of data. Most licensed appraisers will provide an advance estimate of
the cost to perform the appraisal, and many will commit to a fixed fee
for the appraisal. It is always wise to obtain a written contract for
services that includes a description.
back to top
What is a conventional
mortgage?
A conventional mortgage is usually one where the down payment is
equal to 20% or more of the purchase price, a loan to value of or less
than 80%, and does not normally require mortgage loan insurance.
back to top
What is the difference
between Term and Amortization?
The "term" of the mortgage should not be confused with the
"amortization". The amortization of the mortgage refers to the entire
length of time that it will take for the mortgage to be paid and the
house to be "free and clear". The term is the period for which your
current payment obligations are valid. In other words, you may choose a
five-year term and a 25-year amortization. This would mean that your
interest rate, your payments, and your pre-payment options would be the
same for the next five years. At the end of these five years, you would
re-negotiate the term, and the amortization would now be 20 years. Fixed
rate mortgages can be "closed" or "open".
Open Mortgages
Allow one to pre-pay some, or all of, their
outstanding mortgage obligation at any time, without penalty. Generally,
open mortgages have a six-month, and a one-year term option with higher
interest rates than closed mortgages of the same term length.
Closed Mortgages
Generally, closed mortgages are offered in
terms ranging from six months to ten years. Generally, closed mortgages
offer more stringent pre-payment options subject to various pre-set
regulations. For most people, such pre-payment options can be vital to
reducing the amortization of one's mortgage and should be properly
discussed with one's lender/agent.
back to top
Should I wait for my
mortgage to mature before renewing?
Lenders will often guarantee an interest rate to you as much as 90
days before your mortgage matures. Moreover, as long as you are not
increasing your mortgage, they will cover the costs of transferring your
mortgage too. This means a rate promised well in advance of your
maturity date, thus eliminating any worries of higher rates. In
addition, if rates drop before the actual maturity rate, the new lender
will usually adjust your interest rate lower as well.
Most lenders send out their mortgage renewal notices offering
existing clients their posted interest rates. The rate you are being
offered is usually not the best one. Always investigate the possibility
of a lower interest rate with the lender or another lender. Or contact
your local Mortgagebrokers.com agent. If you do not you may end up
paying a much higher interest rate on your renewing mortgage than you
need to.
back to top
How can you pay off your
mortgage sooner?
There are ways to reduce the number of years to pay down your
mortgage. You'll enjoy significant savings by:
- electing a non-monthly or accelerated payment schedule
- Increasing your payment frequency schedule
- Making principal prepayments
- Making Double-Up Payments
- Selecting a shorter amortization at renewal
back to top
What are the costs
associated with buying a home?
Primarily, you have to make sure you have enough money for a down
payment - the portion of the purchase price that you furnish yourself.
To qualify for a conventional mortgage you will need a down payment
of 20% or more. However, you can qualify for a low down payment insured
mortgage with a down payment as low as 5%.
Secondly, you will require money for closing costs (up to 1.5% of the
basic purchase price).
If you want to have the home inspected by a professional building
inspector - which we highly recommend - you will need to pay an
inspection fee. The inspection may bring to light areas where repairs or
maintenance are required and will assure you that the house is
structurally sound. Usually the inspector will provide you with a
written report. If they do not, then ask for one.
You will be responsible for paying the fees and disbursements for the
lawyer or notary acting for you in the purchase of your home. We suggest
you shop around before making your decision on who you are going to use,
because fees for these services may vary significantly.
There are closing and adjustment costs, interest adjustment costs
between buyer and seller and (depending on where you live) land transfer
tax - a one-time tax based on a percentage of the purchase price of the
property and/or mortgage amount.
Finally, you will be required to have property insurance in place by
the closing date. In addition, you will be responsible for the cost of
moving.
Remember, there will be all kinds of things you will have to purchase
early on - appliances, garden tools, cleaning materials etc. So factor
these expenses into your initial costs.
back to top
What should the length of
my mortgage term be?
The length of mortgage terms varies widely - from six months right up
to 10 years. As a rule of thumb, the shorter the term, the lower the
interest rate the longer the term, the higher the rate.
While four or five year mortgages are what most home buyers typically
choose, you may consider a short-term mortgage if you have a higher
tolerance for risk, if you have time to watch rates or are not prepared
to make a long-term commitment right now.
Before selecting your mortgage term, we suggest you answer the
following questions:
- Do you plan to sell your house in the short-term without buying
another? If so, a short mortgage term may be the best option.
- Do you believe that interest rates have bottomed out and are not
likely to drop more? If that is the case, a long mortgage term may
be the right choice for you. Similarly, if you think rates are
currently high, you may want to opt for a short to medium length
mortgage term hoping that rates drop by the time your term expires.
- Are you looking for security as a first-time homebuyer? Then you
may prefer a longer mortgage term, so that you can budget for and
manage your monthly expenses.
- Are you willing to follow interest rates closely and risk their
being increased mortgage payments following a renewal? If that is
the case, a short mortgage term may best suit your needs.
back to top
What are the monthly costs
of owning a home?
You will have financial responsibilities as a homeowner.
Some of them, like taxes, may not be billed monthly, so do the
calculations to break them down into monthly costs. Below you will find
a list of these expenses.
The Mortgage Payment
For most homebuyers, this is the
largest monthly expense. The actual amount of the mortgage payment can
vary widely since it is based on a number of variables, such as mortgage
term or amortization.
Property Taxes
Property tax can be paid in two ways -
remitted directly to the municipality by you, in which case you may be
required to periodically show proof of payment to your financial
institution; or paid as part of your monthly mortgage payment.
School Taxes
In some municipalities, these taxes are
integrated into the property taxes. In others, they are collected
separately and are payable in a single lump sum, usually due at the end
of the current school year.
Utilities
As a homeowner, you will be responsible for all
utility bills including heating, gas, electricity, water, telephone, and
cable.
Maintenance and Upkeep
You will also have to cover the cost
of painting, roof repairs, electrical and plumbing, walks and driveway,
lawn care and snow removal. A well-maintained property helps to preserve
your home's market value, enhances the neighbourhood and, depending on
the kind of renovations you make could add to the worth of your
property.
back to top
How can I save money on my
mortgage?
The simplest way to accomplish this is to decrease your principal;
thus, decreasing your interest obligation. There are a number of very
feasible approaches to performing this task:
Increase Payment Frequency - Instead of paying monthly, consider
paying bi-weekly. This simple step is very feasible for most working
Canadians who are paid bi-weekly. It can cut your mortgage amortization
by up to five years, and can save you tens of thousands of dollars.
Prepay - Use every advantage that the term of your mortgage offers
you to prepay your mortgage. One way to do this would be to use your
RRSP tax refund to make a yearly pre-payment.
Increase Payments - Round up your bi-weekly payment. For example, if
you have a bi-weekly payment of $531.59, round your payment to an even
$550.00. This will have a profound effect on the interest paid, and the
amortization of the mortgage.
back to top
Do You Sell Our
Information to Anyone Else?
At Mortgagebrokers.com we will not sell one's information under any
circumstances. Furthermore, due to the personal nature of the
information that we receive, only one of our lending experts, his /her
supervisor, and the prospective lending institutions will see it.
back to top
What happens if I am not
satisfied with a mortgage offer?
Do not accept it. You have no obligation to accept any of the offers
that are made to you by Mortgagebrokers.com or any of our affiliated
lenders.
back to top
|
