Financing is the First Step in Owning a Better Home
A bank is a place that will lend you money if you can prove that you don't need it.
Securing a mortgage pre-approval is job number one; you can't buy a home until you've met with a lender. I'm a REALTOR® and not a lender, but I can make it easy for you. Click here to receive an email with the names and numbers of three friendly, highly skilled lenders.
I've written this as a list and in a (somewhat) chronological order allowing you to scroll through and find the information you are looking for.
Here We Go!
You: Where can I get a loan?
Me: Banks and mortgage brokers. The banks include the big five (CIBC, BMO, RBC, TD and Scotia) and credit unions such as Conexus and Affinity. A mortgage broker is a licensed professional who connects property buyers with a variety of mortgage lenders.
You: What's the difference between banks and mortgage brokers?
Me: Banks and credit unions sell (yes, they sell you a mortgage because they make money on it) their own mortgage products, while a mortgage broker (sells you) a mortgage secured from one of a variety of lenders that may include one of the big banks but can also include secondary mortgage lenders.
When you deal with the bank, you work with their sales rep directly. When you use the services of a mortgage broker, you don't communicate directly with the lender. All correspondence to the mortgage lender travels through your broker. The mortgage broker acts as a “middleman."
You: Should I use a mortgage broker or my bank?
Me: They are both good choices but slightly different. I would recommend meeting with both to discuss your situation.
You: What's the advantage of using a mortgage broker?
Me: One advantage is great rates. A mortgage broker can shop around and find the lowest rates possible. Mortgage brokers often boast they shop 100's(!) of lenders when they likely only deal with a few regularly. Another advantage of using a mortgage broker is they work outside of “banker hours” To remain competitive most banks now offer mobile mortgage specialists that will meet you in your home during the evening and on weekends.
You: What's the advantage of using my bank?
Me: One advantage is familiarity. If you've been at the same bank for some time, they will already have your financial information on hand. This can make the processing of the loan less painful, however that's not always the case. They may also offer you some perks (free banking and the like) as an incentive for your business, but you have to ask. The banks may also negotiate their rate, but again you have to ask.
You: My credit isn't great, but I make lots of money. Will I qualify for a mortgage?
Me: Probably not. Credit is as important as income. Lenders want to see a good credit history because they are lending you money. If you have a sloppy track record, they will notice.
You: How much do I need for a down payment?
Me: A minimum of 5% of the purchase price is required as a down payment. It needs to be money you saved, you can't borrow it or use a line of credit or a credit card.
You: I've heard of people using their RRSPs?
Me: You can borrow from an RRSP for your down payment. As you can guess, it comes with a whole bunch of rules. Read about it here
You: I'm a bit short on my down payment, can my brother in Toronto top it up?
Me: Yes. You can use a gift from a family member, providing they send confirmation to the lender that the money is a gift and is not required to be paid back.
You: What about a co-signer?
Me: A co-signer is fine, but remember this person's name will appear on the title, and they are responsible for payments should you not be able to make them. Better make sure you guys are tight first :)
You: I told my lender how much I make and what my debts are, and they gave me an idea of what I can afford. Can I shop for a home now?
Me: No. The lender needs all of your paperwork before you can look at homes. A verbal pre-approval is not good enough.
You: What does pre-approved for a mortgage mean?
Me: This involves visiting your lender and providing your most recent pay stubs, bank statements, T4, job letter from your employer, and more. Before you start looking at homes, you need to be pre-approved by a lender. No exceptions.
You: So, once pre-approved, I'm guaranteed the loan?
Me: No. There is a second approval, or final approval, that comes after you've made an offer on a home. This will be included as a condition in your offer. Even though you are pre-approved, the lender will still review the property you are buying and confirm financing. Sometimes they say no, keep shopping.
You: Why would the lender decline to lend on a specific property?
Me: The lender can decline based on the properties condition, the purchase price (if it's above market value) or any other factors they see fit. Even though you've qualified for the amount of the purchase price, the lender may not approve the loan.
You: But if I'm pre-approved and it's a decent house, the bank will give me the money, right?
Me: Not necessarily. During final approval, the lender may not lend to you based on your financial situation. If they find some debt you've been hiding from them or just bought a Winnebago, they may decline you. It happens from time to time. When it does, you get your deposit back in full, and start looking in a lower price range. Or give mom and dad the bad news that you won't be leaving home anytime soon.
You: What is mortgage insurance?
Me: Buyers with a down payment of less than 20% of the total purchase price must have their mortgage insured against default. Mortgage insurance protects the lender and not the borrower. Mortgage insurance assures lenders they will be covered if a borrower defaults on, or fails to make, their mortgage payments within 90 days of being due.
You: Who pays for the mortgage insurance?
Me: You do. The insurance is designed to protect the lender and not the borrower, but they pass the costs on to you. Bummer.
You: Is mortgage insurance expensive?
Me: Yes. It's calculated as a percentage of the loan based on how much you're putting down. Less down, the higher the rate. Current rates can be found here
You: How do I pay for the mortgage insurance?
Me: The good news (sort of) is that the insurance premium is added to your mortgage amount, calculated upfront, and paid only once in a lump sum. Your total mortgage becomes slightly higher, but you don't have to pay for it out of pocket at the time of the purchase.
You: I've heard about terms and amortization periods. What's the difference?
Me: The term is the amount of time your rate (percentage charged on your loan) and associated mortgage conditions are in effect. The amortization period is the total number of years until the mortgage is paid in full. Your term comes up for renewal after a certain number of years, and you must renew at the current rate. Your amortization period is set at the start and remains the same. Here's a great website to learn more RateHub
You: What's the difference between a variable and a fixed-rate mortgage?
Me: Variable rates change as the prime rate changes. Fixed rates are set at the beginning of your term and won't change regardless of outside markets. If you want to lock in at a fixed rate it will be slightly higher than the current variable rate.
You: Which should I choose, fixed, or variable?
Me: Depends on your tolerance for risk. If you're ok having payments fluctuate with the current rates, then a variable rate might be the right choice. If you'd rather know what your payments will be every month for the next five years, you should lock in at a fixed rate. Over time variable rates have marginally outperformed fixed rates.
You: I've heard of a stress test, what is it?
Me: Recently, the Feds introduced a stress test when qualifying for a mortgage. You now have to qualify at a slightly higher rate than you will actually be receiving. It's designed to make sure the borrow can service their debt if rates rise in the future.
You: Will mortgage rates go up?
Me: Rates have been low for a long time but have seen a slight rise lately. How much more they will go up is uncertain. My best advice is to make room in the budget for a rate increase of 2-3%. Don't buy more than you can afford.
You: What should I do next?
Me: Speak with a lender. I work with some great guys and gals that would love to help you out. Let's do it.
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