There’s usually a difference between what you think you can afford and what a lender thanks you can afford. Lenders use two formulas to figure out how large a mortgage you can qualify for. Basically they add the monthly mortgage payment, property taxes, heat, 50 percent of the condo fees if applicable and divide the total by your pre-tax monthly income. If the result is less than .32 then your Gross Debt Service Ratio is fine.
They then determine your Total Debt Service Ratio by adding all the expenses listed above plus your monthly obligations for outstanding loans like car loans, credit card balances, etc. and divide that figure by your pre-tax monthly income. If the result is less than .40 then your Total Debt Service Ratio is fine. There is some leeway on these numbers depending on the lender, your credit score and whether the mortgage is insured or not.
A pre-approval is a less in-depth mortgage application that determines whether you can qualify for a mortgage and how large a mortgage you can get. During the pre-application process you’ll receive a guaranteed interest rate for up to 120 days. This lets you go house shopping, knowing what you can afford and without having to worry about interest rates increasing.
A good mortgage broker will underwrite the application to make sure there are no mortgage-application surprises that will prevent you from buying the home you fall in love with.
Down payments generally need to be five per cent of the purchase price plus 1.5 percent for closing costs. It is possible to get a mortgage with no money down however there are very special conditions that must be met.
Banks will want to see a 90-day history of your down payment. If it is coming from selling an asset like stocks they will likely want to see the paper trail. If the money is a gift from parents or another family member you must have a gift letter. Be prepared to show the money transfer.
It is possible to take money from RRSP for down payment. The maximum is $25,000 per applicant and must be repaid to your RRSP over 15 years or there are tax consequences.
It is possible to borrow your down payment from an unsecured line of credit but you have to be able to debt service the loan, the mortgage and your other monthly obligations.
The federal government requires homeowners who put less than 20 percent down for a down payment to have mortgage default insurance. This is often referred to as CMHC insurance although there are three companies in Canada that offer mortgage default insurance. The amount of the premium depends on the size of your down payment. The smaller the down payment, the larger the percentage the insurer will charge. The percentage is then multiplied by the amount of the mortgage. The premium is usually added to the mortgage total but can also be paid up front.
If your down payment is less than 20 percent of the value of the home you must have mortgage default insurance. There are some other situations that require default insurance however I will advise you if it applies to you.
A high ratio mortgage is any mortgage where the amount you are borrowing is greater than 80 percent of the value of the home. If you have a high ratio mortgage you will need mortgage default insurance.
A conventional mortgage is any mortgage where the amount you are borrowing is 80 percent or less than the value of the home.
An experienced mortgage associate is a critically important part of your team of real estate professionals. A good mortgage associate can help you save thousands of dollars in home ownership costs and guide you to mortgage freedom sooner. The right mortgage associate can mean the difference between your application getting approved or being declined by a lender.
A mortgage and the ongoing payments are major financial obligations. Sometimes bad things happen in life and you need to protect yourself, your family and your obligations against death or accidents. You definitely should consider getting insurance however you are not obligated to have mortgage life and disability insurance in order to have a mortgage. There are many types of insurance available and each has features and options that may or may not meet your needs.
If you have good credit, good income and your application is straight forward there shouldn’t be any out-of-pocket cost for using a mortgage associate as the associate will be paid by the mortgage lender.
If you need to use a private lender because of poor credit or other issues, then you will be charged a fee because the lender will not pay the mortgage associate. The fee is negotiated upfront and typically depends on the size of the mortgage.
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Making accelerated bi-weekly mortgage payments will knock years off your mortgage. Do you know how if you get paid every two weeks there’s a couple of months per year when you get three pay cheques? Well the same thing happens with your mortgage. That means you’ll make 26 payments per year and the two extra payments will be applied to your balance. Do that for over the long term and you’ll save a ton of money in interest.
There’s no doubt a bankruptcy is a major financial set back. The bankruptcy will stay on your credit bureau for seven years but you don’t have to wait that long to get a mortgage. You’ll have to be discharged from bankruptcy. Many lenders want to see that you’ve re-established credit by having two trade lines (a car loan and a credit card, for example) for two years. Some lenders will let you be discharged from bankruptcy for one day, however they will want to see a significant down payment.
The end of a relationship is a stressful time. Some of the major stresses include figuring out where you’ll live and who will end up with the house and paying support. In order to get a mortgage you’ll need a separation agreement or a divorce agreement outlining who will pay and who will receive child and spousal support. The person who is receiving support will get credit for it to help them qualify for a mortgage. The person who is paying support must be able to debt service the payments, just like they would for a car payment or any other monthly debt payment.
It’s possible to get renovation money to help you fix up an older home and put your own stamp on it. Under a program called purchase plus improvements, the bank will lend you renovation money. During the application process, you’ll need to get quotes for the work and pay for the renovations up front. Once the renovations are confirmed as having been completed, the bank will advance the extra mortgage funds.