Answers
How much can I afford to buy a home?
This question is best answered by a professional – it removes a lot of the “guess work”, however if you are up for the challenge, your affordability is based on 2 calculations.
First you need to calculate your GROSS Debt Service Ratio (GDS), and then your TOTAL Debt Service Ratio (TDS).
The GDS is your immediate housing cost:
Monthly Mortgage Payment + Heating Payment ($75.00) + Monthly Property Tax Payment
The TDS is your immediate housing cost + your other monthly credit costs:
Immediate Housing Cost + Credit Card Payment + Auto Loan Payment+ Line of Credit Payment
Without completely confusing you, the GDS can be a maximum of 32% of your monthly Gross Income and the TDS can be a maximum of 40% of your monthly Gross Income.
Example:
If your monthly income is $2000.00 – your GDS can be $640.00 and your TDS can be $800.00.
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.
What is a Home Inspection? Should I have it done? Is there any Recourse if a Problem Arises After I Buy The House?
A home inspection is completed by a certified individual that studies the structural integrity and mechanical reliability of your potential new home. Structural integrity focuses on the foundation and construction of the property. The mechanical inspection covers your larger components of the house like the furnace, water heater, water softener, fireplace, etc.
A home inspection is never a bad thing. Whether or not you need it is irrelevant, it’s the same as asking if you “Need a Tooth Brush”. The truth is, you don’t need it…but the reality is, it wouldn’t hurt. Sure, dental hygiene is probably not the best comparison, but it does get the point across doesn’t it?
Lastly, let’s talk about recourse. The unfortunate truth is that you have little to no recourse in the event that your Home Inspector is in error. The only recourse you truly have is that you may get your “Home Inspection Cost” recovered – there is no “freebie” if they admit to error. Don’t feel deterred from a home inspection based on this detail; the Home Inspection could quite possibly point out some major adverse issues to the home that will better educate you to make a wiser decision.
What is the minimum down payment that you need to make when purchasing a home?
In most cases, you will need to pay a minimum of 5% of the house value as a down payment...you can do a "Zero Down" - but that is misleading...in actuality you get the 5% provided as a Cash Back and you pay it back through the Interest Rate over the first 5 or 7 years of the mortgage. 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, and possibly appraisal fees. For those of you that are SELF EMPLOYED PROFESSIONALS - you have a whole different set of down payment rules...rather than me just starting blathering on...it's best you simply call us up. There are other criteria we need to know before we can determine what category you fit. As of October 2007, April 9th and April 19th of 2010, and most recently effective March 18, 2011 - the rules have changed. Don't worry - it's not earth shattering stuff...rather a bit confusing to try and explain - it's like trying to explain how to tie a knot...it's harder than you would think without a visual aid!
Most of the time, it’s not whether or not you have the down payment, but more importantly where the down payment comes from. In Canada, it is no longer possible to purchase a home without a down payment. With the ever decreasing number of lenders in the industry, both Insured (see “What is Mortgage Loan Insurance”), and Private, no down payment mortgages are nothing more than a memory. The 5% rule in Canada stipulates that the funds need to come from one of the following:
- From Own Resources*
- Personal Savings
- Personal Investments
- Gift From Family (By family we mean a BLOOD Relative - no uncles of an aunt who's son was twice removed...hahaha)
- Signed Gift Letter Must Be Provided (available from your Broker)
- Borrowed Funds
- Borrowed from a recognized financial institution – this amount has to be calculated in to your Total Debt Ratio (TDS – see “How Much Can I Afford to Buy a Home).
- This requirement is “lender specific” and may not be an option to everyone. Your broker can determine whether this privilege is available to you.
*a 90 day track record will be required to establish the funds have not been borrowed. Any deposits larger than $1000.00 may require an explanation.
What is Mortgage Loan Insurance? Do You Need It?
Once upon a time, you needed to have a minimum of 15% – 25% down payment for a mortgage. As time went on, it became more and more difficult for people to afford their own home. Then, the Canadian Mortgage and Housing Corporation (CMHC) came about. A federally governed body that scripted the National Housing Act (NHA)…to which all “insured mortgages apply”. The CMHC drafted a set of rules (loosely the NHA) and proposed to the Banking community “insurance” for mortgage loans. Essentially, they told the Banks they would protect their money if they provided loans to those who had as little as 5% down against a mortgage, who met their (CMHC’s) criteria. The Criteria consists of:
- Credit
- Income/Employment
- Down Payment (again, not “IF” there was a down payment, but “WHERE” it came from).
