For some people, mortgages can be a little confusing. The good news is that there are plenty of qualified professionals around to help. Every borrower comes to the table with a different scenario, but once the paperwork is in place, you will be ready to move into your new home. Here are the four most common mortgage questions first-time buyers ask:
How do I qualify for today’s best rates?
Mortgage rates are a hot topic these days, and it’s no wonder – they are sitting at historical lows. We aren’t sure how long they will last, which means many buyers are taking advantage and quickly searching for their next home. Finding a low rate is just one of the important factors to look for when choosing a mortgage. Some banks offer rock bottom rates, but be sure you understand the other terms. For instance, how much is the penalty if you choose to move before the term is up? Are you allowed to make any additional payments? Speak to an independent mortgage broker if you want to get an idea of all your options. Keep in mind, you need to have great credit to qualify. Having debt is OK, but make sure you are making all your payments on time.
How does my lender determine how much I can afford?
Lenders across Canada, with the exception of credit unions, use fairly similar calculations to determine affordability. The first calculation is your Gross Debt Ratio (GDS). To figure out your GDS, the lender will look at your monthly income, before tax, and subtract your potential mortgage payments, property tax, heating costs, and a portion of your condo fees (if applicable). This figure should not exceed 32% of your gross income. The second calculation is your Total Debt Ratio (TDS). This calculation is similar, but it incorporates the rest of your debt obligations, including credit card, loan, and line of credit payments. This figure should not exceed 40% of your gross annual income.
How much money do I need to have as a down payment?
Provided you have good credit, most applicants can buy a home with as little as 5% down. This is considered a high-ratio mortgage, and is subject to an insurance premium from CMHC or Genworth Canada. It’s a great opportunity to get into the housing market without having substantial savings, and the insurance premium is often offset by the home’s appreciation over the first few years. If you don’t have a down payment saved up, some lenders will allow you to borrow funds from a line of credit or receive a gift from a family member.
What should I do if my mortgage application is declined?
Sometimes, unforeseen issues arise and throw a wrench into your home buying plans. Not to worry, there is always a way to get back on track. If your application is turned down, find out why. Perhaps you’ve had some credit issues before or a past due bill had gone to collections. Ask your mortgage professional to help you make a 6-month or 1-year plan to improve your credit and get moving in the right direction towards home ownership.