Mortgage Basics

There are a lot of things to learn and know when you're buying a home. The reality of the matter is, without a mortgage, the process stops very quickly.

Let's start with the basics.

A mortgage is nothing more than a loan that you obtain to close the gap between the cash you have for a down payment and the purchase price of the home that you're buying. Mortgages typically require monthly payments to repay your debt. The mortgage payments are comprised of interest, which is what the lender charges for use of the money you borrowed and principal, which is repayment of the original amount borrowed.

Learning how to select a mortgage to meet your needs ensures that you'll be a happy homeowner for years to come. You also need to understand how to get a good deal when shopping around for a mortgage because your mortgage is typically the biggest monthly expense of homeownership (and perhaps of your entire household budget). Paying more in total interest charges over the life of your mortgage than you originally paid for your humble abode itself is not unusual.

Truly, the best thing to do is to meet with a mortgage consultant, who will explore all your needs and requirements and give you good, sound advice on saving money, and meeting all the requirements expected of you. The mortgage industry has changed significantly in Canada in the past ten years. We used to go into the bank, speak with a personal loans officer, and hope they would give us a mortgage. Although these people still exist, they may not be the best people to approach. Under the present banking structure, these people do RSP's, car loans, lines of credit, term deposits AND mortgages. Certainly the old term "jack of all trades" and "master of none" may apply here.

Today, there are mortgage consultants, who work as independent brokers for a number of lenders, or the major banks often have their own field reps. The biggest difference today is that these people ONLY do mortgages and have vast experience in the field.

Finding a Mortgage Broker

Mortgage brokers can do the mortgage shopping for you. Mortgage brokers are middlemen, independent of banks or other financial institutions that actually have money to lend.

If your credit history and ability to qualify for a mortgage are questionable, a good mortgage broker can help to polish and package your application and steer you to the few lenders that may make you a loan. Brokers can also help if lenders don't want to make loans on unusual properties that you're interested in buying. Many lenders don't like dealing with co-ops, borrowers with credit problems, or situations where a homebuyer seeks to borrow a low amount of money but has low income. Brokers can usually help with these and other unusual circumstances.

Here are some good questions to ask when interviewing a broker:

How many lenders does the broker do business with, and how does the broker keep up-to-date with new lenders and loans that may be better? Some mortgage brokers, out of habit, send their business to just a few lenders and don't get you the best deals. Ask brokers which lenders have approved the broker to represent them.

How knowledgeable is the broker about the high ratio mortgage programs, and does the broker have the patience to explain all of a loan's important features? The more lenders a mortgage broker represents, the less likely the broker is to know the nuances of each and every loan. Be especially wary of a mortgage rep that aggressively pushes certain loan programs and glosses over or ignores explaining the important points we've discussed for evaluating particular mortgages.

Even if you plan to shop on your own, talking to a mortgage broker may be worthwhile. At the very least, you can compare what you find with what brokers say they can get for you.

Your Prudential agent, as well as other borrowers that you know, can serve as useful references for steering you toward the top-notch lenders and away from the losers. As you solicit input from others and begin to interview lenders, seek to find lenders with the following traits:

Straightforward: Good loan agents explain their various loan programs in plain English without using double-talk or jargon. They help you compare their loans to their competitors' loans. Run as fast as you can in the opposite direction from mortgage officers who talk down to you and try to snow you with lots of confusing lingo.

Market savvy: Good lenders understand the type of property that you want to buy. Here's another big advantage of local loan approval: No deal-breaking, last-minute loan cancellations unexpectedly arise because you inadvertently run afoul of some obscure institutional policy.

Competitive: Good lenders are competitive. Don't be afraid to ask the lender that you like best to match the interest rate of the lowest-priced lender you find. At worst, the lender will turn your rate request down. At best, you'll get the lender you want and the loan terms you want. Loan rates and charges are negotiable.

Detail-oriented: Good lenders meet contract deadlines. They approve and fund loans on time. Your agent knows which lenders deliver on their promises and which don't. Missed deadlines may squash your purchase.

Applying For A Mortgage

Truly the first step when buying a home is getting pre-approved by a mortgage broker.

