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Mortgages – The Basics

For most people, getting a mortgage is one of the most important steps in financing your new home. Without a mortgage loan, most individuals couldn’t afford to buy a new home at all. Mortgages make it possible for you to become a homeowner, but there is a whole host of paperwork and other rigmarole that you have to go through before you can actually get a mortgage. For some people, this can certainly be a rather difficult task that might dissuade them from even pursuing home ownership at all. Of course, when it comes down to it, millions of people have gone through the mortgage loan process and millions more are primed to follow in their footsteps.

Of course, going down the road of a mortgage loan can be both exhausting and frustrating. There are many different aspects of applying for a mortgage that can seem overwhelming to some. If you have gotten to the point at which a mortgage loan application becomes necessary, then you’re probably going to want a little help. There’s no doubt that a REALTOR® can assist you in that endeavor. Although they aren’t required for you to get a mortgage, they can provide their wealth of knowledge and expertise when it comes to procuring a loan. Indeed, for the most part, they are going to offer you their expert guidance as you make your way through the mortgage process. In many cases, they will have access to a wide variety of different professional lenders, making your search even easier.

In Canada, there are two different main types of mortgage lenders: banks and licensed mortgage professionals. You’ll need to decide which lending option is the right one for you. Many people might think of a bank as an obvious first choice because it’s an institution that revolves around money. It’s also relatively common to receive loans from banks for certain things. Even so, banks are limited to one product, and licensed professionals have access to many products with multiple lenders that may suit your needs better. Even so, some individuals might find that banks are a good fit for them as well.

In either case, the first thing your lender is going to have you do is see if you can be approved for a mortgage loan. In some cases, a certain lender will offer pre-approval status to those who qualify. But, it’s important to understand that pre-approval is certainly not the same thing as approval. You are only pre-approved based on certain criteria that might not be in play by the time you actually get ready to buy a house. Thus, it’s important to not put too much stock in pre-approval unless you plan to buy a house shortly thereafter.

In general, your financial preparedness will be determined by two factors: Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio. The GDS ratio looks at certain important costs that must come out of your monthly income like heating costs, taxes, and your prospective mortgage payments. The TDS ratio takes into account other housing costs and debt payments (e.g. credit card payments, car loans, etc.) that will have to come out of your monthly income. It is considered ideal if your GDS ratio is at or below 32% and your TDS ratio is at or below 40%. Of course, this frees up about 28% of your monthly income for extraneous costs.

Basically, these ratios really focus on your ability to make all the payments that will be expected of you as a homeowner. Lenders need to make sure that you will be able to take these costs on your current monthly budget. Once they’ve determined that you’ve got a financially viable means of making these payments, it will be time to decide which type of loan works best for you. There are several different types of loans to choose from, and each one offers its own benefits and disadvantages. Your lender and your REALTOR® will likely go over all the options you have for getting a loan.

There are really five distinct categories of mortgages that you’ll have to understand: fixed rate, variable rate, conventional, open, and closed. In some instances, there may be some natural overlap between these five, but understanding them keenly can help you make the right decision. A fixed rate mortgage essentially locks in the interest rate for your payments no matter how much the external interest rates increase or decrease. By contrast, a variable rate mortgage follows the path of the regular interest rates, and you must make the payment according to fluctuations in those rates. A conventional mortgage is one in which the buyer makes a down payment of at least 20% of the house’s value and the mortgage essentially finances the rest. An open mortgage is one that you can pay off prior to the end of the term without having to pay a pre-payment charge. With closed mortgages, if you want to pay it off early, you’ll have to pay the charge. On the other hand, the interest rates for closed mortgages tend to be considerably smaller than those for open mortgages.

It’s also important to note that any down payments that dip below 20% of the house’s value, will force you to incur mortgage default insurance. This is a measure put in place to protect lenders in the event that you cannot make your mortgage payment. You can technically make a down payment as low as 5% of the total value, but you’ll likely have to add between 0.5% and 3% to that cost with the default insurance. Generally, the more you pay, the smaller your insurance costs will be. Of course, paying the standard of 20% (or higher) for your down payment will effectively negate the need for the insurance.

Once you’ve been approved for a mortgage loan, you can then ensure that you are ready to make an offer on your preferred property. If your offer is accepted, you will likely be bound to the agreements made in the mortgage contract. That’s why it’s always important to follow every aspect of the mortgage dealings and read your contract thoroughly to make sure you understand all the rules that apply. Paying the mortgage off in lump sums might seem like a good way to skip out on the rising interest rates, but if you’re lender had stipulations about those kinds of payments, you might be on the hook for extra charges. It’s always a good idea to have a copy of your mortgage contract with you in the event that you need some guidance.

All in all, there are a lot of aspects that you have to consider during the mortgage process. But, getting a mortgage is really a matter of understanding what you want, and finding the right lender for the job. Many home buyers tend to shop around for lenders because you never know which one will offer the best rates and terms. In any event, it’s certain that a REALTOR® can help you along the way in every aspect of the home buying process. Getting a mortgage is certainly difficult, but it can be made much easier with a little professional help.

We encourage everyone to speak to a qualified mortgage specialist about their specific needs and situation, and to get the best and most up to date advice.

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The trademarks MLS®, Multiple Listing Service® and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA. Used under license.

The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. Used under license. REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. Used under license.