STEP 1 Mortgage Pre-Approval - a Smart Move What is a mortgage pre-approval? A mortgage pre-approval is a conditional approval from the lender that a mortgage professional arranges for you, after reviewing your financial situation. Lenders require proof of:
1. Down Payment - how much money will you put down on the purchase of your home or condominium?
2. Income - What is your monthly income?
3. Credit - the lender must be confident that you will pay them back. Your credit history shows your ability to repay debt. Why get a pre-approved mortgage before you start to look? A pre-approval will… 1. save you time and reduce uncertainty as you will be able to let your realtor know what price range you can afford. 2. give you the edge and confidence when you are putting offers on homes in areas where buyers are actively competing for properties on the market. 3. provide you with a written confirmation or pre-approval certificate of how much you are eligible to borrow.
4. assure you of a particular mortgage rate -- for a specific period of time (e.g. 90-120 days). A "locked-in" rate means there is no risk of an interest rate increase while you are house hunting. A mortgage professional may be able to obtain a longer pre-approval rate hold (e.g. 120 days). Plus, if the rates drop, your rate changes to the new rate. I have expert tips for improving your credit rating if you do not qualify for a pre-approved mortgage from a lender.
What will affect your pre-approval?
1. Changing employment or doing anything that will reduce or affect your income. Examples include if you are in a probationary period at work or if you are currently on, or plan to be on, maternity or parental leave.
2. Applying for new credit cards or loans.
3. Entering into a "don't pay for a year" agreement.
4. Guaranteeing or co-signing a loan or mortgage for someone else.
5. Using any of your down payment money for other purposes.
6. Allowing your investments to slip below the amount you'll need to maintain your current financial position. 5 Tip: Be completely open regarding any current or past credit issues that may affect your pre-approval and your obtaining a mortgage.
STEP 2: What will it Really Cost? What are the potential costs? When buying a house or condominium, purchase price is only the beginning. There are other costs to consider, and knowing them in advance is the best way to avoid surprises later on. Use the Housing Costs Worksheet (Appendix A) to keep track of these costs. How much should you borrow? For many first time home buyers their first home may not be their dream home or a home where they will reside long term. Understanding how much you can comfortably afford to borrow will help you focus on the right home in the right price range. You need to fully understand your financing picture: how much money comes in each month and how much money do you spend. See Appendix B as a guide. What are some potential cash flow sources? To balance out these costs, you can take advantage of a number of things to free up your cash flow and reduce financial pressure: • Get extra money with your mortgage to use for home improvements. For example, CMHC Mortgage Purchase with Improvements Mortgage Insurance Program and Genworth's Program, Purchase Plus Improvements Mortgage Insurance Program are popular options. • Use "windfall" money like a tax refund or a bonus from work, so you're not dipping into money reserved for regular expenses.
STEP 3 Coming Up with the Down Payment What are your down payment options? The money for the down payment, which represents a portion of your home's price, is not included in your mortgage and must come from your own financial resources. The minimum down payment amount is 5% of the purchase price. Acceptable sources include: 1. RRSP Home Buyers' Plan - allows you to use your RRSP for a down payment • Qualifying purchasers can withdraw up to $25,000 each from their registered retirement savings plans (RRSPs) to buy or build a qualifying home without incurring tax penalties. • The money is not taxable, but the RRSP must be repaid within 15 years, with minimum annual payments of 1/15th of the withdrawn amount. 2. Short-Term Investments or Savings - that will be cashed out. 3. Sale of Property - the financial institution will require the sale agreement (with no conditions) and the mortgage statement. 4. Gift - funds must be in your possession and a gift letter must be provided to the financial institution, stating that the funds are an outright gift.
