The following are some of the
more common questions that prospective purchasers pose to their brokers when
considering buying a new home. The more
questions you ask, the more comfortable you will be with the process. At Signature Service Financial, we are
committed to answering all of your questions and concerns about the buying
process and giving the information you need to help make decisions that are
right for you.
Answers
How much can I afford to pay for a home?
To determine affordability, you will need to know your gross
income, as well as the amount of any outstanding debt and the monthly payments
required to service that debt.
To purchase a principal residence, you can use 32% of your gross
income for housing cost. Those costs
include principal and interest costs of the mortgage, property taxes and
heating costs. If you are buying a
condo, half of the monthly condo fee is also included in the housing costs
calculation.
The second step requires calculating 40% of your gross
income and deducting the monthly payments of any outstanding debt. Monthly payments would include personal,
vehicle and student loans as well as minimum required payments on lines of
credit and credit card balances. The
lesser of the two calculations is the amount lenders will allow when
determining what amount can be used for housing costs.
Be sure to consider your own lifestyle and spending when
making your decision on how of your income to allot for housing costs. Your comfort level with the financial
component of home ownership is a key factor to enjoying your new home.
What is a Home Inspection? Should I have it done?
A home inspection is a visual examination of a house by a qualified professional to determine the overall condition and value of the home. When conducting a proper inspection, an authorized home inspector should check all the major components of the house such as the roof, ceilings, walls, and floors along with other systems such as the electrical connections, heating, plumbing and drainage and weather proofing. The inspector usually gives the results of the inspection in writing to the home owner within 24 hours of the inspection.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to clear a majority of the doubts that you might have when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision by removing most of your doubts.
What is a Down Payment?
Few of us are able to purchase a home outright and will look
to a financial institution for a mortgage.
However, even with a mortgage, you will require a down payment.
The down payment is the portion of the purchase you furnish
and represents your equity position in the property. The amount you can supply for a down payment
should be determined well before you begin the home search process.
The larger the down payment the less you will pay in
interest costs over the life of the mortgage.
A higher down payment, if available, can add up to significant savings
over the life of the mortgage.
What is the minimum down payment that you need to make when purchasing a home on a mortgage?
In most cases, you will need to pay a minimum of 5% of the house value as a down payment. In addition to the down payment, you must also be able to show that you have the capacity to cover other closing costs such as the legal fees and disbursements, appraisal fees and a survey certificate.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. This cannot be a borrowed amount. Several programs are available in the market that allow some alternate sources of down payment. The CMHC is one organization offering such programs. Certain lenders also accept gift money from a family member or friend as a down payment. However, such a sum needs a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 20% of the total value, a loan insurance from either the CMHC. Genworth or AIG is required.
Can a Family Gift be used as a Down Payment?
Most lenders will use a down payment that has
been gifted by a family member. The
normal lender requirement is to have the donor sign a gift letter that warrants
the funds are indeed a gift and not subject to repayment. This is a very common program taken advantage
of by first time buyers whose parents are giving them assistance to get into
the housing market.
Mortgage Loan Insurance - What is it?
Mortgage loan insurance is required on any
mortgage with less than 20% down payment.
There are three insurers active in Canada – CMHC (Canada Mortgage and
Housing Corporation) which is a crown corporation, Glenworth and AIG which are
private counterparts. Although there are
some minor differences in philosophy, the premium structure is the same with
all three insurers. The costs of the
insurance can be added to the total mortgage is not required out of pocket up
front. The requirement of this insurance
is not mandated by the lenders but by the federal regulatory body governing
financial institutions. The purpose is
to make sure that financial institutions are not taking undue risk with their
mortgage portfolios which could lead bank failure. This insurance is totally separate are any
insurance coverage that you put in place to protect your equity – life
insurance, fire insurance etc.
How Can an RRSP Portfolio be used to assist in
the Home Purchase Process?
