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Tag: down payment

Assessing the Impact of Mortgage Down Payments
Embarking on the journey of homeownership involves multiple financial components, among which the down payment and mortgage hold a paramount position. A down payment refers to the initial upfront amount paid during the property purchase, and the mortgage represents the loan obtained to cover the remaining property value. Analyzing the mutual impact of these elements is crucial to ensure informed, strategic, and sustainable financial decisions in the vibrant Ontario real estate market.

Down Payment & Mortgage: A Symbiotic Relationship
The down payment and mortgage have a reciprocal relationship, influencing each other and affecting your financial dynamics during homeownership. A higher down payment usually results in a lower mortgage and, consequently, less financial strain over the years. It’s the first step in determining the affordability, loan structure, interest rates, and repayment terms of your mortgage.

Implications of Elevated Down Payments
1. Reduced Loan Amounts: A higher down payment implies a lower loan amount, ensuring reduced interest expenditures and manageable monthly payments. This is pivotal in fostering financial stability and accommodating other financial obligations.
2. Favorable Interest Rates: With a significant down payment, lenders often offer lower interest rates, as it mitigates their risk by reducing the loan-to-value ratio.
3. Absence of Mortgage Insurance: By making a down payment of 20% or above, Ontario homebuyers can often avoid the additional cost of mortgage default insurance, relieving them from the extra financial burden.
4. Swift Equity Accumulation: Elevated down payments allow homeowners to gain immediate substantial equity in the property, offering a safety net against market volatility.
5. Enhanced Market Position: In competitive markets like Ontario, a considerable down payment can make offers more appealing to sellers due to perceived financial reliability.
Consequences of Minimal Down Payments
1. Higher Loan Amounts: Lesser down payments lead to an increased mortgage, culminating in more substantial interest payments and potential financial stress over the loan’s lifespan.
2. Elevated Interest Rates: A smaller down payment usually translates to higher interest rates, as lenders might perceive it as an increased risk.
3. Mandatory Mortgage Insurance: In Ontario, down payments below 20% generally require mortgage default insurance, which can significantly extend the overall loan cost.
4. Slower Equity Growth: Lower initial investment results in slower equity accumulation, leaving homeowners more susceptible to market downturns.
Ontario’s Market Specifics
Ontario’s diverse and dynamic real estate market also brings specific considerations regarding down payments and mortgages. The Mortgage Stress Test, a standard in Ontario, assesses whether borrowers can afford their mortgage payments at higher interest rates, emphasizing the importance of sensible down payments.

Crunching the Numbers
Understanding the numerical correlation between down payment and monthly payments is crucial. For example, on a $500,000 home, a 10% down payment would require a mortgage of $450,000, whereas a 20% down payment would reduce the mortgage to $400,000. This difference in mortgage amount can have a considerable impact on the total interest paid over the life of the loan, monthly payments, and the loan’s duration.

Striking the Right Balance
Choosing the right down payment is akin to walking a tightrope. While a smaller down payment seems appealing due to immediate financial ease, the resultant long-term implications warrant careful consideration. It’s imperative to allocate a down payment that doesn’t deplete all savings but is substantial enough to mitigate long-term financial implications.

Making Informed Decisions
In the evolving real estate terrain of Ontario, prospective homebuyers should assess their financial standing, loan options, and market conditions before determining the down payment. Employing mortgage calculators, seeking advice from mortgage advisors, and understanding loan structures can aid in making informed decisions that align with financial goals and market realities.

In conclusion, understanding the impact of down payments on mortgages is pivotal for anyone looking to purchase a home. The down payment is not just a financial prerequisite; it’s a strategic tool that influences your mortgage and overall home ownership journey. Whether you are a first-time buyer or a seasoned investor, aligning your down payment with your financial capacity and homeownership goals can significantly enhance your experience in Ontario’s dynamic housing market. By making informed and balanced decisions, you can navigate the complexities of the real estate world and pave the way for a stable and fulfilling homeownership journey.
October 2, 2023
How to Find the Best Mortgage

When shopping for a mortgage, it’s important to do your research. A mortgage is, after all, the biggest financial commitment most Canadians will ever make. So it’s no surprise that one of the first things prospective homebuyers do is to shop around for the best mortgage rate they can find. And while getting a great rate is important, if that’s your only focus, it could end up costing you.

Beyond the Rate – What to Look for in a Mortgage?
With so many banks and financial institutions vying for your business, mortgages these days come with a variety of options. In a way, shopping for a mortgage is like shopping for a new car. But you would never base your car buying decision on one single factor, would you? The same goes for your mortgage. Let’s take a look at some of the things you should look for in a mortgage, and why they’re important.

