The first step to finding your dream home is getting the financing arranged to purchase the home! Purchasing any home is one of the biggest investments a person can make in their life time. The purchase of a home impacts certain aspects of your life like what type of neighborhood you are living in, your family, your working commute....
The most important thing for any person looking for a new home or simply to relocate is to make sure that you have a knowledgeable real estate agent with the proper team of professionals working for them to help you get everything that you need!
In this article we will include a basic over view of the Mortgage Process and some simple steps that you can take to ensure you are informed and are taking the steps you need to get your foot in the door!
When starting the mortgage process make sure that you are being realistic about your budget, know your credit history, assess the type of bills that you want to have on a month to month basis.
- Get pre-approved: Avoid any hiccups or obstacles before you begin the home shopping process. Being pre-approved helps in the following ways:
- Determines price range – it will help you understand what your monthly costs will be to determine your price range.
- Guarantees the rate – from 90-120 days. And we will automatically adjust your rate down with any market reductions prior to your completion date.
- Allows you to put in a competitive offer – become a successful bidder with a short subject to financing condition
2. Put in an offer: the offer process may include counter offers and so forth but as your real estate agents we help make sure you get the best price on your future home!
3.Offer is accepted:
- Follow through with the execution of any conditions outlined in your offer
- Receive the lender’s approval on property and final approval letter
4. Remove Subjects:
At this point, your financing is in place and you are ready to firm up the purchase of the property.
5. Lawyers’ Office:
You will be asked to provide any money in the form of bank draft on closing date that is to be used as your down payment, less the deposit you gave to your realtor to secure your home purchase. Remember to get your RSPs or RRSPs available for that!
What do lenders look at when evaluating your Mortgage:
Income and Job Stability:
- •32 % of your total Gross Income is what is applied to the ‘typical mortgage’ less taxes, maintenance, insurance etc…
- •Your credit score must show you pay your bills on time!
- •Repetitive lapses in payments can affect your interest rate
NOTE: Beacon Score will be lowered if you are having several banks check your credit. With a mortgage broker they will do only one credit check and can shop at hundreds of banks!
What you need to supply to the lender:
- Letter of employment
- Recent pay stub
Down Payment Confirmation:
- Prove the source of your down payment- bank statements, RRSPs, stocks, gift notes etc…
- Where down payment is less than 20% - you may be asked to demonstrate that you have access to 1.5% of the purchase price of your home (just in case closing costs run higher than expected)
Contract of Purchase and Sale:
- Copy of the accepted offer and the MLS listing Sheet
Tips to improve your credit rating:
- Pay your bills on time!
- Try to keep your credit balances below 70% of your available credit limits; this will help improve your score. Example: if you have a credit card with a $1,000 credit limit, keep the balance to no higher than $700.00
- Avoid applying for credit unless you must. Too many credit enquiries in a short period of time not only decrease you credit score, but also alarm the banks or lending institutions because you can be labeled as a credit seeker and someone who will overextend themselves by taking on more debt than you can repay
Things to note for first time home buyers:
In 2009, a $5,000 increase was made to the RRSP Home Buyers’ Plan, meaning first-time homebuyers can now withdraw up to $25,000 from their RRSPs for a down payment – tax- and interest-free.
NOTE: this amount will have to be paid back in full within 15years with payments commencing in the second year.
Are you renting?
Afraid that you can not afford a down payment because you are renting? Many lenders will allow for a gifted or borrowed down payment. And of those lenders that will not provide this alternative, many offer cash-back options that can be used as a down payment.
Better yet, there are programs available from some financial institutions where they will offer a “free down payment” or a “flex down”. Of course, you will end up paying about 1% more in your interest rate, but the program will help you get in the homeownership door and start accumulating equity earlier. You must, however, stay with the original lender for the full initial five-year term or else you’ll have to pay the down payment back.
If, for instance, a renter is currently paying $800 per month, with that same payment (including taxes) they could afford to buy a $120,000 home. And assuming real estate values increase 2% per year over the next five years, the new homeowner would have accumulated $27,000 in equity in their home. If they continue renting, however, this $27,000 has generated equity in someone else’s home.
Mortgage Terminology and Definitions:
Mortgage: A personal loan used to purchase a property. You pledge the property being purchased as security for the loan.
Down payment: The portion of the purchase price that you pay initially as a lump sum; the rest is financed by your financial institution. A down payment is generally anywhere from 5% and up and it is based on the purchase price.
Principal: The amount of your loan.
Interest: This is added to the amount you have borrowed to compensate the lender for the use of their money. Your mortgage is repaid in regular payments which are applied toward the principal and interest.
Term: The number of months or years the mortgage contract covers (typically six months to five years), during which you pay a specified interest rate.
Amortization: The number of years it will take to repay the mortgage in full. (This is usually longer than the term of the mortgage.) For instance, you may have a five-year term amortized over 25 or 30 years.
Equity: The difference between the value of your property and the amount you still owe on the mortgage.
Conventional mortgage: Offered to buyers who make a down payment of 20% or more of the appraised value or purchase price.
High ratio mortgage: Offered to buyers with a down payment of less than 20%. This type of loan must be insured against default by the federal government through an approved private insurer (the lender usually arranges this). The borrower pays a one-time insurance premium to the insurer (ranging from 0.5% to 3.10% depending on the size of the loan and value of the home; additional charges may also apply). The premium is usually added to the principal amount of the mortgage. If you default on your mortgage, the lender is paid by the insurer (CMHC or GenWorth).
Fixed rate mortgage: Carries a set interest rate for a specific period of time (the term of the mortgage). The regular payment of the principal and interest remains the same throughout the term. The benefit of choosing this option is that you are protected if interest rates rise.
Variable rate Mortgage: A mortgage whose rate of interest is readjusted periodically to reflect market conditions. This loan’s interest rate may change periodically, and is tied to the prime rate. It is a mortgage that has fixed payments, but the interest rate fluctuates with any changes in interest rates. If interest rates go down, more of the payment goes to principal and if interest rates go up, more of the payment goes towards the interest.
Portability: If you are selling your home and buying another, this option allows you to take your mortgage - with the same term, rate and amount - and apply it to your new house. If your mortgage isn’t portable, don’t sign for a longer term than you’re likely to stay in the house or you could wind up paying a penalty to break the mortgage agreement.
Assumability: This feature allows the buyer of your house to take over or "assume" your mortgage. If your mortgage has a fixed interest rate lower than current rates, it could be an attractive selling feature.
If you have any questions in regards to Mortgages we have an excellent Mortgage Broker who can help you get pre-approved today. Our mortgage broker Maria Diaz from Dominion Lending Centres has very useful information her website www.mariadiaz.ca or contact her directly # 647-393-3900
Please do not hesitate to contact The Fresh Approach Real Estate Team today with any questions you may have in regards to Mortgages or any of the services that we provide.
Allana Thompson, Christy D'Oliveira, Kyrsten Feere