The decision to buy a home is an exciting stage in your life. However, it can also be stressful and disappointing if you don’t do three things before you begin the house hunting process:
Find a real estate agent
Check your credit score
Apply for your mortgage
Here we explain everything you need to know about getting a mortgage, so you avoid disappointment.
Why and How Do I Check My Credit Score?
Without a good credit score you will not qualify for a mortgage. In most cases lenders won’t consider your application unless your credit score is 640, although some lenders will consider a broader range from 620 to 680. For those that will consider you for a mortgage despite poor credit, in most cases, you will be charged a far higher interest rate than those with good credit and be approved for less money. You will also be expected to have more money for your down payment. The only way around these challenges is to find a co-signer for your mortgage.
Why is Mortgage Pre-approval So Important?
Mortgage pre-approval is a must for the following reasons:
You’ll know if you qualify for a mortgage
You’ll know how much you qualify for
You’ll know how much your monthly mortgage payments will be
You can lock into the current lowest rates for as long as 120 days
In most cases you can renegotiate the interest rate at the time you buy your home should your locked in rate be higher
You’ll begin the home buying process equipped with a budget in mind so you don’t overestimate how much home you can afford.
What is the Pre-Approval Process?
During the pre-approval process your broker/lender will assess your financial situation including your income, work history, debt level and any assets you own. You will need the following information:
Proof of employment including your current rate of pay such as a pay stub or notices of assessment from the government for taxes
Proof you can pay for the down payment and closing costs
Information about assets such as a car
Debts and financial obligations
You will also have to prove you have money available for your down payment. Down payments required in Canada are as follows:
$500,000 or less requires 5% of the purchase price
$500,000 to $999,999 requires 5% of the first $500,000 of the purchase price and 10% for the portion of the purchase price above $500,000
$1 million or more requires 20% of the purchase price
Once pre-approved, make sure you ask how long the rate offered is locked in and whether they will offer the lower rate should they drop. Also find out if they are willing to extend your pre-approval if need be.
Where Can I Apply?
Having someone you trust and have worked with before can make the process a little easier, so many people will start with their own bank branch. Your other options include:
· Shopping at other banks
· Mortgage brokers
· Insurance brokers
· Trust companies
· Loan companies
· Credit Unions
One of your best bets is to work with a mortgage broker as they have access to many different lenders and can help you find the best rates and terms.
Why Should I Shop Around for a Mortgage?
The reason either shopping different lenders on your own, or working with a mortgage broker is recommended, is that each lender will have different interest rates and conditions. While they offer similar products, the terms and rates are a major determinant in how much your monthly mortgage payments will be, how long it will take to pay off your mortgage and the penalties if you wish to renegotiate your mortgage contract. By talking to multiple lenders, you can decide which mortgage works best for you.
Why Are Mortgage Brokers a Good Option?
The role of the mortgage broker is not to lend you the money, but instead do the leg work to help you find the best deal for your needs. They will present your best options based on your financial situation, explain the pros and cons of each and then arrange transactions without charging you a fee.
While you can work directly with individual lenders such as banks, they will only show you the products they have available. This can work sometimes in your favour as there are some lenders that do not make their products available to brokers. On the other hand, many lenders don’t offer their products directly to borrowers and instead only work with brokers. So, if you opt to shop around, starting with a broker will provide you easy access to a broad assortment of lenders best suited for your specific needs. This is important if you have challenges such as being self-employed, not having a credit history yet, or having a poor credit score.
Is it Difficult to Qualify for a Mortgage?
It can be a challenge to qualify for a mortgage as not only do you have to prove you can afford to pay the lender back, but also put all of your cards on the table when it comes to the money you owe and your credit history. The lender will consider the following in their decision:
Your housing related costs: This includes your mortgage payments, property taxes, utilities and condo fees if applicable. These costs, known as your GDS ratio, should not exceed 32% of your gross income.
Your total debt: Everything you owe at the time you apply will be tallied by your lender. They will not be willing to offer a loan for people who have a debt load that is equal to more than 40% of your gross income (total debt service ratio).
Whether you pass the “stress test” to show you can afford payments at a higher interest rate than the rate the lender approves for your mortgage contract.
You can get an idea of how these ratios look and if you pass the stress test using the government’s mortgage calculator.
What Are the Elements of a Mortgage I Need to Consider?
It is difficult to cover every type of mortgage because they vary drastically in what they offer. What you need to discuss with potential lenders includes:
The interest rate and how it affects your monthly payments
The term of the mortgage to see how long the contract lasts
The amortization period to determine how long it will take to pay off your mortgage
Open or closed mortgages to determine what options are available for making payments to allow you to pay down your mortgage faster
Fixed or variable interest rates to determent if you have a locked in interest rate for the term of your mortgage, or an interest rate that will change with the most current rates at the time of your payment
What options are available to help you pay down your mortgage earlier such as bi-monthly payments, the option to make lump sum payments, etc.
All fees associated with purchasing the home
Types of insurance available and their cost
Penalties of the various conditions you discuss with your lender
You can get the deeper details about the types of mortgages and all their elements here.
Although getting a mortgage can prove challenging today, being prepared with these tips will help you understand what is required to qualify.
If you are considering buying a home in Toronto reach out to the onlywith.ca team today.