- Affordability (GDS and TDS)
Really all Mortgage Insurance is, is “default protection” for the lender. Whether or not you need Mortgage Insurance depends on 2 things, your mortgage lender, and the size of your down payment. If your credit is bruised, you may need to use a Private Mortgage Lender – in this case you may not have to pay a “Mortgage Insurance”, but you may be required to pay for some variation.
The Mortgage Insurance fee is not an “Out of Pocket” expense normally, however you can choose to pay it if you wish out of pocket. Normally this fee is added on and is calculated as a percentage, based on the strength of your down payment. The numbers below are the premiums found on a 25 year mortgage. Add .20% to the premium if you are seeking a 30 year mortgage:
- 0.00% - 4.99% = 2.95% Insurance Premium
- 5.00% - 9.99% = 2.75% Insurance Premium
- 10.00 – 14.99% = 2.00% Insurance Premium
- 15.00% - 19.99% = 1.75% Insurance Premium
- 20% or greater = 1.00% Insurance Premium
What is a pre-approved mortgage? What is the benefit of getting pre-approved?
A Pre-Approved Mortgage is nothing more than an “interest rate hold” for up to 120 days. It is above all things NOT A GUARANTEE of a Mortgage! There are too many other factors that are not discovered until an actual mortgage application is processed. For instance, the property itself may not meet the requirements of the lender or the mortgage insurance provider. Not to mention, the applicant could experience a credit problem, or perhaps a change to their financial status may occur.
The benefit of a pre-approval is largely to uncover any potential adverse or negative factors that may prevent you from being approved. Once these obstacles are addressed and removed, the pre-approval can secure a rate hold that allows you to purchase a home within the specific duration of the rate hold. As all lenders are different, some provide 30 day rate holds, where others may provide up to 120 days.
Can I qualify for a mortgage if I have declared Bankruptcy, OPD, or a Consumer Proposal?
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 insolvency. Certain measures can be taken by the prospective borrowers to improve their credit rating. Ask your mortgage broker for details.
What is the documentation required to obtain a mortgage?
To make your mortgage application process as simple as possible, it is advisable that you collect the following documents beforehand so as to avoid any interruptions later.
- Personal information and identification such as your driver’s license or passport.
- Job details, including confirmation and proof of income. Usually a letter of employment coupled with a recent pay stub. Depending on the type of income and employment you have, you may be required to provide additional proof of income, your broker will assist you in determining if this is necessary.
- All additional sources of income (pension, superannuation, RIFS, etc.)
- List of assets.
- Information and details of all debts from Banks or other Creditors.
- Source and amount of down payment.
- Proof of source of funds for the closing costs (usually about 1.5% of purchase price)
How will child support and alimony affect my mortgage qualification?
If you are paying child support and/or 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, however some lenders will simply work it in to your Total Debt Service Ratio (TDS).
If you are receiving child support and/or alimony from another person, the amount paid to you may be added to your total income before determining the mortgage that you will qualify for. For such income, unless it is clearly indicated by way of a Court Order, you will be required to produce at minimum a 90 day track record that demonstrates the income is constant. It is possible it may not be admissible.
What is the difference between a fixed rate mortgage and a variable rate mortgage?
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 25 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. Your payments are always the same, always at the same time, and your interest rate will be secure for the duration of your mortgage term.
In a variable or floating rate mortgage, the rate has the potential to move in direct proportion to either the Bank Lending Rate, or the Prime Rate of Interest as set by the Bank of Canada. This rate could change as often as 8 times per year and there is no guarantee if it is going up or down. It is best to have your broker explain fully how your mortgage rate may move. Some people like the idea of a low rate mortgage and typically these rates appear to be lower than current fixed rates. Mortgage interest rates are at an all time low! Take advantage of them now! If you simply cannot decide between FIXED and VARIABLE, ask yourself which one allows you to sleep at nights better.
Ask your broker for your options so that YOU can make the choice that is right for YOU.