The Difference Between Mortgage Term & Amortization
Both the term and amortization of a mortgage refer to a period of time. The amortization of a mortgage represents the entire repayment period of the mortgage. In other words, the number of years before your mortgage will be paid in full. In Canada, the standard amortization period for most mortgages is 25 years, in fact, 25 years is the maximum amortization for any mortgage that is insured by the Canada Mortgage and Housing Corporation (CMHC). Conventional mortgages (non-CMHC) can often be stretched over 30 years.

Conventional vs Insured Mortgages (CMHC)
Whether your mortgage will be conventional or CMHC insured depends on the amount you have available for a down payment. To qualify for a conventional mortgage, you’ll need to provide at least 20% of the purchase price as a down payment. That can be difficult for many new homeowners, especially in expensive markets like Toronto, or Vancouver, which is why CMHC enables borrowers to obtain an insured mortgage with as little as 5% down.

The impact of CMHC premiums on the overall cost of a mortgage can be significant and should be considered when deciding how much mortgage you can afford. To illustrate the difference between conventional and CMHC, let’s assume the purchase of a $300,000 home:

Conventional Mortgage (20% down payment)
Purchase Price $300,000 – Down Payment $60,000 = Total Mortgage Amount $240,000

CMHC Insured Mortgage (5% down payment, with 4% CMHC)
Purchase Price $300,000 – Down Payment $15,000 + CMHC $11,400 = Total Mortgage Amount $296,400

In the first scenario, assuming a 25-year amortization, monthly payments, and an interest rate of 2.87%, your total cost to pay off the mortgage would be $335,952. Using the same criteria, the CMHC mortgage would cost over $414,000, a difference of almost $80,000. Of course, interest rates will change over the years, and there are other incidental costs not included here, such as the PST on the CMHC premium, but this gives you an idea of why getting the best interest rate shouldn’t be the only consideration when shopping for a mortgage.

Fixed Rate vs Variable Rate
One decision you’ll need to make is whether to go with a fixed or variable mortgage. With a fixed mortgage, the bank is guaranteeing you an interest rate that won’t change for the length of the term you choose. For example, if you went with a 5-year mortgage term, at a rate of 2.99%, you’d have the security knowing that your rate won’t change for the next 60 months. You have a peace of mind knowing that your mortgage payment amount also, won’t change.

With a variable rate, you’re choosing a floating rate that is tied to a benchmark rate, usually the Bank of Canada prime rate, or your bank’s prime rate, which may differ slightly. While fixed rates offer safety, and cost certainty, variable rates offer their own advantages. With a variable rate, you stand to benefit in a falling rate environment. If the Bank of Canada reduces the prime rate, your mortgage rate will drop accordingly. Not only that but if fixed rates drop, you usually have the option of switching into a lower fixed rate at any time. With a fixed rate, it’s much more difficult to get out of your existing term without paying a large penalty. The risk with a variable rate mortgage is that if rates increase sharply, you could find yourself in the precarious situation of having to increase your mortgage payment in order to keep up with the contractual amortization.

Open vs Closed Mortgage
Most borrowers will choose a closed mortgage, regardless of whether they’re going with a fixed or variable interest rate. The reason is simple: closed mortgage rates are lower. An open mortgage, on the other hand, is just as it sounds. The borrower has the option of breaking the term, or paying the mortgage in full, without incurring a penalty (in some cases, you may see an administration fee associated with breaking an open mortgage).

There are situations where it may be worth going with an open mortgage, even at a higher interest rate. For example, if you were planning to payout your mortgage in full in the near future, you would avoid the costly penalties associated with a closed mortgage. Potential scenarios would be if you were expecting a large inheritance, or if you were selling your home, with no intention of buying another one, or you were planning to rent a house or apartment instead.

Understanding Your Mortgage Prepayment Options
This is one that not a lot of people think about when shopping for a mortgage. Even if you go with a closed mortgage, most financial institutions will allow you to pay the mortgage down ahead of schedule, by providing the borrower with various prepayment options.

However, not all mortgages are created equal. In other words, the prepayment flexibility can vary greatly between mortgage providers. Some banks or credit unions will allow you make lump sum payments of 10% of the original mortgage amount each calendar year, others will allow 15%.

To use another example, both CIBC and TD Bank will allow you to increase your regular monthly principal and interest rates by double (100%) without any penalties, while other institutions will only allow you to increase your payment by 10-20%. If you have a lot of budget flexibility and plan to pay down your mortgage more quickly, the difference in policy could save you thousands. When shopping for a mortgage, make sure you understand the prepayment options that are offered.

