Understanding your mortgage options:
The Four Parts to a Mortgage
Downpayment
The downpayment can come from different sources - a gift from a family member, personal savings, borrowed funds, even cashback from the Lender. Different Lenders have different rules around what types of downpayments they will accept in any given situation.
Income
The stability and quality of your income is what convinces the Lender of your ability to repay the mortgage loan. Someone with a 10 year history in a given position presents less of a risk in a Lender's eyes than someone who just started a job last week. In general, the optimum situation for a Lender is a borrower with a salaried job at a guaranteed rate of pay.
Property
Your choice of property can impact the Lender's interest in making a mortgage loan to you.
Some Lenders will consider only properties in major urban centres, others will consider high-
rise condominiums, but may reduce the amount they are willing to lend against the property.
Lenders consider safer properties to be ones for which comparable sales can be found
recently, and in close proximity. This consideration should guide your choices as a
homebuyer as well: if you needed to sell, is your property marketable, or is it a unique
property which might hold appeal to a small group of potential buyers...?
Credit
How you have managed your credit in the past gives a Lender an idea as to how you will likely repay them in the future. Your credit repayment history is, for Lenders, a measure of your character. This is not always the case though, as some people may run into difficulty paying revolving credit facilities such as credit cards, but may pay their mortgage on time each month. Similarly, people sometimes run into short term financial issues which do not reflect their honest commitment to repay their creditors.
What is a Pre-Approval?
A pre-approval is the agreement made by a Lender to hold a rate for a specific period of time for a borrower so that borrowers can shop for a home knowing what they can afford, and knowing that they have a rate locked in for them, usually for up to 120 days. A pre-approval is not a guarantee of financing. If the borrowers' income is not as stated in the application, or the credit is not of the quality expected, or the down payment is not as large as thought - any of these factors may influence the Lender's willingness to participate in a transaction. As a result, unless it is known for certain that these
Affordability Calculator
Knowing what you can afford is an essential first step in the house hunting process. A real estate agent will want you to know what you can afford so they can understand what price range of properties you should be looking at.
In general, traditional Lenders (banks, credit unions) require that borrowers pay no more than 1/3rd - typically 32% - of their income towards payment of their mortgage, property taxes and heat. That means that someone earning $48,000 a year would have 1/3rd of $4,000 monthly, or approximately $1280.00 to finance their home. Some Lenders relax this restriction, and some only place a limit on the total amount of monthly payments a borrower must make: mortgage payments and property taxes and heat and also all other debts - credit cards, car loans and so on.
Who is involved in the Mortgage process?
Real Estate Agent - assists in the home purchase by drawing up the Agreement for
Purchase and Sale
Mortgage Agent - Assists the borrower in choosing the appropriate mortgage for their
specific needs, finds Lenders with the lowest rate, best terms. Submits
income, credit and downpayment documentation to the Lender on the
borrower's behalf.
Home Inspector - Inspects the property to be purchased and describes the condition of the
property and its major mechanical systems - electrical, heating, roofing,
etc. Can point out major obvious structural issues and expenses the
buyer may face. A home inspection is always recommended.
Appraiser - Acting on behalf of the Lender, the appraiser provides an opinion as to the
marketable value of the property, using as a guide comparable properties that
have sold recently in the same neighbourhood. Lenders will use the lower of
the appraised value or the purchase price as their guideline for financing.
Lawyer - Confirms the identities of the borrowers, prepares the mortgage documentation,
receives and distributes funds, arranges Title Insurance, confirms clear title to
the property, registers the property with the land registry service.
Underwriter - working for the Lender, the underwriter examines the income and credit
information provided by the mortgage Agent as well as the appraisal (if needed)
and decides whether to lend on a specific property or to specific borrowers.
Lender - provides the funds for the home purchase and provides post-funding servicing
to the borrower.
Step by Step Checklist - home buying process
1. Clients obtain a pre-approval through the Mortgage Agent based on their income and credit information, letting them know what range of property values they may consider.
2. Clients can now look for properties with their Real Estate Agent.
3. Clients find the right property. Their Real Estate Agent draws up Purchase and Sale Offer, accompanied by downpayment if any and provides this to the sellers' Real Estate Agent.
4. If the offer is accepted, the clients (or RE Agent) forward signed Purchase and Sale Agreement to the Mortgage Agent, who forwards them to the Lender to receive a Commitment to lend against the property in question.
5. Lender issues a Commitment to the clients through the Mortgage Agent, stating terms of the mortgage, rate, documentation requirements, and disclosure of any other costs directly associated with the arrangement of financing.
6. Clients provide documentation as requested to the Mortgage Agent, who provides documentation to the Lender. Upon satisfaction of all conditions - income, downpayment, credit, and property, the Lender arranges funding with the clients' lawyer.
7. Clients meet with their lawyer on the day of closing to sign all documentation, and receive keys to their new home.
Costs of purchasing
Many people underestimate the initial costs of a home purchase. The following are some estimates of the costs which borrowers may incur when shopping for a home.
- Legal Fees $600-$1,000
- Appraisal $300
- Home Inspection $300
- Land Transfer Tax estimate ($7,000 on a $350,000 property in Toronto, for example, $5,000 on a property in B.C.)
- Utilities and taxes. The purchaser may be required to compensate the seller for any pre-paid amounts.
- P.S.T. on any high ratio insurance premiums
- Title Insurance
As a general rule, purchasers are advised, and in some cases required, to have approximately 1.5% of the purchase price available to them to cover 'closing costs'.
Using RRSP for down payment with the First Time Home Buyers' Plan
The federal government has increased the amount borrowers may remove from their RRSP to $25,000 per person. This amount must be repaid to borrowers RRSP, and as such it represents an additional monthly expense, but it can allow the borrower to reduce the amount of mortgage insurance premium that is paid, a savings which can run into the thousands of dollars. The institution where you maintain your RRSP will have the required paperwork to enable you to withdraw from your RRSP without penalty.
There are restrictions as to who can use this First Time Home Buyers' Plan.
- You must not have owned a home as a principal residence in the last five years
- The Funds must have been deposited into your RRSP at least 90 days prior to withdrawal
- The funds must be used for the purchase of a home by October 1st of the year following the withdrawal.
- The funds must be repaid over a 15 year period commencing two years after the withdrawal. A minimum of 1/15th must be repaid each year otherwise the deficit is added to your taxes as if it had been withdrawn from your RRSP outside the Home Buyers' Plan
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