Let's take a moment to look at the process. When a lender looks at your application, they are looking at two key issues: you the borrower (and your ability to make the payments), and the property you are buying (in case you don't make the payments and they have to re-sell it). When they look at you, they look at your income, your work history and job stability, your credit history and how you have handled credit I the past, and how many payments you have presently to maintain. They usually have strict guidelines to adhere to, but they have some latitude, as well. If, for instance, you have some bad credit in the past, a good mortgage consultant can advise you how to clean up these problems before you apply. When looking at the property you are buying, they routinely look at issues concerning its resale value. Are you paying fair market value (perhaps an appraisal might be required)? Does the property need a lot of work and do you have the resources to do the work?

We have a Checklist for your convenience to collect all the data required by the mortgage consultant. Most or all of these items are important and the numbers need to be verified before the pre-approval is complete. Make sure you ask your mortgage consultant if he/she does a credit check before the pre-approval is complete. You don't want any surprises later when you're making an offer on a house. You need to know at this point what your credit report says. If the consultant says you are "pre-qualified", you should dig deeper. This is the very superficial part of the process.

Some Important Things to Know

Mortgages are typically amortized (scheduled to be paid off) over 25 years. This can be changed to pay off the mortgage faster.
Mortgages payments are typically made monthly, but they can be arranged to be paid bi-weekly (every two weeks) or weekly, if it suits your payroll.
The term can be anywhere from 6 months to 10 or 15 years. Different rates apply depending on the term. At the end of the term, you "renew" your mortgage and set a new current rate and pick a new term. If rates are low, it might be a consideration to lock in for a long term.
Mortgages for under 75% of the value are called conventional mortgages and mortgages over 75% and up to 95% of the value are called high ratio mortgages. (Sometimes you can finance to 100% under certain conditions). The rules on conventional versus high ratio are extremely different.
A high ratio mortgage is guaranteed by the Canada Mortgage and Housing Corporation or GE Capital to the lender in case of your default. In other words, the lender has much less risk because another agency is guaranteeing your loan. This means you must be approved by CMHC or GE Capital, as well as the bank. There is a fee payable in these cases of up to 3.75% of the value of the mortgage. This fee is added to the mortgage and paid out over the amortization of the mortgage.
Conventional mortgages do not typically have fees.
Sometimes mortgage rates can be negotiable. Typically a borrower with "squeaky-clean" credit can negotiate a better mortgage rate than someone who has credit problems in the past. The rates you see in ads and on signs in the bank can be negotiated downward by as much as one full percentage point
You can borrow against your RSP's to use as your down payment. There are certain restrictions and the money must be paid back into the RSP, or it becomes taxable.
It is always a requirement of the lender that you insure the property against fire. This needs to be arranged before closing the transaction
The mortgage broker will offer you life insurance to insure the mortgage in case of death. This is not mandatory. If you think you need insurance, shop around. You might get a better deal from your insurance agent.
Always ask your mortgage broker about pre-payment penalties and penalties related to paying the mortgage early. These are item in the "fine print"; of the mortgage that vary from lender to lender. It is good to know where you stand before you make a commitment.
If you are considering an income property (duplex or triplex), many different rules apply. Typically a larger down payment may be required. Mortgage brokers can do second mortgages as well, which often they bring in private lenders to participate.

Common Problems with Being Approved

Insufficient income Normally the maximum amount of income to make mortgage payments is 32% including principal, interest, taxes, and heating.
Not enough time in present employment. Changing jobs may slow down your approval process.
Low appraisal on the property. Remember, the lender's concern that, if you default they will have to sell the property.
Bad credit reports. The credit reporting system is only as good as the people entering the data. There may be some inaccuracies in your report.
Documentation not in order. The lenders are not very flexible on documentation. If you don't supply them with the items to verify your statements, you may get declined.
Too many other debts. If there are outstanding credit card balances, or vehicle leases/loans, it may affect the borrower's ability to make the payments
Not enough down payment. Certain rules apply to the down payment. The money can come from a family member as a gift, or financing can be done at 100% in certain instances.
Although these are the typical/normal challenges to putting a mortgage together, many of the problems are not insurmountable. A good mortgage consultant can advise you how to fix or avoid these problems. Don't let a small fixable problem be a roadblock between you and your ultimate goal of owning a home. But be truthful with the mortgage rep. Leaving out the negative details will only make it worse later on.