Dealing with the Bank or a Mortgage Broker?
One of the decisions you’ll need to make when you begin your search for a mortgage is whether to go directly through your bank or deal with a mortgage broker. For years now, mortgage brokers have been a popular option, and represent a perfectly valid solution. A mortgage broker offers some key advantages. For starters, they deal with dozens of financial institutions, so they really are a great place to go, to source out the best mortgage rate.

If you’re not considered a strong borrower, perhaps your credit history isn’t great, a mortgage broker can find a financial institution that will be willing to take on your application. Generally speaking, Canada’s big six banks tend to be the most conservative when it comes to mortgage lending, so it can be tough to meet their criteria if your credit is less than stellar, or your employment situation is not standard. This is where a broker can add value.

February 1, 2021
Inside the Mortgage Approval Process

Documents Required to Get the Best Mortgage Rate

So, you’ve found the perfect home, you put in an offer and it’s accepted—with the condition of financing, of course. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. Below is a list of paperwork that you may need to complete your mortgage application:

Personal information: Age, marital status, number, and age of kids.

Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from CRA for the last two tax filing years, and a letter from your company stating your position, length of employment and salary).

If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements for the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation, as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation.

If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

Current banking information: Including bank, branch, accounts, and balances.

Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift.

Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

Copy of the listing: You will need to print off a copy of the listing and include this in your mortgage documentation package.

Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the document that states the address, what’s included/excluded and the price, deposit, and down-payment you agreed to.

Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include the condo corporation’s financial statements and status certificates.

Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

October 16, 2020
Tips for Reducing the Overall Cost of Your Mortgage

Should You Pay Off Your Mortgage Early

When you get your first mortgage, it’s hard for many people to focus on the end game, especially given that so many people put so much effort into saving up the minimum down payment, or even making use of grants or various cash-back programs that some lenders offer. It’s important that you keep all your options on the table so that when you’re ready to focus on your long-term strategy, your mortgage allows you to take action, whatever that may be.

Option #1: Start smart and maximize your down payment.
While it’s possible to get away with only putting 5% to 10% down on a home purchase, the single biggest cost-cutting measure you can do is to maximize your down payment. Not only will you owe less, reducing the overall interest you pay, but you’ll avoid having to pay mortgage loan insurance premiums—a fee buyers pay for the privilege of putting less than 20% down on a home.

Option #2: Buy what you can afford.
It sounds simple. Buy a home that fits your budget; the reality is when it comes to buying a home most of us struggle. On one side we want our dream home. On the other is the desire to be fiscally smart. Quite often, it’s a trade-off. But if you focus on buying within your budget (not the maximum mortgage amount your bank has agreed to lend you, but the mortgage that works with your financial plan), then you’re less likely to dip below the 20% down payment, and more likely to stick to your plan of paying off the debt sooner.

Option #3: Shop for the best rate.
Buying a home is stressful. Quite often, buyers will stick with banks or financial institutions they know. But when shopping for the best mortgage rate, it’s actually better to cast your net wide and far. Consider credit unions, as quite often these institutions can offer much better rates and terms than some major banks.

Option #4: Pay attention to when interest is charged.
Most standard mortgages in Canada charge interest semi-annually—that means twice a year the lender calculates what interest you owe, based on the outstanding principal debt and the accumulated interest on that outstanding debt. This is known as semi-annual compounding interest (compounding because it’s interest on interest). The rate at which compound interest grows depends on the frequency of compounding, the higher the frequency, or the number of compounding periods, then the greater the compound interest. For that reason, a loan with a 10% interest rate, but compounded annually, will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.

Option #5: Accelerated payments.
When finalizing your mortgage consider going from one monthly payment to accelerated payments. This adds two extra payments per year, which reduces your principal debt just a tad bit faster.

Option #6: Lump sum or extra payments.
But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, however, try and avoid mortgages that only allow you to make extra or lump sum payments on the mortgage anniversary—as this can reduce the likelihood of the extra payment.

Option #7: Lower your amortization.
Those who want to pay off their mortgages sooner should choose the shortest possible amortization. While typical amortization periods are for 25 years, you can opt for as short as 10 years or as long as 30 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The hitch? Your regular monthly or accelerated payments will be much higher.

Option #8: Increase your regular payments.
To give yourself the best of both worlds, consider going with a longer amortization, but increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,000 you could increase this to $2,000 per month if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, you’d have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.

In the end, the answer as to whether or not you should pay off your mortgage early really boils down to what’s important to you in both your short-term and your long-term financial plan.

