Mortgage FAQ's
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What is a home inspection and should I have one done?
What is the minimum down payment needed for a home?
What is
mortgage loan insurance?
What is a
conventional mortgage?
How does bankruptcy affect qualification for a mortgage?
How will child support affect mortgage qualification?
Can I get a mortgage to purchase a home that needs improvements?
Can I
use gift funds as a down payment?
What is a
pre-approved mortgage?
Should
I wait for my mortgage to mature?
What is a down payment?
How can you acquire a home with as little as 5% down?
How
can you pay off your mortgage sooner?
How can you use your RRSP to help you buy your first home?
What
are the costs associated with buying a home?
What should the length of my mortgage term be?
What are the monthly costs of owning a home?
How much can I afford to pay for a
home?
To determine 'affordability' you will first need to know your
gross income along with the amount of any debt outstanding and
the monthly payments. Assuming it is your principal residence
you are purchasing, calculate 32% of your income for use toward
a mortgage payment, property taxes and heating costs. If
applicable, half of the estimated monthly condominium
maintenance fees will also be included in this calculation.
Second, calculate 40% of your taxable income and deduct all of
your monthly debt payments, including car loans, credit cards,
lines of credit payments. The lesser of the first or second
calculation will be used to help determine how much of your
income may be used towards housing related payments, including
your mortgage payment. These calculations are based on lenders'
usual guidelines.
In addition to considering what the ratios say you can afford,
make sure you calculate how much you think 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 don't leave
yourself house poor. Structure your payments so that you can
still afford simple luxuries.
Please refer to our handy Calculators and Tools
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What is a home inspection and should I have one done?
A home inspection is a visual examination of the property to
determine the overall condition of the home. In the process, the
inspector should be checking all major components (roofs,
ceilings, walls, floors, foundations, crawl spaces, attics,
retaining walls, etc.) and systems (electrical, heating,
plumbing, drainage, exterior weather proofing, etc.). The
results
of the inspection should be provided to the purchaser in written
form, in detail, generally within 24 hours of the inspection.
A pre-purchase home inspection can add peace of mind and make a
difficult decision much easier. It may indicate that the home
needs major structural repairs which can be factored into your
buying decision. A home inspection helps remove a number of
unknowns and increases the likelihood of a successful purchase.
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What is the minimum down payment needed for a home?
In addition to the down payment, you must also be able to show
that you can cover the applicable closing costs (i.e. legal fees
and disbursements, appraisal fees and a survey certificate,
where applicable).
Regardless of the amount of your down payment, at least 5% of it
must be from your own cash resources or a gift from a family
member. There are some programs available now to allow borrowed
funds as a down payment.
There are a number of ZERO DOWN products available to the
consumer who has solid income and good credit to show.
Lenders will generally accept a gift from a family member as an
acceptable down payment provided a letter stating it is a true
gift, not a loan, is signed by the donor. Where the mortgage
loan insurance is provided by Canada Mortgage and Housing
Corporation (CMHC), the gift money must be in your possession
before the application is sent in to CMHC for approval.
Mortgages with less than 20% down must have mortgage loan
insurance provided by either CMHC or GE.
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What is mortgage
loan insurance?
Mortgage loan insurance is insurance provided by Canada Mortgage
and Housing Corporation (CMHC), a crown corporation, and GE
Capital Mortgage Insurance Company, an approved private
corporation. This insurance is required by law to insure lenders
against default on mortgages with a loan to value ratio greater
than 80%. The insurance premiums, ranging from .50% to 6.0%, are
paid by the borrower and can be added directly onto the mortgage
amount. This is not the same as mortgage life insurance.
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What is a
conventional mortgage?
A conventional mortgage is usually one where the down payment is
equal to 20% or more of the purchase price, a loan to value of
or less than 80%, and does not normally require mortgage loan
insurance.
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How does bankruptcy affect qualification for a mortgage?
Depending on the circumstances surrounding your bankruptcy,
generally some lenders would consider providing mortgage
financing.
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How will child support affect mortgage qualification?
Where child support and alimony are paid by you to another
person, generally the amount paid out is deducted from your
total income before determining the size of mortgage you will
qualify for.
