Diving into the world of home ownership can be tricky. You have to think about location, style of home, school districts, and, of course, mortgage financing. Just looking at all of the options available, it can be overwhelming and time-consuming. How do you know if you have guaranteed mortgage financing or if you qualify for special mortgage financing? There seems to be as many options for getting your home loan as there are houses themselves. Don’t worry; this guide will answer all of your questions about home mortgage financing, so you can get back to worrying about flooring types and the number of rooms you need.
How Do I Even Know if I Can Afford a Mortgage?
The biggest thing that stops most people from even starting to look for a home is simply not thinking they can afford it. One way to check is to use a mortgage financing calculator. You can input all sorts of variables to help you determine if you can buy a house. You can choose the type of mortgage, how much of a down payment you have, and the price range of the houses you like. From there, the calculator will produce an estimate of what you can expect your monthly payment to be. The numbers in the calculator can vary slightly from what you will end up paying, but it does give you a jumping off point.
Along with the calculator, you can also take a look at your finances to determine if you’ll be approved for a home loan. First, take a look at how much money you have saved for the down payment. If you have a sizable down payment, your monthly rates will go way, way down. After that, lenders are going to want to take a look at your income and other expenses. When getting your home loan, banks usually will want you to allocate no more than 32% of your income toward things like a car loan, credit cards, or other expenses.
Also, even if you think you have bad credit or don’t qualify for a loan, you just may be able to get second chance mortgage financing. Many banks and lenders want to see people in houses, so they are a little more willing to work with you now than they may have been several years ago.
What Are The Different Type of Home Loan Options Available?
Canadians have several financing options when it comes to their mortgage, and it can be confusing trying to decide which one is right for you. Here is a rundown of the types of mortgages to help clear things up:
- Conventional – You will qualify for a conventional mortgage if you are able to put a 20% down payment on the house. This is considered to be “low risk” or “low ratio” by the bank, meaning they are relatively certain you will be able to pay the rest of the mortgage back.
- High Ratio – A high ratio mortgage is what you get if you cannot put 20% down on the house. With this type of mortgage, you also must get mortgage protection insurance, which is an extra guarantee to the bank or lender that they will get their money back.
- Closed Mortgage – All this means is that the terms are set in stone and cannot be changed except in certain, spelled out circumstances. This means you cannot refinance nor can you pay off your home loan early without penalty.
- Open Mortgage – An open mortgage typically allows you some flexibility in regards to the term of your loan, but it comes at a slightly higher rate. With an open mortgage, you can refinance, renegotiate your terms, or even pay off the loan early with no monetary penalty.
- Variable Rate Mortgage – A variable rate mortgage (VRM) means the bank/lender can look at the terms of your mortgage and adjust the rates according to current market trends. This means that you probably will not get the rate you negotiated for the entire length of your mortgage. It is possible for your payments; however, it is more likely that they will go up over the life of your loan.
- Fixed-Rate Mortgage – A fixed-rate mortgage simply means that the terms you set when you sign on the dotted line are the terms that you will have throughout the entire mortgage. They cannot be changed, either way, by the lender.
Mortgage Insurance? What’s That?
In Canada, if you cannot meet the required 20% down payment, you are required by law to take out mortgage protection insurance. Don’t worry, though, as you go through the application process to take out a loan, the paperwork for the insurance will be included. It is usually a quick process with approval, in most cases, coming within the same business day.
The amount you will have to pay depends on how much you are asking to borrow, and you have a little bit of flexibility in how you pay it. If you want to and are able to, you can choose to simply pay the insurance premium upfront and get it out of the way. Most people, however, choose to roll it into their monthly mortgage payment.
The good thing about the mortgage insurance is that it stays with you, even if you decide to leave your current home. Therefore, you won’t have to worry about paying the premium ever again. Also, sometimes the insurance companies will work with you on a move to determine if your rates are eligible to go down.
Do I Need Financing Before I Begin My House Hunt?
No. You do not need to have your financing in place before starting to look for houses. There is no rule in place to stop you from house hunting whenever you wish.
That being said, the process will go a lot smoother if you do have your financing in place first. Once you secure financing, you are considered to be pre-approved, which is great in the eyes of realtors and homeowners. By getting pre-approved , t shows them that you are serious about buying a home and not just looking for the heck of it. Also, it will help you narrow down your search. If you were looking at $500,000 homes, and only get approved for $300,000, you can then tweak your needs and look at houses accordingly. When you are pre-approved, it also saves you time after you find a home. Once you find the perfect house for you or your family, you know the money is there waiting for you, and you are free to put in an offer. If you try to go in without getting the financing first, you are going to have to wait for the answer to come back from a lender, thus gambling that the house will no longer be there when you are ready.
