The number one question a home buyer often has is “What does the mortgage process entail?” In very simple terms, following is an outline of the process upon which you are about to embark:
a. Get pre-approved: Avoid any hiccups or obstacles before you begin the home shopping process. Being preapproved helps in the following ways:
- Determines price range – it’ll help you understand what your monthly costs will be and determine your price range.
- Guarantees the rate – from 90-120 days. And we’ll automatically adjust your rate down with any market reductions.
- Allows you to put in a competitive offer – become a successful bidder with a short subject to financing requirement.
b. Put in an offer: Once you have found the property that meets your needs, you’ll put in an offer that’ll be accepted or countered. This may go back and forth until you reach an acceptable price with the vendor.
c. Offer is accepted:
- Fax or email us a copy of the purchase agreement
- An appraisal is ordered (if necessary, some lenders don’t require an appraisal based on the loan to value.)
- Send in any remaining documents required for financing (income confirmation, down payment confirmation, etc)
- Send a home inspector in (if applicable) – I can help you arrange this
- Receive the lender’s approval on property and final approval letter
d. Remove Subjects: At this point, your financing is in place and you’re ready to proceed with the purchase of the property.
e. Lawyer’s Office: You’ll be asked to provide any money that’s to be used as your down payment, which is not already on deposit with your realtor. Typically, you’ll go in 1-2 days prior to the completion date.
What Does a Lender Consider When Looking at Your Mortgage Application?
- Income and Job Stability – Your income determines how much you may borrow. In most cases, 32% of your gross income for salaried, non-self-employed or commissioned people is used to determine how much you can borrow to cover the cost of the mortgage payments, taxes and any applicable maintenance. All other debts (eg, car loans, credit cards and lines of credit, etc) must not exceed an additional 8% of your gross income.
- Credit History – Your credit score must show that you pay your bills on time. If not, you may still be approved, but the interest rate may be higher than expected.
What you need to supply to the lender:
a. Income Confirmation – For salaried individuals: letter of employment and your most recent pay stub.
b. Down Payment Confirmation – The lender will require that you prove the source of your down payment. You’ll have to send in bank statements, statements showing RRSPs, stocks, etc. You must show a three-month history of your accounts. If there are any large lump-sum deposits, you’re likely to be asked to show where the deposit originated. For mortgages where your down payment is less than 20% of the purchase price, you’ll also be asked to demonstrate that you have access to 1.5% of the purchase price in your bank account. You must be able to show this through a credit card, line of credit, gift from family or savings in case closing costs run higher than expected.
c. Contract of Purchase and Sale – This is a copy of the accepted offer of the home you intend to purchase and a copy of the MLS listing sheet.
Conventional Versus High-Ratio Mortgage
Whenever possible, it’s advisable to try to put a 20% down payment into the new home. Most individuals are unable to do this, so their mortgage needs to be insured by either Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guaranty. This is the case because the Bank Act will only allow financial institutions to lend up to 80% of the price without mortgage default insurance.
The mortgage is insured so that if you default on your payments, the lender is paid out in full and the insurer is left to deal with the borrower. The insuring companies charge an insurance premium. The premiums are based on the loan to value (LTV), which is the amount of the loan versus the value of your home.