Where child support and alimony are received by you from another
person, generally the amount paid may be added to your total
income before determining the size of mortgage you will qualify
for, provided proof of regular receipt is available for a period
of time determined by the lender.
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Can I get a mortgage to purchase a home that needs improvements?
Subject to qualification, yes. In fact, even purchasers with 5%
down may qualify to buy a home and make improvements to it. For
high-ratio financing, both Canada Mortgage and Housing
Corporation and GE Capital, insured mortgages are available to
cover the purchase price of a home as well as an amount to pay
for immediate major renovations or improvements that the
purchaser may wish to make to the property. This option
eliminates the need to finance the renovations or improvements
separately. Some conditions apply.
Where the improvements are cosmetic, the mortgage loan insurance
premium is unchanged from the standard schedule. Where the
improvements are deemed to be structural, the mortgage loan
insurance premium is increased by .50% over the standard
schedule. For information on mortgage loan insurance premiums
see high-ratio home mortgage financing.
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Can I use
gift funds as a down payment?
Most lenders will accept down payment funds that are a gift from
family as an acceptable down payment. A gift letter signed by
the donor is usually required to confirm that the funds are a
true gift and not a loan. Where the mortgage requires mortgage
loan insurance, Canada Mortgage and Housing Corporation requires
the gift money to be in the purchaser's possession before the
application is sent in to them for approval. Where mortgage loan
insurance is provided by GE Capital this is not a requirement.
See 'what is mortgage loan insurance?' for further information.
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What is a
pre-approved mortgage?
A pre-approved mortgage 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
based on information provided by you and is generally subject to
certain conditions being met before the mortgage is finalized.
Conditions would usually be things like 'written employment and
income confirmation' and 'down payment from your own resources',
for example.
Most successful real estate professionals will want to ensure
you have a pre-approved mortgage in place before they take you
out looking for a home. This is to ensure that they are showing
you property within your affordable price range.
In summary, a pre-approved mortgage is one of the first steps a
home buyer should take before beginning the buying process.
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Should I
wait for my mortgage to mature?
Lenders will often guarantee an interest rate to you as much as
120 days before your mortgage matures. And, as long as you are
not increasing your mortgage, they will cover the costs of
transferring your mortgage too. This means a rate promised well
in advance of your maturity date, thus eliminating any worries
of higher rates. And if rates drop before the actual maturity
rate, the new lender will usually adjust your interest rate
lower as well.
Most lenders send out their mortgage renewal notices offering
existing clients their posted interest rates. The rate you are
being offered is usually not the best one. Always investigate
the possibility of a lower interest rate with the lender or
another lender. If you don't you may end up paying a much higher
interest rate on your renewing mortgage than you need to.
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What is a down payment?
Very few home buyers have the cash available to buy a home
outright. Most of us will turn to a financial institution for a
mortgage the first step in a potentially long-standing
relationship. But even with a mortgage, you will need to raise
the money for a down payment.
The down payment is that portion of the purchase price you
furnish yourself. The amount of the down payment (which
represents your financial stake, or the equity in your new home)
should be determined well before you start house hunting.
The larger the down payment, the less your home costs in the
long run. With a smaller mortgage, interest costs will be lower
and over time this will add up to significant savings.
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How can you acquire a home with as little as 5% down?
Most lenders now offer insured mortgages for both new and resale
homes with lower down payment requirements than conventional
mortgages - as low as 0%. Low down payment mortgages must be
insured to cover potential default of payment, and their
carrying costs are therefore higher than a conventional mortgage
because they include the insurance premium.
With all low down payment insured mortgages, you are responsible
for:
: legal fees
: the payment of the mortgage default insurance premium
(although the amount of the premium may be added to the mortgage
amount).
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How can
you pay off your mortgage sooner?
There are ways to reduce the number of years to pay down your
mortgage. You'll enjoy significant savings by:
Selecting a non-monthly or accelerated payment schedule
Increasing your payment frequency schedule
Making principal Pre -payments
Making Double-Up Payments
Selecting a shorter amortization at renewal
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How can you use your RRSP to help you buy your first home?