RRSP’s are a very common source of down payment for home
buyers. Each applicant on title can
withdraw up to a maximum of $25,000 from their RRSP account to be used toward
the purchase of their home. To be
eligible for the program you must not have owned a home in the last 5 years. Access to RRSP funds without a tax
implication is only available one time.
You must repay your RRSP account within 15 years of the home purchase
withdrawal. In any given year, if you
not make the required contribution to an RRSP account it will be added to your
taxable income. The first two years after
the withdrawal is made do not require repayment.
To qualify for withdrawal under the home buyers plan the
funds must have been in the RRSP account for a minimum of 90days. If you have saved enough for your down
payment it may be of benefit to deposit to an RRSP account and then withdraw
after the 90 day period under the Home Ownership Plan and receive taxable
benefit on the down payment amount assuming you have the contribution room.
While the use of your
RRSP savings may help to get into home ownership sooner there are other factors
to consider. It can mean that you will
miss out on some tax sheltered growth on your savings. Be sure to seek the advice of a financial
planner to make sure this strategy makes sense for your personal financial
situation.
What is a Conventional Mortgage?
A conventional mortgage is one in which the down payment amount is equal to more than 20% of the purchase price (or where the loan value is less than 80%). Such a mortgage normally does not require mortgage loan insurance.
What is a High-Rate Mortgage?
A mortgage which is greater than 80% of the purchase price or appraisal, whichever is less, is known as a High-Ratio mortgage. A High-Ratio Mortgage requires mortgage loan insurance. Premiums for a mortgage loan insurance can range from 0.5% to 3.15%, depending on the value of the mortgage.
What is a pre-approved mortgage? What is the benefit of getting pre-approved?
A pre-approved mortgage is one that provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 90 days) and for a set amount of money. The pre-approval is calculated on the basis of information provided by the borrower and is subject to certain conditions being fulfilled before the mortgage if finalized. These conditions usually include factors such as a written confirmation of employment and income among other things. Many brokers prefer it when their clients have a pre-approved mortgage as this gives a clear idea of the affordable price range when hunting for a new home.
The benefits of getting a pre-approved mortgage are many. First of all, pre-approval gives you an idea of what you can afford, making your search for a new home much simpler. It also does away with the tension of trying to find out what your monthly installments are going to be. Probably the greatest advantage of getting a pre-approved loan is that it allows you to lock in a rate. As the lender guarantees a fixed rate when pre-approving the mortgage, the borrower can secure that same rate even when the market prices climb up. In case a situation arises where the interest rates fall below those that were pre-approved, the lenders usually offer the lower rate.
Can I qualify for a mortgage if I have been declared bankrupt?
Some lenders may consider you eligible for a mortgage even though you have faced bankruptcy. However, this decision may vary from lender to lender and will greatly depend on the circumstances surrounding the bankruptcy. Certain measures can be taken by the prospective borrowers to improve their credit rating. Approach your mortgage broker for details.
What is the documentation required to obtain a mortgage?
To make your mortgage application process as simple and lucid as possible, it is advisable that you collect all these documents beforehand so as to avoid any interruptions later.
- Personal information and identification such as your drivers license or passport.
- Job details, including confirmation and proof of income.
- Your sources of income.
- Proof of financial assets.
- Information and details of all your bank accounts, loans and other debts.
- Source and amount of down payment.
- Proof of source of funds for the closing costs (usually about 1.5% of purchase price)
How will child support and alimony affect my mortgage qualification?
If you are paying child support and alimony to another person, generally the amount paid out is deducted from your total income before determining the mortgage amount that you would qualify for.
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for. However, you will be required to produce a regular receipt for the same for a set time period as specified by the lender.
What is the difference between a fixed rate mortgage and a variable rate mortgage?
In a fixed rate mortgage, the interest rate is pre-determined at the beginning of the loan term, which can be range from 6 months to 10 years. The advantage of this type of mortgage is that it offers a security of knowing your monthly payments beforehand and allows you to plan accordingly.
