Can I qualify to purchase a home?
In order to qualify for a mortgage you will need three things: a down payment, stable income, and reasonably good credit. How much you qualify for is dependant on your debt service ratios – ie: how much of your income goes to paying off debt (expenses are not included, only debt payments such as credit cards).
How much down payment will I need?
You can put as little as five percent down under most circumstances. If you put down less than 20% you are required to have mortgage insurance through CMHC or another insurer. This premium can be added onto the mortgage so you don’t have a big lump sum payment at closing. Down payments must come from your own resources and cannot be borrowed (unless secured against real estate or investments). You can use your RRSPs and gifted down payments are acceptable as well.
If your credit score is above 680 CMHC will allow you to borrow the down payment but the payments on that loan will be included in your debt ratios. If your credit is over 620 you may be eligible for a Cash Back mortgage where the lender will pay your down payment for you in exchange for a higher interest rate.
Keep in mind that you will also need to show the ability to pay 1.5% for closing costs as well.
If I’ve had problems with my credit can I still get a mortgage?
Lenders will look at two things regarding your credit. One is your beacon score (preferably 620+). The second is your payment history. If the challenged credit is a few years old your beacon score can come up quite quickly. The main things that affect your credit score are how timely your payments are made, the number of accounts reporting (not too many or too few, you’ll need a min. of two), how many credit enquiries you’ve had in a period of time (5 or 6 per year is ok; be careful when you’re car shopping), collections or judgments (very bad), balances over your credit limit, and the amount of time since any indiscretions.
If you do have any collections or judgments they will need to be paid off before applying. Lenders will look at whether or not debts have been paid and how many late payments there have been. Two years of good credit history is enough to qualify for the best rates. If not, you may end up with a higher rate or a bigger down payment requirement. A bankruptcy is workable once discharged and will stay on your credit for 6 years. Two bankruptcies is a no go and they stay on your bureau for 14 years each. A third and they stay on record for life.
What kind of income is acceptable?
Salaried is the easiest because it’s predictable. This includes hourly if you have guaranteed hours. If you have casual employment, commissions, tips, or are in business for yourself then you will be required to show two years worth of income records (Notice of Assessments, tax returns, books, etc.). Overtime can be taken into consideration by averaging the last two years income. If you have full-time, permanent employment then you just need to be past your probationary period.
What is a Conventional Mortgage?
The amount of the mortgage, as a percentage of the value of the property, is called the Loan-to-Value ratio (LTV). A conventional mortgage is a loan that does not exceed 80% of the value of the home (80% is the LTV). A high ratio mortgage has a Loan-to-Value of more than 80% thus requiring mortgage insurance.
What is mortgage insurance?
Mortgage insurance is default insurance in favour of the lender. It is required for high ratio mortgages. It is provided by the Canada Mortgage and Housing Corporation (CMHC), Genworth, or AIG. This is not to be confused with mortgage life insurance which is term life insurance to pay off your mortgage in the event something happens to you.
Another type of insurance is title insurance which can be purchased by your lawyer. This covers you against unknown title defects. Title defects are anything that affects your clear ownership of the property you intend to purchase. Examples are a builder’s lien that you didn’t know about, a fence that’s not on the property line, or a building that was erected over a utility that requires it to be torn down. Title insurance will cover all of these including legal fees and only costs you about $150 dollars for the lifetime of your home.
Should I get a fixed or a variable rate?
This really depends on your appetite for risk and change. A variable rate will usually outperform a fixed rate but the payments can change frequently and there is always the chance that rates could go up significantly causing a drastic rise in your payment. A fixed rate is stable and secure. You know exactly what you’ve got for the term of the mortgage.
What terms and amortization periods are available?
Terms range from six months to ten years or more for fixed rates; the longer the term - the higher the interest rate. Variable rates are only available for 1, 3 or 5 years. Open mortgages (loans with no pre-payment penalties) are available in six or twelve month terms.
Amortization periods (the length of time required to pay off the entire amount) stretch up to 40 years for conventional loans or 35 years for high ratio mortgages (30 as of March 18, 2011).
Can I make extra payments to my mortgage if I want to?
This is something you need to plan for as every company is different. Most mortgages come with some pre-payment privileges such as increasing the amount of your payment or making lump sum payments but there are vast differences in the restrictions that apply. If this is important to you, talk to your Mortgage Professional about this before you apply. Some lenders will even allow you to make extra payments so you can skip some later; handy for long term travelers or temporary decreases in income.
To pay off your mortgage completely before the end of your term will involve a payout penalty (unless it’s an open mortgage) which is usually three month’s interest. If current rates have dropped you may have to pay an Interest Rate Differential (IRD) instead which can be extremely expensive. This is another thing that you should discuss with your Mortgage Professional before applying.
I hope this has adequately answered some of the most common questions. As always, I appreciate comments or questions you may have. You may contact me anytime at (780) 996-2655 or at tmacmillan@dominionlending.ca. Please visit my website for more information about mortgages and leasing at www.trevormacmillan.ca.
