Unless you are properly qualified, please do not even contact a realtor. Far too often people get ahead of themselves, skip this step and spend the realtor’s time without completing this process.
What is a properly qualified client? Being pre-approved means your broker has checked your credit and offered any suggestions to improve your score. They have requested, reviewed and verified the quality of your documents. You have been provided with a maximum and True Qualification. At this point you should also have a mortgage rate hold in place.
True Qualification is essentially maximum qualification in reverse. You review your budget and share how much you can honestly afford monthly. Then the broker does the entire qualification process in reverse to assess your pre-approval qualification. You set the monthly mortgage payment and then he or she calculates backwards in accordance with your down payment to figure out your purchase price. This is how all pre-approvals should be calculated.
Maximum qualification on the other hand is where you are qualified for the maximum that you can possibly buy. Unfortunately, this is the type of qualification that most brokers and banks provide. Let’s think about this for a minute. What happens if you are careless with your liabilities and over a year or two have an extra $500 in monthly credit card interest? How about you get fired, laid off, or your company of employment goes belly up? How about none of that happens but interest rates simply go up? With any of the above happening, you would now be over-leveraged. Be smart and do not purchase for your maximum amount. Instead practice True Qualification and set your limits.
Always be prepared for Payment Shock. When you start your term with a lower mortgage interest rate (for example 3%) and complete your term when rates have increased (say to 5%), your mortgage payment will increase substantially. This is Payment Shock. Always know what your potential Payment Shock "could" be at renewal based on your current path. Clients of the Jessi Johnson Mortgage Team receive annual reports indicating their future payment shock at renewal.
Creating your budget might sound easy, but it isn’t. Always keep a fund for problems and potential repairs. Don’t forget to factor in the cost of insurance and potentially higher interest rates.
When purchasing your first home, a minimum of 5% is acceptable (20% for investors). Please keep in mind that you must be able to show 1.5% of the purchase price for closing costs in addition to the 5%. Granted you likely won’t need a full 1.5% but the lender wants to ensure you have the capacity to complete the purchase in the event of higher closing costs. Generally the highest closing cost is the property transfer tax (when applicable), we will get into this more later.
No down payment? As much as we don’t suggest buying a home if you have trouble saving 5% (plus closing costs), there are still tricks to help the "investment-challenged". The most common trick is to obtain a LOC (line of credit) and instantly withdraw the money. The funds must be transferred into a high-interest investment account (ideally) and after 90 days can be used for the down payment. What are the cons of this? You are paying interest on this capital (minus the high interest investment account return) and your credit score will take a hit. More on that later.
Down payment can come from the following sources: - Cash in savings / chequing accounts - Investment accounts - Business bank or investment accounts - RRSP's (more about this later) - Equity in another property (then you aren't a first time buyer) - Gifted money (be prepared to show where it came from)
Your mortgage Term is the length of the mortgage contract you have with your mortgage lender. Not to be confused with Amortization which is essentially the overall life of your mortgage. Most people take a 25 year Amortization which is typically made up of 5, 5-year mortgage Terms.
What happens when the term runs out? This is your opportunity to negotiate a new mortgage with your existing lender or a new lender. Each week one or two lenders generally shine with a lower rate than the rest so you are free to move at no cost to another lender. We suggest getting the ball rolling 6 months out and locking your mortgage renewal rate in 120 days prior to your renewal.
"My current mortgage holder (certain banks or all credit unions) told me I will have to pay fees if I leave at renewal". We hear this all the time and it is unfortunate that more information is not shared with the client. The only time you would incur any costs leaving from one lender to another would be if you were placed into a collateral mortgage (also referred to as a running account). In this case you unfortunately have to hire a lawyer and appraiser to break this type of product that is attached to the title of your property. There is nothing wrong with a collateral mortgage if you are actually using it. Unfortunately this is a new common trick with lenders to keep you with them at renewal. Always double check with your new lender to ensure you are not being placed into a collateral mortgage unless you are getting a more advanced mortgage product. More on this later.
Qualification for employed or retired: Lenders will use either the income stated on your job letter (which would not include your typical overtime pay) or the average of your last two NOAs (Notice of Assessments). The lender will use your NOA average if it is higher than the income stated in your job letter and the most recent year is equal to or greater than the year before. Pension income is also acceptable.
Qualification for self-employed or commissioned sales: The lender will look at line 150 of your NOA (notice of assessment) from the past two years. They will take an average of the two years and gross up by 15%. Again, the second year must be equal to or greater than the previous year.
Perhaps you are very creative with your income taxes and do not claim the required amount to qualify for your requested mortgage? There are programs in existence that allow you to "state your income" based on reasonability. The availability of these programs largely depends on your down payment.
Are you having problems Qualifying? Have you tried to find a co-signer or guarantor? A co-signer vouches for you that your mortgage payments will be made on time. They are on the title of the mortgage. A guarantor essentially does the same thing but is not on title of the property. There is added risk for them because they hold no asset ownership but only liability.
When you don’t have 20% down, there are options for you. The "high ratio" insurers offer solutions, but at a cost. CHMC, Genworth or Canada Guarantee will guaranty your mortgage payments to the lender and take the risk when you don’t have 20% down. This is default insurance. There is a fee charged that is dictated by your down payment. This fee is capitalized (added on top of your mortgage) so luckily you don’t have to pay it as a closing cost.
Approximately 40% of your income (give or take 5%) is used for your mortgage & overall debt so please; don't buy a vehicle, change your job, rack up your liabilities or negatively affect your credit score until you take possession! This could substantially affect your potential for a mortgage qualification.
We also recommend getting used to your new potential mortgage payment if it’s higher before actually taking the mortgage.