In a variable or floating rate mortgage, the payments are fixed for a period of one or two years but the interest rates can fluctuate every month depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime-lending rate.
What are Closing Costs?
Closing costs are required in every mortgage
transaction. For high ratio mortgage
(over 80% loan to value of the purchase price) insurers confirm that you have
l.5% of the purchase available for these costs.
For a conventional the lender will also confirm that closing costs are
available but may not be as stringent on the l.5% of purchase price. Some of the things included in closing costs
are as follows: legal fees and
disbursements, tax adjustments, title insurance if required and fire
insurance. This list is the more common
elements of closing costs but not meant to be inclusive of all costs that may
occur with your real estate deal.
What are the Differences Between
Prequalification, Preapproval and Mortgage Commitment?
It is important when you starting your home
search that you talk to a professional to determine a realistic price range to
be looking in and to be aware of the difference in the above three terms.
Prequalification
Prequalification will let you know the price
range you can search in for your new home.
It is the initial step in the process.
A mortgage professional will assist you in determining the amount of
mortgage you qualify for determined by your income and also whatever financial
obligations you may have. This does not
mean that you are preapproved. It is
meant as a tool to help you to confine your home search to an appropriate price
range. This step will help to avoid
disappointment by looking at properties that may be outside your financial
capability. It can also work in the
opposite direction by showing that you can afford more than you anticipated to
service a mortgage.
Preapproval
Preapproval is a firmer commitment based on a
more detailed investigation of your financial situation as well as your history
of handling any credit obligations. It
is very important to be very candid when meeting with your mortgage
professional about your financial situation.
Without full disclosure about your financial situation, the broker could
be arriving at unrealistic and inaccurate numbers and ratios in relation to
what you can afford for housing.
Often being preapproved will give you some
leverage with the seller. They know that
you have done your homework and are ready to purchase. Also it is important to realtors that their
clients are preapproved. They want to
know that there is chance to close a deal in the price range you are looking at
and that you have talked to a financial professional about the financial
details. All information given to a
mortgage professional will require verification so again full disclosure is
very important for the process to be meaningful.
Mortgage Commitment
A mortgage commitment is a letter issued by a lender that
states the details of the mortgage that they are willing to fund for you. It covers the interest rate and the terms of
the mortgage. The other component is
that the home you buying meet the guidelines of the lender. The letter may state that the commitment is
subject to the appraisal of the home meeting the lending criteria – value,
square footage, type of heating and electrical etc.
The amount of a mortgage approval granted to you is based on
a number of different criteria.
Affordability, credit history, length of time of employment are all
considerations when lenders underwrite your file. However, only you know your lifestyle and how
much discretionary spending you are used to having access to. It is important for you to leave a cushion for
unforeseen expenses such repairs to the home or unexpected high utility bills
etc. It is also important if you are
making an adjustment to your financial obligations each month that you take
some time to consider the changes and formulate a household budget to make the
process of adjustment easier to accomplish.
Once you have committed to taking out the
mortgage to purchase your new home, be sure that you do not make any
significant changes to your financial situation like buying a new car etc or
you could be jeopardizing your home purchase.
The lender has given the approval based on the information that they
were given at the application stage and changes could cause them to reconsider
the decision and possibly keep you from getting the advance. If you are making a purchase that requires
any credit facility, be sure to speak to your broker to be sure that it will
not affect the mortgage advance.
What is Title Insurance?
A title insurance policy protects the purchaser
and lender against loss resulting from defects on the title of the
property. If any loss incurs as a result
of the title being anything other than what was represented the insurance will
cover that loss any legal costs that may be incurred. The uniqueness of title insurance is unlike
other forms of insurance it covers any risks of loss from events that have
happened in the past. If the insurer
finds that are defects or claims they are eliminated or exempted from the
coverage of the policy.
There is more information available on the Government Of Canada Website, please have a look at the following information:
First-Time Home Buyers Tax Credit
Home Buyers Plan
Energy Efficient Home CMHC Loan Insurance Refund Form