We agree, buying or building a home is one of life’s biggest projects. Becoming a homeowner requires time, energy, and lots of money! Unless you’re Rihanna or Jeff Bezos, few of us can pay for a property in all cash. A mortgage is THE solution for turning your dream home into a reality. Here’s what you need to know, all about mortgages:
Let’s face it, most first-time homebuyers use credit. To limit risk, Canadian mortgage lenders require a minimum down payment of 5% of the property’s purchase price. Your down payment is savings you have accumulated in anticipation of your home purchase. Beyond the money you have saved, the rest of the house is financed using a mortgage loan.
Legally, a mortgage is a loan agreement between you and a bank or financial institution/lender (e.g., a credit company). The loan agreement defines the terms and conditions of the loan, such as the repayment period and the amount of your monthly payments, among other specifics.
Per your contract, the lender agrees to loan a pre-determined sum that you require to purchase the property; ultimately, they are loaning you the purchase price plus other expenses, minus your down payment. In return, you agree to repay the entire loan, with interest. To secure the loan, the property you are acquiring will be used as collateral. If you fail to repay your lender, they retain the legal right to seize your property to collect on your debt. For this reason [and many others], meticulously selecting your lender should be your highest priority. To determine which lender is best for you, think Team Distinction!
Simultaneously, it is important to note that a mortgage differs from other common types of credit. Here are some of its features:
The term of the contract rarely allows you to pay off your loan in full (unless you are very wealthy or bought your house for a pittance, for example);
The lender accepts the collateral for the property you intend to purchase.
Typically, each mortgage term (the length of your contract) can range from six months to five years. However, some lenders may offer longer terms such as seven to ten years.
Be careful not to confuse a mortgage “term” with a mortgage “amortization”, because the latter is the intended period for total repayment of your loan. Typically, people aim to pay off their homes in 25, 20 or 15 years. Therefore, clients renew their terms multiple times within their amortization period.
Single-family homes, multi-family buildings, land, condominiums and cottages are generally eligible for a mortgage. Lenders are solely interested in homes that meet well-defined technical and legal standards.
Each of the financial institutions that we at Team Distinction work with determine their respective criteria.
The mortgage process follows a specific sequence. The first step is to verify your eligibility, starting with a pre-qualification and/or pre-approval application. This is how a mortgage broker determines your maximum borrowing capacity. A mortgage broker can also guarantee an interest rate for you for a set period of time, often 30 to 120 days.
A mortgage professional will analyze your finances as part of the pre-qualification process. Their analysis will consider:
Your credit rating;
Your professional situation and stability;
Your monthly income;
Your debts;
Your current expenses;
Mortgage pre-approvals can be done by:
Credit unions;
Mortgage companies;
Insurance companies;
Trust companies;
Mortgage brokers (such as those of Team Distinction!)
To verify your eligibility as a borrower, you must prove that you are financially and professionally stable. To do so, your broker or desired lender will require you to provide an assortment of documents, including:
In our experience, lenders avoid signing with high-risk clients. Instead, they pay close attention to signs of financial solvency. To increase your chances of pre-qualification, keep these factors in mind:
The larger your down payment (e.g. more than 5% of the purchase price of your home)
the more trust you gain;
Make sure you have enough savings for the closing costs
some maintenance and moving expenses (all of which are not included in your mortgage);
Remember that the amount of your mortgage depends on the value of the property you purchase (being realistic in your choice increases your chances of approval)
In theory, mortgage financing is available to any Canadian citizen deemed creditworthy. In certain situations, such as those below, specific procedures must be followed when applying for a mortgage.
If you’re looking to buy a home, you must consider the available mortgage rates, but not rates alone! While the rate is important, you should also think about the loan’s terms and conditions. With a Team Distinction broker, you’ll get a “two for one” service. They will secure you the best rate based on your needs AND negotiate the best possible mortgage conditions (e.g. minimum closing costs).
For first-time buyers, lenders may be flexible in their requirements. Theoretically, your minimum down payment will be 5-10% of the purchase price; this may fluctuate depending on the price of the property. You must simply prove your ability to pay the costs associated with the purchase.
To acquire the down payment, you can use the Home Buyers’ Plan (HBP). This program allows you to withdraw money (up to $35,000) from your Registered Retirement Savings Plan (RRSP) without fees or penalties.
Your eligibility for the HBP depends on several conditions, including:
Reside in Canada or Quebec at the time of withdrawal;
Intend to occupy the home as their principal place of residence within one year of purchase;
Be able to justify the withdrawal by acquiring or constructing a qualifying home for yourself or a related person with a disability.
Note that the HBP program can be combined with the federal government’s Affordable Housing Program and assistance from the Canada Mortgage and Housing Corporation (CMHC), should you meet the eligibility criteria. For more information, do not hesitate to contact a broker of Team Distinction.
As you might expect, if you have poor credit history due to late payments or high debt, your mortgage application is likely to be turned down. With that, a low credit score doesn’t mean “your dog is dead”! With the help of an experienced broker from Team Distinction, we can strategize a plan based on your current and future ability to repay lingering debts.
Planning to build your own home? Lenders are also willing to finance this type of project, in exchange for a minimum down payment of 20% and an “ironclad” credit history. In this situation, your mortgage must cover both the price of the land and the cost of labor and materials. The project’s estimate must be as precise as possible to avoid unwanted surprise expenses – which happens more often than one might think!
Have you decided on a house that needs a lot of love? A purchase-renovation mortgage is an interesting solution for homes that require little to major work. The amount of the mortgage includes both the purchase price and the estimated cost of the work.
Mortgage in a complex situation
Wanting to explore one of these particular situations, the brokers of Team Distinction at Multi-Prêts Hypothèques can advise you and help bring your project to life!
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