The Mortgage Process
How much can you afford?
When it comes to buying a home, the last thing you want to do is get in over your head. At Greg Kemp Real Estate, we can help you think through the real costs of home ownership-everything from redecorating, repairs and insurance, to suddenly needing a lawnmower.
When getting approval on your mortgage, your mortgage broker will consider your income as it relates to not only your home, but your other debts as well. Generally, they'll use two calculations to determine the maximum amount of financing you can afford.
Gross Debt Service (GDS) ratio
Your monthly housing costs should not exceed 30% of your gross monthly income. Included in housing costs are: monthly mortgage principal and interest payments, property taxes, hydro and heating, and (if applicable) condominium fees.
Total Debt Service (TDS) ratio
Your overall debt load (including housing costs and payments on car loans, credit cards, personal loans and lines of credit) shouldn't be more than 40% of your gross monthly income.
Pre-approval
Pre-approval makes shopping for a home easier. That's because you'll know exactly what your price range is before you go out looking. You'll know how much you can borrow, the interest rate, and your payments. You won't be obligated to make a purchase, but if you see something you like, you can quickly make a realistic offer. That can be a big advantage in a hot housing market.
Plus, your interest rate is guaranteed for 60 - 90 days, protecting you against rising rates.
Documents required for pre-approval
- Income confirmation
This can include a letter from your employer, T4 slips, financial statements, and Revenue Canada assessments.
- Down payment confirmation
Your down payment can include saved funds on deposit with your financial institution, RRSPs, a gift from an immediate family member, and/or equity from the sale of another property.
- Credit application
This will provide us in assessing your mortgage request and your net worth. It also authorizes us to do a credit bureau check.
- Credit confirmation
We'll need to do a credit investigation and confirm that your credit rating is satisfactory for lending purposes.
How much of a down payment do you have?
The larger your down payment is, the smaller your mortgage will be and the less interest you'll pay over the life of your mortgage. The size of your down payment will also determine the CMHC/GE Capital underwriting premium that you will need to pay.
A typical down payment is 25% of the purchase price (or appraised value) of the home. Save up this amount and you'll be eligible for a conventional mortgage. Using RRSPs for your downpayment is also an option.
If you don't have 25% saved, there are other options:
- High ratio mortgages
- CMHC or GE Capital O% down
High-ratio mortgages
If you don't have 25% as a down payment, you may apply for a high ratio mortgage. This type of financing requires you to obtain mortgage-underwriting insurance from Canada Mortgage and Housing Corporation (CMHC) or GE Capital.
Application fee
You pay an application fee upon disbursal of the mortgage to CMHC or GE Capital, this amount is added to your total mortgage.
Requirements
§ Your payments for principal, interest, property taxes, heating and, if applicable, condominium fees, should amount to no more than 30% of your gross monthly household income.
§ Your total debt ratio should be no more than 40% of your gross monthly household income (includes housing costs and debt such as car loans, credit card payments, personal loans and line-of-credit payments).
§ You must provide at least a 5% down payment. If you don't have this amount saved, you may use a personal loan, a loan from family or friends, or a line of credit to borrow funds. The source of the funds must not be tied or linked to the purchase or sale of the property. Note that if you decide to borrow for your down payment, you'll pay a higher insurance premium.
Using RRSPs for your down payment
Under the Home Buyers' Plan, first-time homebuyers can withdraw up to $20,000 tax free from their RRSPs (or $40,000 per couple) to finance a home purchase. These funds can be used for the down payment, closing costs or other expenses. Please visit the Government of Canada website for further details. Some conditions apply:
- You must have entered into a written agreement to buy or build a qualifying home.
- You must purchase your home by October 1 in the year following your RRSP withdrawal.
- All RRSP withdrawals must be in the same calendar year.
- To remain tax free, all funds must be repaid within 15 years. Repayments start in the second calendar year following the withdrawal and are not tax deductible.
- You must live in the home for at least one year after the date of purchase. There can be no more than two first-time buyers in the purchase of a new home.
Buy with 0% down
If you don't have RRSPs, and aren't able to borrow your down payment from other sources (family, friends, loans etc.), the CMHC or GE Capital no-money-down mortgage could be an option. A good credit history and a good cash flow is all you need.
Here are some other details to keep in mind:
- The mortgage is offered at a fixed rate only (minimum three-year term).
- The mortgage must be on your principal residence.
- You must provide 1.5% from your own resources for closing costs (including the deposit required at subject removal).
- You will need to obtain mortgage-underwriting insurance from Canada Mortgage and Housing Corporation(CMHC) or GE Capital and pay the current underwriting fees.
Although slightly more restrictive than other mortgages, the no-money-down option can be a great way to take advantage of current housing costs and current low interest rates.
What type of mortgage do you need?
There are several factors to consider when deciding on a mortgage.
Amortization period
The amortization period is the actual number of years it will take for you to repay the mortgage loan in full. The more time it takes to pay off a mortgage, the more interest you will end up paying.
Short term or long term
A term is the length of time your interest rate and other details in your mortgage agreement will be in effect. A term can range from a 6 months to 10 years, and you'll probably have several terms over the life of your mortgage. How long a term should you choose? That depends.
- Are you planning on moving again soon? If so, a shorter term may be appropriate.
- Are interest rates increasing or decreasing? If they're going down, you may want the option of renewing sooner.
Closed or open
A closed mortgage has limited pre-payment options. If you decide to refinance, renegotiate or pay out the mortgage before your term ends, a penalty applies. However, what you sacrifice in flexibility, you usually make up for on the interest rate.
An open mortgage can be repaid at any time during the term of the mortgage, but usually has a slightly higher interest rate than a closed term. If you're expecting to have a large influx of cash (in excess of the pre-payment allowance), or are thinking you may be moving again soon, an open mortgage may be a good choice.
Fixed rate or variable rate
With a fixed-rate mortgage, your payments are set in advance. You'll know exactly how much you'll owe at the end of the term, making budgeting easier.
A variable-rate mortgage fluctuates with the market and gives you the lower possible interest rate at all times. If interest rates go down, more of your payment is applied to reduce the principal. If rates go up, more of your payment goes toward paying the interest.
Finalizing your mortgage
Once your offer on a house is accepted, you'll need to provide:
- A T-4 slip/proof of salaried income
- Your social insurance number
- Your offer to purchase
- A copy of the real estate listing sheet (including a picture)
- A confirmation of your down payment
Once your mortgage is approved, you'll need to contact a Real Estate lawyer to prepare the necessary documentation, and once the documents have been signed, the lawyer will arrange registration of the mortgage and transfer the title to you.
Other costs
Mortgage underwriting insurance
This cost can be paid as a lump sum or added to your total mortgage amount.
Legal fees
You need to payyour lawyers professional fees.
Property Inspection fee
The last thing you want is expensive surprises. Consider having an independent professional inspect your home with a satisfactory inspection as a condition of your offer.
Prepaid taxes
You'll need to reimburse the seller for the property's expenses paid in advance (pro-rated).
If you would like further information on mortgages or assistance obtaining mortgage pre-approval please contact us. We look forward to hearing from you. |