Mortgage FAQs

What are some factors in qualifying for a mortgage?

Qualifying for a mortgage is about four main factors, stable income, a good credit history, making a sound choice on the property you are purchasing, and how much (if any) of a down payment you have. All four of these factors work together to determine which mortgage options will suit your situation best, and the rate you will receive from the mortgage lender.

 

Stable Income – Mortgage lenders need to confirm income, whether as an employee or self-employed. Most require a letter of employment confirmation, recent pay stubs and the last two years Notice of Assessment forms from Canada Revenue Agency (these are notices you receive annually after you pay taxes).

 

Credit History is always reviewed by mortgage lenders. This can be one of the first steps used in the assessment process. A credit score of 680+ is best but don’t worry if your credit isn’t perfect, there are always other options available.

 

Property choices also impact the mortgage qualifying process. Mortgage lenders want to see that the security has been maintained and a well-presented home will help with good mortgage pricing.  A lender will often hire an appraiser to establish an independent market value and that the physical condition of the property is acceptable.

 

Down payment always figures into the underwriting of any mortgage file and determines many key features such as pricing.  Down payments from 5%-20% create ‘high ratio’ loans which trigger a lender’s need for loan insurance, usually from CMHC. A down payment of 20% or more of the purchase price results in a ‘conventional’ loan with no insurance policy or premium necessary.

How does the mortgage broker get paid?

In most cases the lender buying the mortgage pays the broker a fee for arranging the loan and managing it from application to closing on its behalf and there is no additional fee to the borrower. The level of compensation varies from file to file and is generally based on the loan amount.

 

In cases where private or commercial financing is arranged, or where there are complex situations, a fee may be charged. The Financial Institutions Commission of British Columbia (Regulatory Authority) requires that the nature of compensation is always disclosed to the borrower regardless of who is paying the fee. Any fee requirement is set out at the commencement of a file and any fees in a transaction are required to be disclosed in a transparent fashion.

How much are closing costs?

When buying a new home, there are other costs to be aware of.  Here is an overview; not all will apply every time, so be sure to ask your agents, lawyers etc. for guidance.

 

BC Property Transfer Tax:   This is a provincial tax charged every time a property transfers ownership. It is 1% on the 1st $200,000 of value, and 2% of the balance. For first time home buyers, there is a program to provide full or partial relief from this tax on qualifying properties. We can help determine if your file qualifies.

 

GST: If you are buying a newly subdivided lot or a new home, 5% GST will generally be charged against the purchase price. If you are building a home, contractors can treat the render of the tax through different means, so it is important to understand this process prior to making financial commitments.

 

Appraisal: Most lenders will require an appraisal of the property to establish the lending value of the property. Fees are higher for revenue, rural, commercial and atypical properties, but expect at least $300 plus tax for a standard residential appraisal.

 

Property Inspection: May not be required by lenders, but is good protection for you as a purchaser. A licensed inspector evaluates the structure, systems and components of a home. The inspector should report on the condition of foundations, electrical, plumbing, heating, water heaters, fireplaces, drainage, roof, walls, floors, attic, crawl spaces, patios, etc. An inspection can cost anywhere between $300-$600 but the cost is worth identifying any major repairs required.

 

Title Insurance: Protects stakeholders’ interests in the property against things such as defects in title, fraud, the unwitting presence of encroachments, easements, zoning non-compliance and so forth. Title insurance is often a less expensive and acceptable alternative to getting a survey prepared for the property. Expect to pay $150-$250 depending on property type.

 

Survey: Lenders may require a survey but often will take Title Insurance as an alternative. A survey is a report conducted by a certified surveyor of property lines and the location of improvements on the property.  A survey will reveal illegal encroachments and other critical matters. The cost of the survey varies for size/complexity of the property, but standard neighbourhood lots have a survey cost of about $300-$400.

 

Mortgage Insurance: The term “Mortgage Insurance” is used in two different ways, and each have different and specific purposes:

 

Life/Disability Insurance: This optional insurance is often recommended by lenders to ensure that you are able to pay out the loan or meet the mortgage payments should you or your co-borrower become disabled or die during the term of the loan. Rates and Coverage vary widely; we can help determine whether you are getting the most coverage for your money.

 

Default Insurance: Default insurance is usually required on loans where the borrower is borrowing more than 80% of the value of the property. Genworth and CMHC provide this insurance and the cost varies with the amount borrowed relative to the property value.

 

Realtor Commissions: If you are purchasing and use a Realtor to help you, the seller will pay for their Realtor and yours. If you are selling, fees vary, but are often 6% or7% on the 1st $100,000 and 2-4% thereafter. There are a number of lower commission Realtors, and their fees will vary. Realtor fees are also subject to GST.

 

Property Insurance: Mortgage lenders always ensure improvements to the property are covered for loss from fire, flood etc. Mortgage lenders are generally listed on the policy as first loss payee which means that the loan is paid out before any other stakeholder.

 

Legal fees: If you are selling a property, you will be responsible for legal fees regarding clearing the title for the purchaser. If you are the purchaser, you are responsible for conveyance fees, preparation of statements of adjustment, and mortgage registration. Items often included in the statement of adjustments prepared at the lawyer’s office:

 

Interest Adjustments: This is the interest that you will pay for receiving the mortgage funds for periods outside of standard payment periods. For example, if your completion date was on the 23rd of a 30-day month, you owe 8 days of ‘per diem’ interest for those days prior to the ‘interest adjustment date’.

