Buyer’s Guide: Step 2

Buyer’s Guide: Step 2

MORTGAGE PRE-APPROVAL

Pre-Approval is the next important first step towards buying a home. Pre-approval simply means that a qualified lender will look at your credit history and income, compare it with your current monthly obligations, and see what you can realistically afford.

It does not mean you have already been approved for a mortgage, rather it is a predictor of the likelihood you will get one.

You may be asking yourself “But shouldn’t I find a home first?” No! While it may seem intuitive to proceed in that order, speaking with a lender before you start home searching is the best way to proceed.

HOW PRE-APPROVAL HELPS

• Avoid Disappointment: Pre-approval helps you know which houses you can realistically afford and warns you about any financial hurdles early on.

• Save Time: Knowing ahead of time what you can afford helps narrow the choices, which means you’ll find what you want faster.

• Plan Wisely and Establish Priorities: Understanding financial limits helps you focus on which of the features in a home are most important to you, and plan your search based on those criteria.

• Make Attractive Offers: Sellers know that a Buyer that has been pre-approved is a serious buyer.

• Smooth Closing: If there is something in your credit which could keep you from qualifying for the home you’ve chosen, it will be identified and dealt with during the pre-approval process and there will be no surprises when you go to close the deal on your new home.

IMPORTANT DOCUMENTS – MORTGAGE PRE-APPROVAL

As part of your application process, your mortgage professional will ask you questions relating to what you owe and own…

what your projected expenses relating to your future home might be (such as taxes, heating costs, and condo fees if applicable). They will also need to gather information from these important documents which you should be sure to bring along to your consultation:

• Copy of latest pay slip

• Letter of employment

• Last 2 years of T1 General and/or Notice of Assessment (NOA) if self-employed

How Much Do I Qualify For?

The amount that you qualify for will be based on a number of things: The main items taken into consideration are employment and income, credit score and credit history, and available cash for a down payment.

Qualifying rate stress test to all conventional mortgages

Uninsured mortgage consumers must now qualify using a new minimum qualifying rate. The rate will be the greater of the five-year benchmark rate published by the Bank of Canada OR the lender contractual mortgage rate +2.0%.

Qualifying rate stress test to all insured mortgages

All mortgages that require mortgage default insurance, which are those with less than 20% down payment, will now require borrowers prove they can qualify based on a higher mortgage rate set by the Bank of Canada called the “benchmark rate”.

As of  April 19th, 2018 the Bank of Canada benchmark rate ie: 5.14%.

Sample Mortgage Qualification Breakdown

 

HOW MUCH DO I NEED FOR A DOWN PAYMENT?

The minimum down payment is 5% of the purchase price, but you may choose to put down as much as you’d like.

For homes over $500,000 you will need a down payment of 10% on the portion of the sales price over $500,000.

For homes over $1,000,000 a 20 % down payment is required.

If less than 20% is being put down, a CMHC insurance premium will be charged to protect the lender against default. The CMHC insurance rate is based on the down payment. At 5% down, the premium is 2.75% of the total mortgage value (purchase price less down payment). This premium will be rolled into the mortgage so that the buyer doesn’t have to pay it up front. The PST needs to be paid on the mortgage insurance at time of closing as it cannot be rolled into the mortgage. Putting down as much money as you can up front can add up to significant interest savings over the long run.

How Can I Fund the Down Payment?

Down payments must come from your savings, your RRSP’s, as a gift from a direct family member, or a combination of the three. If you are a first-time home buyer, you can use up to $25,000 in RRSP savings ($50,000 per couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP before you are taxed on the money.

How much will my monthly Payment be?

Your monthly mortgage payment will depend entirely on your specific situation. Your down payment, the amortization period, the mortgage rate; all will affect how much you pay per month. To get an exact calculation of your mortgage payments and CMHC costs go to wayneschilstra.com and click on Buyers > Mortgage Calculator and enter the numbers into the mortgage calculator located there.

What Type Of Mortgage Should I Get?

There are different benefits and risks to each mortgage type. Variable mortgages tend to have lower rates than fixed mortgages, but increase and decrease with the Bank of Canada rate. Fixed rates are set and do not change for the term of the mortgage. Your mortgage options will also affect how much you’ll pay per month.

The CMHC Improvements program gives qualified buyers the ability to borrow up to 10 per cent of the as-improved value of a home to put towards the cost of renovations and include it in their mortgage loan amount. Formerly known as the Purchase Plus Improvements program, this flexible financing option is offered by the Canada Mortgage and Housing Corporation (CMHC) – the government insurer of mortgage loans taken out with less than a 20 per cent down payment.

What Other Expenses Do I Need To Account For?

In general, lenders want to see that the buyer has 1.5% of the purchase price available for closing costs in addition to the down payment. Here are a few costs you can expect to budget for:

Home Inspection: $400-500.

Septic/water Inspection: $350-$750 (for rural property only).

Appraisal fee: Most banks do not charge you for the appraisal but it may be applicable to your situation (Confirm mortgage specialist).

Mortgage Penalty: If you are already locked in to a mortgage it is possible that you may have to pay a penalty to get out of it (Confirm with mortgage specialist).

Lawyer’s fees: $1500-$2500 – fees vary depending on disbursements, title insurance, discharges etc (Confirm with lawyer).

Home Insurance: $900-$1400 (Confirm with insurance provider).

Land Transfer Tax: Provincial tax based on the purchase price of a property. If you are a first time buyer, an instant rebate of $4,000 is applied. This tax is payable through your lawyer.

PST on CMHC: 8% of premium (on a $350,000 house at 5% down, the premium is $11,970 so the PST would be approximately $958)

Deposit: Anywhere from $1000 – $10,000 or more. This amount is negotiated between the Buyer and Seller and usually paid when your Offer has been accepted by the Seller. This money will be credited towards the purchase price and your down payment on closing.

First Time Home Buyers

First time buyers may be eligible to claim an amount of  $5,000 as a tax credit for the purchase of a qualifying home.  http://www.cra-arc.gc.ca/hbtc/

Who Can I Go To For Mortgage Advice?

There is a wealth of options in the mortgage market these days. Types of payment, different amortization periods, closed or open, and the list goes on. Whatever mortgage option you choose, we always advise that you speak with a qualified mortgage professional. You can find a list of recommended professionals near the end of this guide.