Step 1 – Make Financial Decisions
Unless you have cash sitting around to purchase a home outright, you will have to sit down and make some financial decisions.
In this section you’ll learn the following:
- Tips on how to select a lender
- Prepare to see a mortgage specialist
- Learn the difference between being pre-qualified vs. pre-approved
- Types of mortgages available
Select a Lender:
A lender can be a major bank or an independent broker; regardless, shopping around for a lender is not what it used to be. Thanks to competition and the fact that all the major lenders are fighting for your business, rates between lenders no longer vary as much as they used to.
Your relationship with the mortgage provider is key, especially for first-time home buyers. You want to make sure the lender you choose is looking to set up a long-term relationship and not just looking at you as a transaction, a one-time deal. The best rate should not be the sole reason to select a particular lender over another, as you may not get the service you require and that could cause you hardship in the long run.Here are some things to think about:
- Find a mortgage broker that is willing to sit down with you face-to-face
- Ensure their communication style works for you
- Can answer your questions and make you feel confident about your mortgage decisions
- Their responses are timely and efficient
- You may have questions after your home purchase has been completed – will the specialist be accessible to you after the initial transaction?
Preparing to see a Mortgage Specialist
It’s always good to be prepared before going into your first visit with a mortgage specialist. Here is a checklist to help the specialist understand your financial situation in order to pre-qualify you for a mortgage.
- An idea of your credit score and history
- The amount of all, if any, outstanding debts
- Down payment amount
- The price range you are looking in (the minimum and maximum amount you want to spend)
If you are unsure of your financial state, then not to worry, a good mortgage specialist will be willing to work through the details with you.
Pre-qualification vs. Pre-approval
One of the first things a mortgage specialist will do is calculate how much of a mortgage you may qualify for. This is determined by:
- Your income
- Your down payment amount
- Your credit history
- Any outstanding debts
This is a great initial step that can kick off your home shopping fun but it doesn’t mean much in terms of actually getting the mortgage. What you will need to do is get a pre-approved mortgage in writing. Though contingent upon the final property purchased, a Pre-approval is written guarantee of the mortgage amount and the rate for up to 120 days. This means if the mortgage rate goes up within the 120 days, you are guaranteed to receive the original lower rate offered. Should the mortgage rate decrease within that 4 month period, the new lower rate is offered.
Having a mortgage pre-approval not only lets you know what you can afford according to the lender, it also tells you how your monthly payment will look like.
It can even give you an advantage over other buyers when bidding for the same home. How? Your realtor can present to the seller the fact that you are pre-approved to make the home purchase, which will indicate to the seller you are a serious buyer adding strength to your offer. Quite often we have seen sellers take a lower bid from a serious, pre-approved buyer as opposed to a higher bid with non-pre-approved buyers to avoid time delays or risk of the offer collapsing.To re-cap:
- A Pre-qualification may give you an idea of what amount mortgage you may get approved for but is not a guarantee
- A Pre-approved mortgage will be a written guarantee of the amount and rate that will give you the leverage you need to take the next step. Though this is dependent on the property up for purchase, a “soft” pre-approval may be given to help the buyers shop within the parameters outlined by the mortgage specialist.
Of course, pre-approval will require you to provide documents so the lender can assess your ability to pay back the mortgage.
So what are you waiting for? Get yourself a pre-approved mortgage and let the shopping begin!
Types of Mortgages
Just when you thought it was all figured out, you’re faced with more questions and decisions to make: what type of mortgage loan do you want? What amortization period do you prefer? Do you want a variable rate or fixed? And the list goes on…
Stop, take a breath… Let’s simplify these options together:
- There are two basic types of mortgage loans
- The first is a conventional loan which allows you to borrow up to 80% of the purchase price of the home – with you paying 20% down payment.
- The second is a high ratio mortgage loan that lets you borrow more than 80% of the purchase price but in these cases the lender requires the borrower to pay for mortgage insurance to protect itself in case the payments are not made. This is where Canada Mortgage and Housing Corporation (or commonly known as CMHC) comes in.
- The amortization period is the number of years that you have in order to pay the loan. This period is usually 20-25 years. The longer the period, the lower your monthly payments will be but be aware that keeping the amortization period as short as possible will reduce your cost of borrowing.
- Fixed Rate or Variable Rate: Interest rates fluctuate with the economy, and honestly the choice between one or the other may be more of a personal one – do you prefer the comfort of a steady fixed rate over the next 2,5 or 10 years? Or do you prefer the uncertainties of a changing variable rate, which may be lower now but has the potential to go up with time? Nothing is certain so it’s best to decide on what option works best for your finances considering both your short-term and long-term goals.
Many questions may come about as you go through the mortgage applications process but, with the guidance of the right mortgage specialist, you can arm yourself with the knowledge you need make the right financial decisions.