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Mortgage 101:  Basic Things You Need To Know to Secure a Mortgage for Your Home

The term “mortgage” sounds intimidating especially to people who are not familiar with financial jargon. However, a general understanding of what takes place during the mortgage process will show that it is almost the same as getting a loan from financial institutions for any purpose.  

A mortgage is defined as a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt.

A mortgage is not as terrifying as it seems and the reality is, a mortgage is generally necessary if you want to acquire a property that you can’t afford on cash basis. 


Why do you need a mortgage?

If you are not able to pay all cash for your new home, you will need a mortgage.  Generally, if you want to acquire a property – real estate or chattel – and either you can’t afford to for pay it upfront or can afford it  (lucky you) and just  want your payments to be amortized or spread over a period of time depending on our capacity to pay. 

A mortgage will serve as a budget for the purchase.   Is is possible to get preapproval for a mortgage.   This pre-approval will determine the type or size of house or condo unit you can afford to buy and in which location (suburban, upscale, low cost housing communities, etc.).   The amount of mortgage the bank will grant you will determine the parameters in selecting your home.   

How do you get a mortgage?

Getting a mortgage is easy provided that you have a stable source of income and good credit.  The bank or mortgage broker will ensure that your income is sufficient to cover for your living expenses and amortization for your home.

If you have an existing bank, ask if they can offer you mortgage for your home. The process will be easier because you are already an existing client and the bank has record of your financial condition. 

If you do not have one, ask referrals from your friends or persons who have undergone the process of mortgage.  Peers who are more or less within your range of financial condition are good resource persons because you more or less will encounter the same difficulties especially when paying the amortization later. 

Mortgage brokers are also a good alternative.   They will negotiate with multiple lenders on your behalf.    One mortgage broker has a great mortgage rate quote tool.   It's worthwhile to get a ballpark rate and do your homework, prior to meeting with the bank or mortgage broker.

Do not jump at the first mortgage offer you get. Gather at least three quotes so that you can compare interest rates based on the loan principal granted.  Also, you will want to factor in the quality of service that the lenders provide.   As long as you have good financial standing, there would likely be many financial institutions that are willing to offer you mortgage.  After all, these companies are competing for clients. 

If you want a reliable opinion on which lenders to choose, and whether the rates that will be offered to you in the future are competitive, refer to an independent financial advisor. 

When you go to a bank or a lender to get a mortgage, you need to be prepared with your financial documents proving your capacity to pay the amortization.  These will include bank statements and proof of income such as T4’s, income tax returns and Notices of Assessment from Canada Revenue Agency.  If you are self employed you will need your business’ financial statements.  The lender will take a look at your income and expense, savings and debts, and calculate the price range you can afford for a home. 

With your existing finances, do you want to know if you are qualified for a mortgage?  Check out the alleyneteam.com online mortgage calculator to get an idea of how much your payments would be at various mortgage levels.   This is a good guideline, but your lenders results may be slightly different as each lender has a different set of criteria for computing amounts eligible for mortgage. 

Here are some general guidelines that lenders use to determine eligibility for mortgage:

  • Do not spend more than 32% of your gross income on items associated with housing such as payments for mortgage, taxes, lease, etc.
  • Do not spend more than 40% of your gross income on payment for debts including mortgage.

 

It is practical to get a pre-approved mortgage first before going on house-hunting so that you know exactly how much you can afford rather than look for your dream home only to find out later that you could not afford it.  

Definition of terms

In the course of your mortgage application and throughout its cycle, you will encounter the terminologies below.

When you obtain a loan from a lender, the total amount that you will pay is usually composed of the principal loan amount and the interest.   

  • Principal is the loan amount borrowed from the lender. 
  • Interest is the lender’s charge to you for the privilege of borrowing money, usually expressed as an annual percentage rate. Interest is also calculated based on the principal.

 

In your loan amortization schedule, the principal and interest are separated so that you will see which part of your payment is applied to the principal and which part goes to the interest. Remember that payment to the interest alone does not reduce the principal loan amount.

  • Amortization is defined as paying off debt with a fixed payment schedule or regular installments over a period of time.  The time over which you will pay the debt is called the term of the loan.

 

To further explain, the mortgage term is the time you are committed to the mortgage rate, amortization schedule and other terms and conditions connected with the loan, as laid out by the lender.   The term serves as the “reset” button of the mortgage wherein you must renew your mortgage on the remaining principal amount at a new rate at the end of the term.

In Canada, the typical mortgage has a term of 5 years over an amortization period of 25 years.  Mortgage lenders can cover up to 95% of the price of the property, and you have to have a downpayment of at least 5%.   More typically, the down payment will range from 5% to 20%.   If the down payment is in excess of 20% then it is not necessary to get CMHC financing insurance.   CMHC insurance is mandatory and is paid for by the purchaser.   This highlights the importance of your financial capability.

A mortgage, especially for home purchase is a common practice and so long as you have a stable source of income and a good credit history, it is something that is easily accessible to home buyers.   

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