To keep you from being caught off guard, we’ve put together this list of homework dos and don’ts before you go hunting for that perfect home and signing a mortgage.
1. Check your credit report for anomalies
Do not confuse it with your credit score for which you have to pay and which will be of no use to you in your efforts (nor in general). Just ask for your file, which you can get free of charge. It contains your personal information, including your social insurance number, as well as data on your credit usage (cards, margin, personal loan, mortgage) and your payment habits with telecommunications service providers. You could spot problems that could delay getting a loan and make you miss out on a buying opportunity.
2. Do not visit houses without doing this …
Taking the most exciting step in the buying process without having budgeted or qualified for financing is a classic mistake that exposes its perpetrators to disappointments and wasted time. What could be more frustrating than succumbing to a property and finding out at the time of financing that no lender is willing to grant you the mortgage you need to purchase it. Worse, you could get the loan and find months later, choked with monthly payments, that the house is beyond your means.
3. … and this.
Some would argue that mortgage pre-approvals push buyers to homes that are beyond their affordability. Many couples in the past have been surprised by the (large!) Amount the bank was willing to lend them. The phenomenon has not disappeared, but it has been mitigated by the tighter qualification rules, put in place for almost two years.
Like the budget, credit pre-approval allows you to narrow your research into market segments that are within your means. Above all, it will prevent you from missing buying opportunities, as sellers and their brokers are more attentive to offers from buyers who have previously received the support of their banker.
4. Know the mortgage qualification rules
To qualify for a mortgage, you must comply with more demanding debt ratios. Your financial obligations, which include mortgage repayment, property taxes, heating and electricity costs, and all of your debts, must not exceed 44% of your income. However, lenders must consider in this ratio a higher mortgage rate than the one actually granted. This is the novelty, especially for five-year fixed rate mortgages.
5. Don’t obsess over the 20% down payment
It’s worth pulling out your calculator. Many lenders provide lower mortgage rates for an insured mortgage. Why ? An insured loan carries less risk for the institution. These receivables can also be securitized more easily in order to be sold on the financial markets.
6. Think about other costs
Buyers could be tempted to put all their cash in the down payment, while forgetting the other costs that await them: notary and moving costs, property transfer tax (welcome tax), as well as the curtains and the mower . Consideration of the down payment must take this parameter into account.
7. Think about renovations before, after it will be too late
Many homeowners pay for their renovations by refinancing their home or using a home equity line of credit. On the other hand, these tools are inaccessible if the mortgage exceeds 80% of the value of the house, therefore to the majority of first-time buyers.
The terms of such a loan vary from one institution to another, but the principle is the same. When granting the mortgage, the lender makes additional funds available to the buyer, accessible only on presentation of invoices proving that the work has been carried out. In the meantime, they are paid with a line or a credit card. When the renovations are complete, the temporary loans are transferred to the mortgage.
8. Will you be staying in your new home for a long time? Think about it!
The interest rate is one important aspect, but there are others. This is why the mortgage broker will inquire about your plans. Do you plan to have children? Do you think you will be called to work in another city or in another country? Is your job stable? The answers to these questions could have consequences on the choice of lender, the term of the loan, and the type of rate chosen, fixed or variable.
If you were to sell your home before the end of the term, usually five years, you could face hefty mortgage prepayment penalties. The formula for determining the amount is particularly disadvantageous for the customer of a fixed rate mortgage. The penalty can sometimes be equivalent to the down payment. For a variable rate mortgage, it is more reasonable. It represents three months of interest.
If the purpose of the sale of the house is to acquire another, often this is not a problem, the lender will agree to transfer your mortgage to the new property on the same terms, unless you move to another country.
The mortgage advisor won’t ask you these kinds of questions, but ask yourself deep down whether your relationship is strong. Couples who break up are most often the victims of these significant penalties. They emerge impoverished from separation, unable to purchase a new home, with a bill of several thousand dollars for mortgage prepayment.
Above all, never sign a mortgage at the rate posted by your financial institution. It is artificially inflated.