October 1, 2020
Millennial’s Guide to Home Buying
The transition from rent to home ownership has many obstacles for millennials. We’ve put together this guide to help young people make home ownership work for them. Buying your first home is one of the biggest financial decisions you’ll ever make. For millennials struggling with lower income and savings, the dream of home ownership can appear out of reach in today’s market.

All hope is not lost. Low mortgage rates and a gradually improving job market are empowering millennials to invest in property rather than rent. By taking a few practical steps, you can be well on your way to buying your first home. Investing in your first home requires careful planning, effective judgement and setting reasonable expectations. Below is a six-step process for making that happen.
1. Shop within your means.
If you’re a millennial first-time buyer, the selection of homes you can afford is likely much smaller than established buyers. After all, you don’t have any equity yet, and will be relying purely on savings to invest in your first down payment. An important part of setting reasonable expectations is shopping within your means. Even if you qualify for a large mortgage, there’s no rule that says you must use it all. As a first-time home-buyer, your goal should be to finally start building equity. If you want a property but can’t afford it, you shouldn’t buy it. It’s as simple as that!
1. Make sure you have enough for a sizeable down payment.
In Canada, most professionals will advise you to make at least a 20% down payment on your property to avoid paying homeowner insurance. While this is recommended, it might not always be possible, especially if you don’t want to delay your first real estate investment. Even if you can’t pay at least 20%, you should still be prepared to make a decent down payment to minimize the total loan amount. In Canada, 5% is the absolute minimum you must put down.
1. Sort out your finances.
Home ownership carries significant expenses that extend beyond your down payment and monthly mortgage payment. Property tax, insurance, closing costs and utilities must all be factored into your decision both at the time of closing and after you’ve moved in. When deciding to enter the market, be sure you have enough money to cover the down payment and all the ancillary costs associated with closing your home. You’ll also want to budget carefully to make sure you can afford to pay your mortgage and living expenses after you’ve moved in.
1. Compare neighbourhoods and regions.
Most home-buyers are limited by geography in shopping around for property. For millennials living in the big city, this can make affordability a greater challenge. That’s why it’s essential to compare neighbourhoods and property types. It’s equally important to consider location and whether you are willing to commute to work each day. Proximity to your job may be convenient, but will likely be more expensive, especially if you live in a big city. Working with a real estate agent can help you develop a better view of property values based on location and property type.
1. Use a Mortgage Broker.
Financing a home can be a complicated process. That’s why more and more Canadians are turning to mortgage brokers to steer them in the right direction. It used to be the case that most people went straight to their bank to finance their mortgage. Now, many people visit a mortgage broker first. That’s because a broker is tasked with one job: finding you the best deal possible. They work with the big banks as well as non-traditional lenders to match you with the best interest rate and lending terms on the market.
1. Maximize your benefits.
The government has made it a little easier for first-time home-buyers to enter the market. If you’re a first-time buyer, you can use your RRSP account to finance your down payment tax-free up to a maximum of $25,000. This means you can take up to $20,000 from your RRSP account and put it toward a down payment with no tax penalty. The First-Time Home-buyer Credit can also help you reduce the amount of taxes you owe. Various provinces, such as Ontario, also have a land transfer tax refund that will greatly reduce the amount of land transfer tax you owe.

As a millennial, shopping around for your first home can be both rewarding and challenging. This six-step process will help you make the most out of your experience.
December 5, 2018
How Much House Can You Afford?

Shop for your new home the smart way! Learn how to calculate how much house you can afford before hitting that open house or applying for a mortgage. Buying your first home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.

The Rules of Home Affordability

Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less.

Your maximum mortgage payment (rule of 28): The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

Your maximum total housing payment (rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32% of your gross monthly income. That means, for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

Your maximum monthly debt payments (rule of 40): Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40% of your gross monthly income. In the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (i.e. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.

This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

How to Calculate an Affordable Mortgage

Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average 6% interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed.

For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.
($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)

Include Your Down Payment

Ideally, you have a down payment of at least 10%, and up to 20%, of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.

Note: If you put less than 20% down, your mortgage lender will require you to pay mortgage insurance, which will increase your non-mortgage housing expenses and decrease how much house you can afford.

October 5, 2018
How You Can Benefit from Other Home Buyers’ Mistakes

Most homeowners admit to making at least one mistake when they purchased their home, according to the 20^th Annual RBC Home Ownership Poll. Listed below are the top mistakes made by first-time home buyers:

The Property Needed Work
Even those buyers with home inspections encountered issues after they moved in.

Not Having a Bigger Down Payment
A small down payment meant that many buyers found themselves overwhelmed by the costs of keeping a home.

