18 Nov

10 Commonly Asked Mortgage Questions

General

Posted by: Rabinder Dhillon

 1. What’s the best rate I can get?

  • Rate is key but is definitely not the most important aspect of a mortgage. You need to obtain a mortgage product that suits your goals and plans. There are many rock-bottom rates out there but they often come from no frills mortgage products. In other words, even if you obtain the lowest rate, you often have to give up other things such as prepayment and porting privileges when opting for the lowest-rate product.

 2. What’s the maximum mortgage amount for which I can qualify?

  • To determine the amount for which you will qualify, there are two calculations you’ll need to complete. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and 50% of strata/condo fees, if applicable). Generally speaking, this amount should be no more than 32% of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in monthly housing expenses. Second, you will need to calculate your Total Debt Service (TDS) ratio. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 40% of your gross monthly income. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to obtain a pre-approved mortgage. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

 3. How much money do I need for a down payment?

  • The minimum down payment required for an owner occupied home is 5% of the purchase price. And in order to avoid paying mortgage default insurance for the benefit of the lender, you need to have at least a 20% down payment.

 4. What happens if I don’t have the full down payment amount?

  • There are programs available that enable you to use other forms of down payment, such as from your RRSPs, a gift from an immediate relative or a borrowed downpayment.

 5. What will a lender look at when qualifying me for a mortgage?

  • Most lenders look at five factors when determining whether you qualify for a mortgage: 1. Income; 2. Debts; 3. Employment History; 4. Credit history; and 5. Value of the Property you wish to purchase. One of the first things a lender will consider is how much of your total income you’ll be spending on housing. This helps the lender decide whether you can comfortably afford a house. A lender will then look at your debts, which generally include monthly house payments as well as payments on all loans, credit cards, child support, etc. A history of steady employment, usually within the same job for several years, helps you qualify. But a short history in your current job shouldn’t prevent you from getting a mortgage, as long as there have been no gaps in income over the past two years. Good credit is also very important in qualifying for a mortgage. The lender will also want to know that the house is worth the price you plan to pay.

 6. Should I go with a fixed- or variable-rate mortgage?

  • The answer to this question depends on your personal risk tolerance. If, for instance, you’re a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If, however, your financial situation can handle the fluctuations of a variable-rate mortgage, this may save you some money over the long run. Another option is to opt for a variable rate, but make payments based on what you would have paid if you selected a fixed rate.

 7. What credit score do I need to qualify?

  • Generally speaking, you’re able to qualify for a mortgage if your credit score is 600 and above. The higher you can get above 650 the better. These days almost anyone can obtain a mortgage, but the key for those with lower credit scores is the size of the down payment. If you have a sufficient down payment, you can reduce the risk to the lender providing you with the mortgage. Statistics show that default rates on mortgages decline as the down payment increases.

 8. What happens if my credit score isn’t great?

  • There are several things you can do to boost your credit fairly quickly. Following are five steps you can use to help attain a speedy credit score boost: 1) Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they’re below 70% of your limits. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on. 2) Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month. 3) Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you. Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit-scoring agencies that you’re regularly maxing out your cards. The best bet is to pay your balances down or off before your statement periods close. 4) Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the cards for a long time. Use these cards periodically and then pay them off. 5) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

 9. How much will I have to pay for closing costs?

  • As a general rule of thumb, it’s recommended that you put aside at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs as a first time home buyer (2.5% if you have already owned a home in Canada). There are several items you should budget for when it comes to closing costs. First Time Home Buyers are exempt from paying the Property Transfer Tax in British Columbia. GST/HST is only charged on new homes, and does not affect homes priced at less than $400,000. Even homes that exceed the price threshold are only taxed on the portion that exceeds $400,000. There will be a property tax adjustment between you and the seller as property taxes are paid in advance on July 1st.  Your lawyer/notary will charge you a fee for drawing up the mortgage and conveyance of title. The amount of the fee will depend on the individual that you use. The typical cost of a notary for a purchase is $1000. Other costs include such things as an appraisal fee (approximately $350), title insurance and a home inspection (approximately $450). You also have to take into consideration house insurance, moving expenses and utility connections.

 10. How much will my mortgage payments be?

  • Monthly mortgage payments vary based on several factors, including: the size of your mortgage; whether you’re paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments. You can view some useful calculators on my website to find out your specific mortgage payments: http://rabinderdhillon.ca/home-purchase-calculators
5 Nov

Collateral Versus Standard Charge Mortgages

General

Posted by: Rabinder Dhillon

With some lenders moving towards collateral charge mortgages, it’s important to understand the differences between a collateral and a standard charge mortgage.

The primary difference is that a collateral charge mortgage registers the mortgage for more money than you require at closing. For instance, up to 125% of the value of the home at closing with some banks or 100% through many credit unions, instead of the amount you need to close your transaction (as is the case with a standard charge mortgage).

The major downside to a collateral mortgage becomes evident at your mortgage renewal date. For borrowers who want to keep their options open at maturity and have negotiating power with their lender, this isn’t the best product feature because collateral charge mortgages are difficult to transfer from one lender to another.

In other words, if you want to change lenders in order to seek a better product or rate in the future, you have to start from the beginning and pay new legal fees, which range from $500 to $1,000. With a standard charge mortgage, in most cases, the new lender will cover the charges under a “straight switch” in order to earn your business.

In addition, with a collateral charge, it could be difficult to obtain a second mortgage or a home equity line of credit (HELOC) unless your home significantly appreciates in value.

Lenders offering collateral charge mortgages promote the benefit that it makes it easier and more cost effective to tap into your equity for such things as debt consolidation, renovations or property investment. There’s no need to visit a lawyer and pay legal fees – the money is available as your mortgage is paid down. Yet, if you read the fine print, you may still have to re-qualify at renewal.

A standard charge mortgage gives you the ability to move to another lender at renewal should you want to without incurring legal fees, and many borrowers find it more beneficial to keep their options open. If you need to borrow more with a standard charge mortgage, you have the option of a second mortgage or a HELOC, which also enables you to take money out as your mortgage is paid down.

Navigating through the mortgage process alone can be tricky. Working with a mortgage professional who has access to multiple lenders will help ensure you receive the product and rate catered to your specific needs.