When buying a home, we always recommend that you make the offer conditional on financing. Too many times we have seen clients make firm offers (i.e. no conditions) to try to be more competitive only to lose their deposit because something came up that prevented them from receiving final financing approval. If we are confident with your situation, then we can mitigate the risk of a firm offer. But there are times when the final decision is unpredictable, for example when the mortgage is insured by CMHC. If they don't like the property for some reason (the location, the water supply, the size etc.) it is a government agency that can be fickle!
Pre-approvals are useful. They give the client some confidence when shopping for a home. Some pre-approvals are better than others but none are guarantees! A pre-approval is generally a very superficial check that you will be conditionally approved when the time comes to purchase. Chose a seasoned broker who will do his due diligence and give you more confidence when making an offer on a purchase. We dig deeper so that the pre-approval has more meaning.
5 Things to Know When Shopping for a Home
Many people believe that not having any credit cards or loans translates to good credit. They believe that that since they don't use any credit facility, it means that they have never been in a position to miss a payment and therefore, they must have good credit. This is completely false! If you want a good credit score, you need to use it, pay it on time, keep your balances at less than 75% of their limits at any given time and minimize the number of credit checks that are done on you. For more information on this topic, please check out this article: http://www.robertfloris.com/four-simple-tricks-to-improve-your-credit/
If you have a previous bankruptcy, you can usually still get a mortgage depending on the circumstances of the bankruptcy, what was involved and how long ago it happened. But whatever you do, NEVER EVER miss or be late on a mortgage payment and NEVER (if possible) include a mortgage in a bankruptcy. You will be blacklisted!
Before a lender will qualify you for a mortgage, it will check to see if you can AFFORD one first. You might think they are looking out for your best interest, but actually they are following the law and they are looking out for themselves to make sure they get paid. :-)
What do they factor in when making this decision? Most of your monthly payments (I say MOST because some things are not factored in that in my opinion should be - like child care!):
mortgage payments (principle & interest)
heating costs (usually estimated at $125/mth)
all debts both secured (ex. home equity line of credit) and unsecured (ex. credit cards)
any alimony/child support payments
The ideal scenario for income is somebody who is a salaried or hourly (with guaranteed hours) full time employee who has been working at the same company for a considerable amount of time (ideally 3 years) and has passed any probationary period. Unfortunately in today's society, that scenario is rare. When qualifying for a mortgage, other types of income can be used depending on the lender:
part time hours if your can show a 2 year history of stability
self-employed - again, supported with a 2 year history and documentation
pensions or RIFs
When it's not a clear cut case, again, it is important to consult with an experienced broker who can structure the deal for the bank in such a way that you will qualify. Or, in some cases advise against borrowing. The broker should not let you overextend yourself. In our office we believe in quality of life, family first and pay yourself first.
Assets include things like bank savings, investments, RRSPs etc. But they also include things like the value of the property or properties owned, vehicles, trailers etc. Some of the assets cannot be used towards a downpayment or towards closing costs, but some lenders consider your net worth.
There are many different factors that are taken into consideration when determining if you qualify for a mortgage or not. The threshold for qualifying changes depending on your credit score, they type of property, the size of your down payment, the lender, the length of the amortization etc. But a general rule of thumb that can give you some indication are the ratios 39/44.
Step 1: Add up your monthly income. Some sources can't be used (like child tax benefit). See income section above.
Step 2: Add up your monthly (proposed) mortgage payments (principle & interest), monthly property taxes and monthly heat (use $125). That gives you PITH (principle, interest, taxes, heat).
Step 3: Divide the value in step one by the value in step 2. (Monthly Income/ Monthly PITH). The "magic" number is 0.39. You want to stay below this threshold.
Step 4: Add up all of your monthly debt payments. If you have unsecured debt, you can't use the minimum payment. You need to use 3% of the balance of each one and divide that by 12 to get the monthly amount. This is why unsecured debt weighs so heavily on your ability to qualify.
Step 5: Add the value in step 4 to the value in step 2 (monthly debt + PITH). Divide that into your monthly income. The magic number is 0.44. You want to stay below that threshold.
Home Loan Process Fees
If you are purchasing a home, ideally you want to have 20% down. The reason is that the qualification criteria are less strict with 20% down and the government doesn't mandate that you buy insurance. If you put less than 20% down, an insurance premium will be added to your mortgage AND they will also charge you HST on that insurance premium that will need to be paid up front. You can put as little as 5% down on a home but the less you put down, the higher the insurance premium.
Closing costs include things like lawyer fees and land transfer tax. Generally lenders ask you to show that you have 1.5% of the purchase price of the home available in your savings to cover the closing costs. First time homebuyers have the added benefit of avoiding the land transfer tax. If you are refinancing your home, some lenders will cover the appraisal, existing lender fees and legal fees as an incentive to win your business!
There are mainly 3 type of insurance to consider when getting a mortgage: life/disability insurance, home/fire insurance and mortgage loan insurance.
It is mandated by the government that you will be offered life and disability mortgage insurance when signing up for the mortgage. It is important to discuss this with an experienced broker before accepting or waiving this type of insurance. You do not want to be over or under-insured AND you want to make sure it is the right product for you since you might be able to get superior product elsewhere. Beware the sales job!!! Mortgage insurance covers the balance of the mortgage if something happens to you.
All lenders will require you to have home/fire insurance on the property on which they are lending. They will also require that they are listed as the primary beneficiary. The reason is that they own (a portion) of the home in fact so if God forbid it burns down, they need to make sure the insurance pays them first.
A mortgage loan insurance premium will be added to your mortgage if you put less than 20% down on the home. This is mandated by the government to mitigate any risk to the bank.
Sometimes appraisals are required for purchases and/or refinances. It really depends on the circumstances. Generally if a home is being purchased and there is an MLS listing, an appraisal is usually not required (unless the lender has some doubt about the value for some reason). If it is a private sale, they will almost always require an appraisal. Sometimes appraisals are covered by lender. Sometimes appraisals only require a check on the computer (less expensive), others require only a drive-by and still others require a full entering of the home and inspection of all parts with pictures. Some mortgage brokers will cover the cost of the appraisal again, depending on the circumstances. Generally if you put less than 20% down on home purchase, the appraisal is essentially included in your government mandated insurance premium.
Some lenders will require you to choose a real estate lawyer. We have lawyers that we trust and recommend but we would never presume to sway the client if they are already working with a lawyer. Every purchase or refinance requires a lawyer to be involved to officialize the people who own the property, the lender and the amount, to search the title for any defects etc. Some banks will use their own "internal" legal system to facilitate the transaction (ex. FNF or FCT) and this can be less costly than hiring an independent lawyer. The clients also generally have the option to use the same service to save some money on legal/closing costs by using the same service. But there is a catch: when using these "discount legal services" the client generally needs to provide extra documentation AND the process tends to take a little longer.
Mortgage Education and Advice in a Stress-Free Environment
651 Fennell Avenue E, Hamilton, Ontario
905-574-9200 Ext. 215