Not Getting a Home Inspection
By skipping this step, some buyers found themselves faced with astronomical repair costs. Particularly those who had purchased older homes with ancient plumbing and wiring.

Not Knowing the Closing Costs
Some ill-informed buyers didn’t account for additional costs such as the land transfer fees, the title fee, lawyer’s charges etc…

Not Getting Pre-approved for a Mortgage
By not obtaining a pre-approval, many home buyers fell for homes that were out of their price range.

Falling in Love with the Wrong House
Buyers found they ignored obvious structural or electrical problems because the home had 10’ ceilings or a great stone fireplace. Beware of buyer’s remorse.

Not Checking the Market Value of the Neighbourhood
Some purchasers paid too much for homes that were renovated above and beyond neighbouring properties. This may price them out of the market when it comes time to sell.

Focusing on Interest Rates
New buyers felt compelled to buy because mortgage rates were low. Experts recommend buyers focus on the mortgage product that works for them instead of just trying to score a super-low rate.

April 18, 2016
What First-Time Home Buyers Need to Know

With record-low interest rates that may go away in the distant future, many would-be first-time home buyers are considering their options with regard to buying a home. In preparing to purchase a home, it will help to know what lenders are looking for when buyers apply for a mortgage with them. There are four components: down payment, credit, income and assets, and appraised value of the property.

Down Payment – Putting down at least 25% is ideal, in that buyers can avoid having to purchase mortgage default insurance on their loan. The higher the loan to value ratio, the more risk the lender is being asked to take on. This will result in higher interest rates for the buyer.

Credit – There are several components to this, including total debt, recent payment history, and ability to manage credit over time. These items give the lender a picture of the buyer’s ability to manage obligations over time. Of the above items, recent payment history is probably the most important. Prior to taking on a mortgage, buyers who are having issues making monthly payments such as those on a car will face questions as to how they will be able to manage after they move into a home.

Income & Assets – Lenders are looking for two to three years of stable employment history from borrowers. They use two ratios to determine if buyers qualify from an income perspective. The first is the GDSR, or Gross Debt Servicing Ratio. This is the ratio of total shelter expenses (mortgage, taxes, insurance) to gross income. Lenders are looking for this number to be in the 30% to 32% range. The second ratio is the TDSR, or Total Debt Service Ratio, which is the ratio of all financial obligations to gross income. Lenders here are looking for 40% to 42% maximum.

Ideally buyers will obtain a mortgage in which the principal and interest components of the payment amount will remain constant for as long as possible.

Should property values decrease, even if the income of the buyer remains the same, being able to refinance the mortgage at the end of the term could prove to be out of the question, at any rate. As far as assets go, the lender will want to know where the down payment is coming from, which could be from the buyer’s savings or perhaps via a gift from a close relative.

Property Value – The lender needs to know if the property is worth what the buyer and seller think it is worth. If there is a difference between the appraised value of a property and the contract price, the lender will take the lower of the two.

June 1, 2015
What Does ‘Pre-Approval’ Mean?

Getting pre-approved by a lender makes it easier for buyers to find the home they want within their price range. However, it does not guarantee you’ll get the mortgage. It is simply a certificate saying that through a quick calculation of your finances, the lender has determined what you can afford.

During the pre-approval, the lender will also fix the interest rate, which is usually good for between 60 and 90 days. If a better rate promotion occurs during the buyer’s fixed period, the buyer is usually eligible for that as well. It is likely the pre-approval will lead to a mortgage, but there have been situations when this has not been the case. The best way for buyers to ensure success is to understand what the lenders look for and to be prepared. Another way is for buyers to work with their mortgage broker, who can flag any potential challenges.

A lender will determine a buyer’s debt load by calculating the Gross Debt Service (GDS) Ratio and Total Debt Service (TDS) Ratio. The GDS Ratio is the proposed housing costs, including mortgage payments, taxes, heating costs and 50% of condo fees, if applicable, and shouldn’t be more than 32% of the buyer’s gross monthly income. TDS calculations take into account all the buyer’s other debt obligations and shouldn’t be higher than 40%.

Once a buyer has made a conditional offer on a home, the lender will gather all the documentation required to approve the mortgage, including a credit report. Other items a lender will need are a letter from an employer confirming the buyer’s salary, information about other sources of income, bank accounts, loans and other debts, proof of financial assets, sources of the down payment and deposit, and proof that the buyer has the funds for closing costs.

Problems can crop up during the mortgage approval process. For example, the buyer’s credit score may be too low, the buyer might not have the right source for the deposit funds or the closing costs may not have been deposited in an account. The buyer’s GDS and TDS ratios might also be too high.

October 1, 2014