Answers
How much can I afford to pay for a home?
To find out how much you will be able to pay for your new home, you will need to know your gross taxable income. The bank and insures will allow you to use 32% of your gross income toward your mortgage payment, taxes, and small component for heating costs. You then will ensure that you use no more than 44% of your gross taxable income for mortgage, property taxes, heat and all other debt you may have, such as credit card payments, personal loans. The ratio's for 32% and 44% may vary depending on credit, down payment and bank policy. It is best to contact a mortgage profsssional and receive a pre-approved mortgage prior to entering into a contract of purchase and sale.
Apart from what the ratios tell you, you should make calculations of your own to determine how much you can afford, and that you will still have a comfort level with your mortgage payments if mortgage rates go up prior to your renewal. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you take all other expenses into consideration too so that you can easily afford the basic luxuries.
What is a Home Inspection? Should I have it done?
A home inspection is a visual examination of a house by a qualified professional to determine the overall condition and value of the home. When conducting a proper inspection, an authorized home inspector should check all the major components of the house such as the roof, ceilings, walls, and floors along with other systems such as the electrical connections, heating, plumbing and drainage and weather proofing. The inspector usually gives the results of the inspection in writing to the home owner within 24 hours of the inspection.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to clear a majority of the doubts that you might have when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision by removing most of your doubts.
What is the minimum down payment that you need to make when purchasing a home on a mortgage?
In most cases, you will need to pay a minimum of 5% of the house value as a down payment. In addition to the down payment, you must also be able to show that you have the capacity to cover other closing costs such as the legal fees and disbursements, appraisal fees and a survey certificate.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. This cannot be a borrowed amount. Several programs are available in the market that allow some alternate sources of down payment. The CMHC is one organization offering such programs. Certain lenders also accept gift money from a family member or friend as a down payment. However, such a sum needs a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 20% of the total value, a loan insurance from either the CMHC or GE is required.
What is Mortgage Loan Insurance?
Mortgage Loan Insurance is an insurance cover provided to a lender against default on mortgage installments, when the down payment amount is less than 20%. Like any other insurance, mortgage loan insurance too requires premium payments. The premium amount can vary between 0.5% to 3.75%, depending on the insurance provider and how much of the purchase price is financed by the mortgage; greater the down payment, lesser will be the premium. Mortgage loan insurance is also know as defulat insurance and is often confused with but is distinct from Mortgage Life Insurance as the latter guarantees that your remaining mortgage at the time of your death will not be a burden to your estate. Mortgage default insurnace offers the banks flexibility in offering you the same best mortgage rates and mortgage products available to buyers with a larger down payment, some restrictions do apply for particular products. This insurnace protects the bank in a situation where the homw owner cannot make their mortgage payments. There are 2 main insures in Canada they are CMHC (canada mortgage and housing) and Genworth (genworth financial)
What is a Conventional Mortgage?
A conventional mortgage is one in which the down payment amount is equal to more than 20% of the purchase price (or where the loan value is less than 80%). Such a mortgage normally does not require mortgage loan insurance.
What is a High-Ratio Mortgage?
A mortgage which is greater than 80% of the purchase price or appraisal, whichever is less, is known as a High-Ratio mortgage. A High-Ratio Mortgage requires mortgage loan insurance. Premiums for a mortgage loan insurance can range from 0.5% to 3.75%, depending on the value of the mortgage.
What is a pre-approved mortgage? What is the benefit of getting pre-approved?
A pre-approved mortgage is one that provides an interest rate guarantee from a lender for a specified period of time (usually 90 to 120 days) and for a set amount of money. The pre-approval is calculated on the basis of information provided by the borrower and is subject to certain conditions being fulfilled before the mortgage if finalized. These conditions usually include factors such as a written confirmation of employment and income among other things. Many brokers prefer it when their clients have a pre-approved mortgage as this gives a clear idea of the affordable price range when hunting for a new home.
The benefits of getting a pre-approved mortgage are many. First of all, pre-approval gives you an idea of what you can afford, making your search for a new home much simpler. It also does away with the tension of trying to find out what your monthly installments are going to be. Probably the greatest advantage of getting a pre-approved loan is that it allows you to lock in a rate. As the lender guarantees a fixed rate when pre-approving the mortgage, the borrower can secure that same rate even when the market prices climb up. In case a situation arises where the interest rates fall below those that were pre-approved, the lenders usually offer the lower rate.
Can I qualify for a mortgage if I have been declared bankruptcy?
Some lenders may consider you eligible for a mortgage even though you have faced bankruptcy. However, this decision may vary from lender to lender and will greatly depend on the circumstances surrounding the bankruptcy. Certain measures can be taken by the prospective borrowers to improve their credit rating. Approach your mortgage broker for details. If you are purchasing a home and it is high ratio ( less than 20% down payment ) you must have been discharged for at least 1.6 years and have re-established your credit.
What is the documentation required to obtain a mortgage?
To make your mortgage application process as simple and lucid as possible, it is advisable that you collect all these documents beforehand so as to avoid any interruptions later.
- Personal information and identification such as your drivers license or passport.
- Job details, including confirmation and proof of income.
- Your sources of income.
- Source and amount of down payment.
- Proof of source of funds for the closing costs (usually about 2.5% of purchase price)
How will child support and alimony affect my mortgage qualification?
If you are paying child support and alimony to another person, generally the amount paid out is deducted from your total income before determining the mortgage amount that you would qualify for.
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for. However, you will be required to produce a regular receipt for the same for a set time period as specified by the lender.
What is the difference between a fixed rate mortgage and a variable rate mortgage?
In a fixed rate mortgage, the interest rate is pre-determined at the beginning of the loan term, which can range from 6 months to 25 years. The advantage of this type of mortgage is that it offers a security of knowing your monthly payments beforehand and allows you to plan accordingly as your payments will not change during the chosen term.
In a variable or floating rate mortgage, the payments are fixed for a period of one or two years but the interest rates can fluctuate every month depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime-lending rate. With many variable rate mortgages today the bank will not set the monthly payment , but rather it will be adjusted each time the bank adjusts its prime lending rate. The banks set their rates off the Bank of Canada's rate.