STEP 4 Shopping for your Home Working with a real estate agent that is knowledgeable in the area where you are purchasing, will help you narrow down your search options and weed out properties that might look good on paper but do not fit the bill long tem. A good realtor will: • get to know you and your home requirements. • review and narrow down the potential list of homes for you to view. • have access to new listings and able to advise you on their benefit, often before they are listed. • advise on the housing market in the area that you are interest in, offering advise of what a fair market value of a property may be. • offer insight into the community, neighbourhoods, and other developments in the area. • do the leg work of arranging showings or taking you though open home viewings. • advise on features, advantages and benefits of each home that you view, as well as point out any potential red flags with each property. • guide you through the offer and sales process, including preparing all sales documentation and other negotiation aspects of the purchase. When selecting a realtor, look for someone who knows the area, is able to listen and understand your needs, and is able to advise you on what is best for you now and in the future. Your realtor should be fully licensed, work with the Multiple Listing Service (MLS®), be available when you are and have a good track record with previous clients. It's OK to ask for references if the agent was not referred to you by someone you know.
STEP 5 Making an Offer Now that you've found a home that meets your needs, the next step is to make an Offer to Purchase (also known as an Agreement of Purchase and Sale). What goes into an offer? 1. The amount you are willing to offer for the property. Following the advice of your realtor, start as low as is reasonable and leave room for negotiations. 2. Your deposit cheque. With every accepted offer, a deposit cheque is generally required. If the person selling the home rejects your offer, your cheque will be returned to you. If however, you cancel an accepted offer, the vendor will likely keep your deposit. 3. The specific items you want included in the purchase price such as appliances, light fixtures or window coverings. 4. The closing date when you want to take possession of the home. 5. The expiration date and time of your offer. Your offer to purchase has a time limit. If the person selling the home doesn't accept your offer within the timeframe you've indicated, your offer expires and your deposit cheque should be returned to you. 6. Any conditions of the offer such as financing, a land survey or home inspection.
For guidance, ask your real estate agent for sample listings from the same street or neighbourhood. Find out the listing prices, as well as the sold prices.
What happens after you make an offer? After you make your offer, the seller may accept it, reject it or return it with some requested changes. This is known as a counter offer. When you start negotiating, remember what you've already determined about how much you can afford and remember your "must haves". Try not to get caught up in a false sense of urgency or emotion during this process. What is involved: • Negotiating your best offer • Getting mortgage approval /choosing your mortgage (Step 7) • Meeting with a lawyer • Getting a home inspection • Insuring your new property • Completing the paperwork • Picking up your keys
STEP 6 Choosing your Mortgage What are your mortgage options? There are really only two mortgage options: 1. Conventional Mortgage: A mortgage loan less than or equal to 80% (Loan to Value ratio) of the value of the property i.e. a mortgage for $160,000 on a $200,000 home. 2. High Ratio Mortgage: A mortgage loan greater than 80% (Loan To Value ratio) of the value of the property, and therefore subject to mortgage loan insurance (also known as default insurance) available through either CMHC or Genworth Financial Canada. With mortgages insured through either, a one-time insurance premium is added to the mortgage amount. What are the types of mortgages? There are numerous mortgage options available to the homebuyer. These include: A. Fixed-Rate Mortgages: means that the interest you pay and your regular payments remain the same throughout the term of your mortgage. There are 6 month, 1, 2 and 3 year (open, closed and closed-convertible) and 4, 5, 7 and 10 year closed terms. B. Variable or Adjustable Rate Mortgages: can have interest rates, and sometimes payments, that change based on changes in the Bank of Canada's prime lending rate. There are 3, 4, and 5 year terms (open, closed, closed-convertible and capped). C. Split-Term: Combination of all possible terms (6 month to 10 years). D. Self-Directed RRSP: A specialty mortgage — term optional — within CMHC guidelines. Invest your own RRSP funds into all or part of your home mortgage. At the end of the term, you may either pay off your mortgage or renew it.
STEP 7 Closing and Other One-time Costs On closing, you will need to provide your lawyer with a certified cheque to them "In trust" to cover the down payment, as well as the other closing costs. The exact closing costs depend on where you live, how much you are borrowing, etc., and your lawyer will advise you of the exact amount required a day or two in advance. Don't forget, in order to close you will have to provide proof to the lender that you have home (fire) insurance, and if a newly built home, the "new home warranty".
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