Are you a first time home buyer? I love assisting first time home buyers and can help you discover and understand all your options available.
A mortgage is a loan for a home with a commitment between you and the lender. Real estate is used as the collateral for securing the loan.
The mortgage commitment is a written contract between you and the lender. It outlines details such as the terms of your mortgage. This includes, the options of the mortgage and the penalties if not paid on time or broken. Also, your prepayment privileges, what fees are associated with your mortgage and other important details. Plus, the contract highlights the property that will be secured as collateral. As a first time home buyer, knowing your options on the mortgage will be important and the more options, the more flexility you will have over time.
If you do not have enough money to purchase a house, a mortgage can make you as a first time home buyer. It is typically risky for lenders to lend hundreds of thousands of dollars to people, however by using the property as collateral for the mortgage, this helps to minimize their risk and offer lower rates.
A lien is put on your house by the lender on the closing date. Your closing date is the date you take possession of the house. There are two main types of liens, a conventional and a collateral lien.
By having the mortgage secured against real estate, this reduces the risk to the lender. This means the lender can lend to you at a lower interest rate. This is why mortgage rates are lower than personal loan and credit card rates.
There are two main types of mortgages, fixed and variable, and each one comes with strengths and weaknesses.
The choice of which is better for you is a personal decision based on your outlook of the economy and interest rates. Also, your tolerance level with fluctuations in interest rates.
Fixed rate mortgages are the most popular and this is where you lock in a rate for a certain term. Typically these terms are from six months to ten years. The longer you lock in the rate, the more protected you will be against increases in interest rates during the term.
For this extra protection, fixed rates are higher than variable rates. Also, the longer you secure a rate, such as ten years over five years, the higher the interest rate.
Variable rate mortgages are also sometimes called adjustable rate mortgages. The main difference between a variable and a fixed rate is that the interest rate can change during the term with a variable rate. Lenders offer a variable interest rate based on the lender’s mortgage prime rate. The benchmark for this rate the Bank of Canada overnight rate.
As the Bank of Canada overnight rate goes up and down, the bank’s mortgage prime rate will go up and down and therefore your variable mortgage interest rate will go up and down. During these changes one of two things can happen, your payment will increase or decrease or your amortization will increase or decrease, if the bank or you do not change the payment amount.
Some people prefer that their payment stay the same in order to assist with budgeting. However a caution, a small change in prime can have a large impact on your amortization. It may be more challenging in the future to get back on track in a rising rate environment if you are not adjusting your payment with each rate change.
An application is done to review your current financing situation. A lender will be looking to the five Cs of credit. A lender will look at your employment, credit history, assets and liabilities, debt to income ratio and other financial details.
There is a variety of documents needed when obtaining a mortgage including down payment verification, income verification, void cheque and lawyer’s contact information. Contact me anytime for an example checklist of documents that a lender requires for a purchase.
There are two ratios that a lender typically looks at. They are your gross debt ratio (GDS) and your total debt ratio (TDR). Lenders will compare your current debt obligations in relation to the new home purchase obligations. For the home purchase these obligations include payments such as heating, property taxes, condo fees if applicable and the mortgage payment.
Banks and lenders typically need to see a credit score of medium to strong strength. Having a credit score above 700 is ideal. The credit score is out of 900 points in total.
It’s a good idea to obtain a pre-approval before you begin your search for a home. The pre-approval will help uncover any challenges in your finances that you may or may not be aware of, help guide you with what documents will be needed once you have made an offer on a home and provide you with extra confidence that you can make an offer on a home of a certain price.