Today, about 50% of first-time home buyers use their RRSP
savings to help finance a down payment. With the federal
government's Home Buyers' Plan, you can use up to $20,000 in
RRSP savings ($40,000 for a couple) to help pay for your down
payment on your first home. You then have 15 years to repay your
RRSP.
To qualify, the RRSP funds you're using must be on deposit for
at least 90 days. You'll also need a signed agreement to buy a
qualifying home.
Even if you have already saved for your down payment, it may
make good financial sense to access your savings through the
Home Buyers' Plan. For example, if you had already saved $20,000
for a down payment - and assuming you still had enough
"contribution room" in your RRSP for a contribution of that
amount you could move your savings into a registered investment
at least 90 days before your closing date. Then, simply withdraw
the money through the Home Buyers' Plan.
The advantage? Your $20,000 RRSP contribution will count as a
tax deduction this year. Use any tax refund you receive to repay
the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home
sooner, it can also mean missing out on some tax-sheltered
growth. So be sure to ask your financial planner whether this
strategy makes sense for you, given your personal financial
situation.
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What are the costs associated with buying a home?
First and foremost, you have to make sure you have enough money
for a down payment - the portion of the purchase price that you
furnish yourself.
To qualify for a conventional mortgage you will need a down
payment of 20% or more. However, you can qualify for a ZERO down
payment insured mortgage on approved credit.
Secondly, you will require money for closing costs (up to 2.5%
of the basic purchase price).
If you want to have the home inspected by a professional
building inspector - which we highly recommend - you will need
to pay an inspection fee. The inspection may bring to light
areas where repairs or maintenance are required and will assure
you that the house is structurally sound. Usually the inspector
will provide you with a written report. If they don't, then ask
for one.
You will be responsible for paying the fees and disbursements
for the lawyer or notary acting for you in the purchase of your
home. We suggest you shop around before making your decision on
whom you are going to use, because fees for these services may
vary significantly.
There are closing and adjustment costs, interest adjustment
costs between buyer and seller and (depending on where you live)
land transfer tax - a one-time tax based on a percentage of the
purchase price of the property and/or mortgage amount. Please
refer to our Calculators & Tools for Assistance
Finally, you will be required to have property insurance in
place by the closing date. And you will be responsible for the
cost of moving.
Remember, there will be all kinds of things you'll have to
purchase early on - appliances, garden tools, cleaning materials
etc. So factor these expenses into your initial costs.
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What
should the length of my mortgage term be?
The length of mortgage terms varies widely - from six months
right up to 40 years. As a rule of thumb, the shorter the term,
the lower the interest rate the longer the term, the higher the
rate.
While four or five year mortgages are what most home buyers
typically choose, you may consider a short-term mortgage if you
have a higher tolerance for risk, if you have time to watch
rates or are not prepared to make a long-term commitment right
now.
Before selecting your mortgage term, we suggest you answer the
following questions:
1. Do you plan to sell your house in the short-term without
buying another? If so, a short mortgage term may be the best
option.
2. Do you believe that interest rates have bottomed out and are
not likely to drop more? If that's the case, a long mortgage
term may be the right choice for you. Similarly, if you think
rates are currently high, you may want to opt for a short to
medium length mortgage term hoping that rates drop by the time
your term expires.
3. Are you looking for security as a first-time home buyer? Then
you may prefer a longer mortgage term, so that you can budget
for and manage your monthly expenses.
4. Are you willing to follow interest rates closely and risk
their being increased mortgage payments following a renewal? If
that's the case, a short mortgage term may best suit your needs.
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What
are the monthly costs of owning a home?
Needless to say, you'll have financial responsibilities as a
home owner.
Some of them, like taxes, may not be billed monthly, so do the
calculations to break them down into monthly costs. Below you
will find a list of these expenses.
The Mortgage Payment
For most home buyers, this is the largest monthly expense. The
actual amount of the mortgage payment can vary widely since it
is based on a number of variables, such as mortgage term or
amortization.
Property Taxes
Property tax can be paid in two ways - remitted directly to the
municipality by you, in which case you may be required to
periodically show proof of payment to your financial
institution; or paid as part of your monthly mortgage payment.
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