Home Buyers’ Essentials | What You Need to Know to Secure Financing
Tags: Home Buying
Before beginning your new home search, we recommend evaluating your financial situation, confirming your budget, familiarizing yourself with mortgage options, and securing pre-approval from your preferred lender. This process will help you search with confidence and be able to negotiate your desired property effectively.
Receive a free comprehensive guide on buying a home by downloading our Home Buyers’ Guide. For additional advice on real estate buying, investing or selling, discover the many real estate tips provided on our blog.
Establish Your Budget
Typically, total monthly housing costs for a home you live in (including mortgage payments, taxes, maintenance fees, insurances, interest charges and utilities) should not exceed 32% of your gross monthly household income. Professional financial advisors also suggest that total monthly debt, including mortgage payments, car payments, and credit cards, should not exceed 40% of your gross monthly income.
If you have plans to purchase a real estate investment property, we recommend you consult your real estate and financial advisor to ensure that you understand both the tax and financial implications of your investment.
Confirm Down Payment
You will need to purchase mortgage loan insurance if your down payment amount is less than 20% of the total property purchase price. It’s important that loan insurance guarantees the debt against default. In most cases, this is combined with the mortgage loan.
Check Your Credit Rating
Your credit report is an important piece in your mortgage approval process and in calculating the interest rate (and other loan terms) that a lender can offer you. Before you meet with a potential lender, it’s a good idea to check your credit rating so you have time to resolve any potential issues. Contact Equifax Credit Information Services Canada at 1-800-465-7166 or Trans Union of Canada at 1-800-663-9980 for more information.
Understand Mortgage Basics
Mortgage interest rates can be fixed, variable or adjustable.
Fixed Mortgage Interest Rate is a locked-in rate that will not change for the entire term of the mortgage agreement.
A Variable mortgage interest rate can fluctuate depending on market conditions while the mortgage payment itself remains unchanged.
An adjustable mortgage interest rate means that both the interest rate and the mortgage payment can change based on market conditions.
Open or Closed Mortgage
With a closed mortgage, your loan cannot be paid off, in whole or in part, before the end of its term. This is a good option if you prefer a fixed monthly payment that allows you to better predict your expenses. A closed mortgage also allows you to lock in current interest rates, giving peace of mind knowing payments won’t be increasing for the long term. Restrictions and penalties can occur if you pay an additional amount – making this potentially a poor choice if a decrease in interest rates is anticipated or if you decide to move before the end of the term.
Open mortgages are flexible, you can pay off part of it or the entire amount at any time without restrictions or penalties. This may be a good choice if you plan to move before the end of the term or if you intend to pay off a large portion of your loan.
It’s important to note that most lenders will allow open mortgages to be converted to a closed mortgage at any time, often for a small fee.
Amortization is the length of time the loan term is agreed upon. Most mortgages are amortized over 25 years or longer. The longer the agreement, the lower your scheduled mortgage payments typically are but the interest payments are more in the long run.
Conventional Vs. High Ration Mortgages
If a mortgage loan is equal to, or less than 80% of the lending value of the property, it is considered a conventional mortgage. The lending value is the property’s market value or purchase price – whichever is less. The down payment for a conventional mortgage is typically 20% of the property’s market value or purchase price.
High Ratio Mortgage
If your down payment is less than 20% of the home price, you would generally need a high-ratio mortgage. This usually requires mortgage loan insurance. Your lender may include the mortgage loan insurance with your mortgage or ask you to pay it in full at closing.
Mortgage term refers to the length of time that the mortgage contract conditions are agreed upon. This includes interest rates. Because there are several term options for a mortgage, it’s very important to weigh the pros and cons of each. A longer term may protect you from interest rate increases but also could prevent you from benefiting from decreases in interest rates in the future.
Optimizing Your Mortgage
A lender can help you optimize your mortgage payment schedules in a way that works best for your unique situation. Many homeowners aim to pay off their mortgages as quickly as possible. Your mortgage can be structured in a way that allows increases in payments and annual anniversary lump sum payments. If your real estate purchase is solely for investment purposes, other considerations, like tax implications, come into play. It’s important you consult your real estate and financial advisor for guidance.
Get Written Pre-Approval
When there is high demand in your preferred real estate market, written pre-approval is essential and will give you that competitive edge when attempting to secure a new home. Often when a seller is presented with two competing offers, they will choose the buyer with financial approval.
Once you have evaluated your finances, determined your budget, learned the basics of mortgage options and secured a lender’s pre-approval, you will be well on your way to securing your dream property purchase.