I Have a Unique Circumstance, Will I Still be Eligible for a Home Loan?
Yes, you will! Canada is great in that they have lots of home loan options available to people who have a unique or special circumstance. For example, if you have bad or no credit, you may be eligible for a second chance mortgage. Lots of lenders and banks are willing to work with people these days in order to get them into the home they want.
If you are disabled, you could qualify for the Home Buyers’ plan, which lets you take money out of your retirement account and put it toward a house. First-time home buyers also get a tax rebate when purchasing their house.
In short, no matter what your situation is, you might just qualify for one of the less traditional types of mortgage, or for some kind of credit on your taxes. Be sure to talk to your lender or broker about these options.
Are There Any Other Costs I Need to Think About When Looking For a Home?
Absolutely. The purchase price of a home is merely the starting point. There are many other things you need to take into consideration when looking for that perfect house. For example, as you look around, note the appliances. Are they all there and in working order? Do the current residents plan to take them when they go? The cost of appliances can add up quickly, so be sure to do your due diligence.
In addition, you need to think about surveys, appraisals, and inspections. They are all usually required to be paid for by the potential buyer. Sometimes the insurance company will require any or all of these to be done before they will agree to a closing price. The survey will tell you the amount of property you will get, the appraisal is simply how much the house is worth, and the inspection will tell you of any major problems or construction issues that you may need to know.
Some areas of Canada also require a water certification or a land transfer tax. If the water in your new home is not going to be hooked up to the public services, often the lender will require the water to be tested to make sure it is not hazardous. In addition, some Canadian provinces require a land transfer tax, basically passing ownership of the land from one person to another. Often, this will just be rolled into your mortgage.
Finally, moving costs and home maintenance expenses need to be considered. Are you going to hire movers or rent a truck and do it yourself? Is the house move-in ready or do you need to paint or fix anything before you arrive? All of these costs can add up and should be taken into account.
I Found A House! Yay! What Kind of Terms Will Be On My Mortgage?
Great question! When you sit down to discuss the terms of your mortgage, the first thing you will decide is the principal. The principal is simply the outright purchase price of the home. This will be negotiated between your realtor and the seller’s.
The next thing you will see is your interest rate. Basically, this is how much the lender will be paid back for giving you the money in the first place. When you pay your monthly mortgage payment, the interest is already calculated into that amount. As discussed above, several factors will depend on what interest rate you get, including type of mortgage, size of down payment, and if you are considered to be high-risk.
After that, you’ll see the dates associated with your mortgage:
- Amortization Period – This is simply the number of years you will have your mortgage by paying the monthly rate. In Canada, the most common lengths of mortgages are 25years for insured high ratio mortgages and 30 years for conventional mortgages.
- Term – This is this contract period, effectively the length of time your current mortgage lender has to guarantee the rate you have or the discount to posted (if you have a variable mortgage). Most lenders offer terms from 6 months to 10 years.
- Maturity Date – This is the date at the end of your term. At the maturity date, you are open to do anything you wish with your mortgage. You can renew with your existing lender. You can pay off the mortgage in full without penalty. You can also transfer the mortgage to another lender. Effectively, you can refinance, pay off, or renegotiate the terms of your mortgage without any fear of penalty.
Finally, the last thing you will see on your mortgage documents are the options you pick. Things like the type of mortgage (specified above) and other optional terms will be listed here.
All Right, How Do I Get Mortgage Financing?
Choosing your lender is a very important step in the process, as you could be working with this person/company for the length of your mortgage. It needs to be someone you can work with easily who will help you through the process of getting a home loan without simply looking at their bottom line. That being said, there are a couple of ways that you can approach getting a home loan.
The first is to simply approach the banks yourself. You can go and talk to the different banks and see what they have to offer you in terms of the types of mortgages available for you, what you qualify for, and what the interest rate will be. Make sure you do your due diligence because bank rates can vary wildly, so it’s important to make sure that you are getting the absolute best rate. You can also go through a private lender. Again, this will require you to call around to get the best interest rate for the money you wish to borrow.
Alternatively, you can work with a mortgage broker, who will do all of that work for you. A broker will contact all of the lenders and get you the absolute best rate. And, even better, it will probably be a better rate than you would be able to work out on your own, simply because they have the expertise and the experience necessary to navigate these tricky waters. Best of all, mortgage brokers typically get a commission from the lender, so you won’t have to pay a dime.
So, when you’re ready to take the plunge and purchase your home, be sure to contact Steven Crews at www.mymortgagebrokercalgary.com or by calling/texting 403-870-2669. He can answer any or all of your questions and get you the best rates in the business.