Frequently Asked Questions (FAQ)
To find out how much you will be able to pay for your new home, you need to analyze your taxable income along with the amount of debt that you have to pay off through monthly payments.
The first rule is that your monthly housing costs should not exceed 32% of your gross monthly household income. Housing costs include monthly mortgage payments, taxes and heating expenses. If applicable, this sum should also include half of monthly condominium fees.
Secondly, your entire monthly debt load should not be any more than 40% of your gross monthly income. This includes housing costs, and other debts such as car payments, personal loans, and credit card payments.
Next, you need to calculate 40% of your taxable income and from that, deduct all of your other monthly payments such as car loans, credit card bills and other such debts.
Apart from what the ratios tell you, you should make calculations of your own to determine how much you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you take all other expenses into consideration too so that you can easily afford the basic luxuries.
A home inspection is a visual examination of a house by a qualified professional to determine the overall condition and value of the home. When conducting a proper inspection, an authorized home inspector should check all the major components of the house such as the roof, ceilings, walls, and floors along with other systems such as the electrical connections, heating, plumbing and drainage and weather proofing. The inspector usually gives the results of the inspection in writing to the home owner within 24 hours of the inspection.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to clear a majority of the doubts that you might have when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision by removing most of your doubts.
In most cases, you will need to pay a minimum of 5% of the house value as a down payment. In addition to the down payment, you must also be able to show that you have the capacity to cover other closing costs such as the legal fees and disbursements, appraisal fees and a survey certificate.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. This cannot be a borrowed amount. Several programs are available in the market that allow some alternate sources of down payment. CMHC is one organization offering such programs. Certain lenders also accept gift money from a family member or friend as a down payment. However, such a sum needs a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 20% of the total value, a loan insurance from either the CMHC or GE is required.
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with as little as 5% down payment — with interest rates comparable to those with a 20% down payment.
To obtain mortgage loan insurance, lenders pay an insurance premium. Typically, your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
Mortgage loan insurance is not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate.
A conventional mortgage is one in which the down payment amount is equal to more than 20% of the purchase price (or where the loan value is less than 80%). Such a mortgage normally does not require mortgage loan insurance.
What is a High-Rate Mortgage?
A mortgage which is greater than 80% of the purchase price or appraisal, whichever is less, is known as a High-Ratio mortgage. A High-Ratio Mortgage requires mortgage loan insurance.
A pre-approved mortgage is one that provides an interest rate guarantee from a lender for a specified period of time (usually 90 to 120 days) and for a set amount of money. The pre-approval is calculated on the basis of information provided by the borrower and is subject to certain conditions being fulfilled before the mortgage is finalized. These conditions usually include factors such as a written confirmation of employment and income among other things. Many realtors prefer it when their clients have a pre-approved mortgage as this gives a clear idea of the affordable price range when hunting for a new home.
The benefits of getting a pre-approved mortgage are many. First of all, pre-approval gives you an idea of what you can afford, making your search for a new home much simpler. It also does away with the tension of trying to find out what your monthly installments are going to be. Probably the greatest advantage of getting a pre-approved loan is that it allows you to lock in a rate. As the lender guarantees a fixed rate when pre-approving the mortgage, the borrower can secure that same rate even when the market prices climb up. In case a situation arises where the interest rates fall below those that were pre-approved, the lenders usually offer the lower rate.
Some lenders may consider you eligible for a mortgage even though you have faced bankruptcy. However, this decision may vary from lender to lender and will greatly depend on the circumstances surrounding the bankruptcy. Certain measures can be taken by the prospective borrowers to improve their credit rating. Approach your mortgage broker for details.
To make your mortgage application process as simple and lucid as possible, it is advisable that you collect all these documents beforehand so as to avoid any interruptions later.
* Personal information and identification such as your drivers license or passport.
* Job details, including confirmation and proof of income.
* Your sources of income.
* Proof of financial assets.
* Information and details of all your bank accounts, loans and other debts.
* Source and amount of down payment.
* Proof of source of funds for the closing costs (usually about 2.5% of purchase price)
If you are paying child support and alimony to another person, generally the amount paid out is deducted from your total income before determining the mortgage amount that you would qualify for.
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for. However, you will be required to produce a regular receipt for the same for a set time period as specified by the lender.
In a fixed rate mortgage, the interest rate is pre-determined at the beginning of the loan term, which can range from 6 months to 10 years. The advantage of this type of mortgage is that it offers a security of knowing your monthly payments beforehand and allows you to plan accordingly.
In a variable or floating rate mortgage, the payments are generally fixed, but the interest rates can fluctuate depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime-lending rate.