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Everything You Need to Know About Home Financing

06 Nov 2020

Buying a home can arguably be one of the biggest and most exciting moments of your life. That being said, you can imagine that it might get a little overwhelming. The good thing is, being prepared and asking the right questions beforehand can help put your mind at ease!   

To get started, we asked our Mortgage Expert Joseph Byles to answer some frequently asked home financing questions that clients ask him.   

 

Home Financing Frequently Asked Questions

Why should I use a mortgage broker? 

A mortgage broker can offer you better rates, personalized service, flexibility and products at no cost to you. They will learn about your budget and lifestyle and find you the right mortgage that suits your needs. Using a mortgage broker can also protect your credit score. If you choose to apply to multiple lenders yourself, that results in more hard credit checks, leading to a lower credit score. 

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What is a pre-qualification?

A pre-qualification provides you with a ballpark estimate of how much you may be able to afford based on your own self-reporting of your financial situation. This helps set a realistic price range for those eager to start shopping in the real estate market.

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How do I financially prepare myself for homeownership?

We suggest you create a budget to ensure you have the financial means to afford your mortgage payment, property taxes, strata/condo fees, monthly utility bills and any other household expenses. Building a strong credit score is a crucial step when preparing to buy a house because a low credit score can actually prevent you from buying your dream home. Lastly, try your best to reduce any debt you may have. Many mortgage lenders will use debt ratios to determine if you can qualify for a mortgage.

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What can I use as a down payment?

You can use your savings, a cash gift from a family member, equity from the sale of another property, or if you are a first-time homebuyer, you can use your RRSPs up to $35,000. 

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What are some of the ongoing costs I can expect when owning a home?

In addition to your mortgage payments, you need to be prepared for property taxes, insurance, utility bills,  condominium fees and routine repairs and maintenance. It’s essential to take these extra costs into account because your monthly budget may get stretched too thin if you don’t. With a proper budget in place, and understanding your monthly fees, you can become a responsible homeowner.  

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What is the difference between a qualifying rate and a contact rate?

The qualifying rate is the Bank of Canada’s conventional 5-year fixed posted rate. A contract rate is the rate offered by the lender on the homebuyer’s actual mortgage payment. Qualifying rates were offered to protect the borrowers.  This ensures that they can continue to make their payments if mortgage rates increase over the course of their term.

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What is the difference between variable and fixed rates?

A fixed-rate means you are locked in for a term and know your monthly mortgage payment. Variable rates are often lower than a fixed rate and fluctuate with the Bank Of Canada’s posted rate.  The variable rate can be riskier depending on your term’s length because overtime the rates have the potential to increase.

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Does my credit history affect my mortgage rate?

Yes, your borrowing power is increased with a higher credit score, and in many cases, most lenders offer better rates. For example, a 625 credit score compared to a 750 score could add you half a percent on the rate you will pay for your mortgage loan.

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What should I consider if I’m refinancing?

Great question! It's important to know that you can only tap into 80% of your home’s value. Also, your lender choice may be limited, as you will not qualify for default insurance. Finally, you would have to re-qualify under the current rates and rules. 

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What are the benefits of refinancing my mortgage?

This can be an excellent option for you and provide several benefits. You could get a lower interest rate, consolidate your debt, change your term, get a different mortgage or tap into your home equity to finance those renovations you've been dreaming about.

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My mortgage is up for renewal within the next 6 months. What can I expect during the renewal process?

Some big banks will send you a renewal letter within three months of your term, encouraging you to sign the current posted rate to rollover your mortgage. We recommend that you speak to a mortgage broker to ensure you are exploring all of your options when it comes to your next mortgage term. 

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Do I need a lawyer or notary when finalizing my home purchase?

Yes! You will need to make arrangements for a lawyer or notary to draw up the mortgage documents for you to sign. 

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I’m self-employed, can I qualify for a mortgage?

Yes, you can! It is important to know that you need to submit additional documentation when self-employed. Including the following: notice of assessments, T1 generals, and proof of being in business (business license, etc) collectively from the past two years. This can be difficult to navigate sometimes because not all lenders specialize in self-employed mortgages, and this is where a mortgage broker has significant advantages. 

It is important to know that you need to submit additional documentation when self-employed. Including the following: notice of assessments, T1 generals, and proof of being in business (business license, etc) collectively from the past two years.

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What is title insurance, and do I need it?

When you purchase a property, whether a single-family home, condo or cottage, you buy the title. The registration of that title confirms that you’re the rightful owner. Most transactions include a lender’s title insurance policy, which protects the loan and helps the deal close faster. Still, only an owner’s policy will offer you protection against title fraud, survey and title issues, or even pre-existing defects.

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I hear a lot about default insurance, what is it, and what does it mean? 

If you're putting anything less than 20% down when purchasing a home, mortgage default insurance is mandatory in Canada and allows consumers to buy homes with a minimum of 5%. Simply put, Mortgage defaults insurance protects your lender in case you can’t keep up with your mortgage payments.

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I’m worried I might not be approved for a mortgage. Is it OK to embellish my application?

Don't do it! It is critical that income details, properties owned, debts, assets and your financial past is accurate. If you have been through a foreclosure, bankruptcy or consumer proposal, please disclose this information to your broker.

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I am looking to purchase a home with an income suite. Does this increase my borrowing power?

Yes, your income dictates the mortgage’s size; hence a mortgage helper adds income to your application and increases your mortgage qualifying amount. Buying a home with an income suite can be a great way to reduce the costs of owning a home and help pay off your mortgage quicker. 

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Can I make a large purchase after I’ve been approved for a mortgage?

We do not recommend it! A lender can pull their credit 30 days before closing if the original information on the approval changes. Making big financial commitments like a car or financing furniture may result in the deal going sideways. We recommend waiting until after you close on the mortgage to make any big purchases.

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What is a reverse mortgage?

A reverse mortgage is a loan secured against the value of your home. It enables a homeowner to convert 55% of the home's value into tax-free cash. It is exclusively for homeowners aged 55 years and older. 

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I am a first-time homebuyer and worried about closing costs. How much do I need to budget for?

These can add up right before your eyes. Closing costs are generally 1.5 % to 4% of the purchase price of your home. To put it into perspective. On a $400,000 home, you would want to set aside around $12,000 for closing costs, which would cover expenses like legal fees, moving, taxes, and utilities.

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What does a lender consider when looking at your mortgage application?

Lenders look at 5 C's. 

  1. Credit

  2. Capital: Your income

  3. Capacity: Your income to debt ratio.

  4. Character: Yes, they google you

  5. Collateral: Condition of the property, location, history, essentially the characteristics of the real- estate that will secure the mortgage. 

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What types of documentation do I need once my offer has been accepted?

To get the keys to your dream home, you will need income confirmation, down payment confirmation, and a purchase and sale contract. 

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Browse Our Bradley Homes

Buying a home is no joking matter, and being fully prepared can save you a lot of time and money. If you are ever unsure about anything, think of the motto: “there are no dumb questions.” 

After reading through these frequently asked questions, we hope you feel more comfortable and have a better understanding of the home buying process. 

Are you looking to buy a home in Barrie? Browse our new homes available for sale. If you have any questions about any one of our new homes, don't hesitate to contact our sales team at sales@bradleyhomes.ca!

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