I have always believed that financing should become part of the school curriculum. This is the reason for this blog. It is a simple breakdown of what a mortgage is and what is required to get a mortgage.
A mortgage is basically a loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
The process may seem difficult but in actuality it is a fairly easy transaction. The first step though is meeting with a professional to discuss what you qualify for and can afford. Skipping this step could cause you a lot of grief and frustration down the road.
You will need to provide all your information, sign a consent to check your credit, prove your income and down payment (options are available for 0 down mortgages – see my blog on 0 down options here). Once this is done and you are given the green light on how much you qualify for you can go looking for homes. Get some suggestions from your mortgage broker on who to use to help you look for a home as they would have a list of good REALTORS®.
Down Payment: Normally 5% down is the minimum required amount. This can be gifted from an immediate family member. You can also take from your RRSP’s or investments. It can be saved but you must show an accumulation of at least 3 months in your account. Another option is the sale of something you own but make sure there is a paper trail. If you are only putting 5% down the lender will also require you prove 1.5% of the purchase price for closing costs.
Interest Rates: You can chose variable (payments could change) or fixed (rate and payments stay the same for a specific period). This is why you need to speak to a mortgage broker to discuss the pro’s and con’s for each project and to make sure you are comfortable with your choice.
Terms: I find the majority of people take a 5 year term. This basically means you will renew your mortgage after 5 years. Terms, however, are available from 6 months up to 10 years. Mortgages are also amortized up to 30 years. This helps to keep the payments to an affordable level. For example you may opt for a 5 year term and 30 year amortization. This means after 5 years you will have 25 years left to pay on your mortgage.
Closing Costs: As stated above you need to prove 1.5% BUT this is only a lender guideline and not a guarantee this is all it will cost. You need to think about moving costs, utility hook ups, house inspections, insurance etc. Again another great reason to speak to a mortgage broker to go through a budget with you.
Insurance: If you are putting a down payment of 20% or less down on the deal then the banks are going to get your mortgage insured which will add up to 2.95% to your mortgage using a traditional down payment and 3.1% on a non-traditional down payment (cash back from lender for example). For example if you purchase for $100000 with a 5% down or $5000 then you will be signing and your payments will be based on a mortgage amount of $97802.50. The lenders use either CMHC, Genworth or Canada Guaranty.
So as stated above visit with a professional to discuss all your options first so you are comfortable with all before going out to find your new home. My services are free and I will take the time to explain and answer any questions you may have. This is too important of decision to make blind. The process is easy BUT it is also one of the most important decisions you will make so ensure you are educated first.
As always comments accepted and encouraged.