 

Property Tax Adjustments: Generally, property taxes for the calendar year are paid July 1st.  Sellers and buyers will be responsible for property taxes for the days they own the property and there may be adjustment between the parties which will occur at the lawyer’s office, especially with a credit to a seller from a buyer for possession dates subsequent to July 1st.

 

Rental Deposit Adjustments: If the property has a rental suite the vendor must transfer the tenant’s security deposit to the purchaser. If completion takes place mid-month, adjustments must also be made for rent collected by the vendor and pro-rated payment made to the purchaser.

What is the mortgage process when purchasing a home?

1. A mortgage application is undertaken and you and your agent align your objectives with the various possibilities available in the market.

 

2. With your plan structured, the application is electronically submitted to lenders who will provide you the best plan possible.

 

3. A lender is chosen and will then be prompted by the agent to issue a “Mortgage Commitment” which is then accepted by the borrower. This commitment is a type of loan agreement and will outline the terms and conditions upon which the lender will provide the loan to the borrower. It will best reflect the original loan objectives sought by the borrower. Once accepted by the borrower, the file is then sent to a Solicitor for the preparation of documents.

 

4. The Solicitor will then work on your behalf to review:

– the offer to purchase;

– the Mortgage Commitment;

– any conflicting encumbrances, liens, easements, restrictions, encroachments, or other claims registered on title;

– arrange transfer of the funds;

– contact the utilities and property tax authorities to determine sums required for closure of the transaction.

 

5. You then meet with the Solicitor prior to the closing date to review and sign documents such as mortgages, a deed, declarations, undertakings etc. On the closing day, your Solicitor and the vendors’ Solicitor exchange documents, funds, keys and register documents with Land Titles Registry.

What mortgage documents will be required?

Being prepared when purchasing a home and applying for a mortgage is important. Documents at the ready will make the process go smoother and can also increase the likelihood of securing a better interest rate!  It will also reduce the stress of trying to organize documents with a deadline fast approaching.

 

Necessary documents typically include the following:

 

Income Verification

– Copy of latest two pay stubs

– Notice of Assessment – 2 Years

– T4 Slips – 2 Years

– Letter of Employment (including: Job status/hourly rate or salary/time with company on company letterhead with signature

– T1 General or Notice of assessments (most common with self employed, overtime or commissioned employees)

 

Confirmation of Down Payment

– Bank account showing 90 days of down payment amount (must show name, account information and current balance)

– Sale of existing home (copy of purchase & sale agreement)

– Gift Letter for gifted down payments

– Most Recent RRSP & Investment Statements

 

Property

– Form B

– AGM & Last 6 Months Strata Minutes

– Copy of Purchase & Sale Agreement

 

Other

– Void Cheque

– Solicitor Information – One can be recommended if you do not have a solicitor (firm name, solicitors name and full address)

– Photo ID

Pre-qualifying vs Pre-approval?

Pre-qualification

 

Mortgage pre-qualification is a relatively simple process where you supply your lender with information about your financial situation including income, assets, and debt. This can be done over the phone or online at no cost. Pre-qualification will not account for credit rating or be an in-depth analysis of affordability. You can talk to your lender about any specific needs or goals that you may have and gain a better understanding of what mortgage rates and options might be suited to you. Pre-qualification can give you an estimate of the mortgage amount for which you can expect to get approved.

 

Pre-approval

 

A mortgage pre-approval will provide you with a concrete indication of the type of loan you are capable of obtaining relative to a home purchase. Having one will relieve the pressure of obtaining a loan within a defined and sometimes short time period subsequent to entering a contract to buy a home. Your loan is substantially pre-arranged such that when you find your home, organizing the loan is a fast and effortless process. We just plug data on your new home into the file and PRESTO! Its done! All you have to do is get ready to move.

Mortgage term glossary

Amortization – the length of time over which your mortgage is financed. This may be anywhere up to 30 years, with 25 years being the traditional amortization. Note that mortgage amortization is different than “mortgage term” which is the length of your agreement with the mortgage lender.

 

Assumable – this means that your mortgage MAY be taken over by another party if, for example, you sold your house and the buyer wanted to take over your mortgage payments. This may be of an advantage to a buyer if the rate on your mortgage is lower than current rates. Even though the mortgage is assumable, the borrower MUST qualify to the satisfaction of the mortgage lender.

 

Appraisal – The process of determining the value of property, usually for mortgage lending purposes. This value may or may not be the same as the purchase price of the home. A qualified appraiser physically inspects the property making note of condition, special features and then assesses the value including assessment of comparable properties.

 

Blend and Extend – Taking your existing mortgage and adding to the term and combining the old and new rate into a blended rate on a weighted basis. It can be a good way of avoiding prepayment penalties if you are moving and increasing the size of your mortgage.

 

Blended payment – usually refers to a payment that includes principal and interest.

 

Bridge Financing – This is temporary financing that can be arranged for a variety of purposes, but generally for situations where a new home has been purchased but the old one not yet sold, or where borrows want to stay in their existing home while a new one is being constructed; borrowers must still be able to service the debt as required by the mortgage lender.

 

Closed Mortgages – A closed mortgage means that you have to pay a penalty if you wish to payout your mortgage completely during the contractual term of your mortgage. Many closed mortgages allow some prepayment, up to 20% per year. These partial prepayment terms vary among lenders and need to be understood. The benefit of a closed mortgage is that they are often available at the most favourable interest rates. This may suit your needs if you do not anticipate wanting to pay down your mortgage before term expires.

 

Closing Costs – see FAQ page.

 

CMHC – Canada Mortgage and Housing Corporation (CMHC) operates a Mortgage Insurance Fund which protects approved lenders from losses resulting from borrower default. CMHC insurance can insure for loans where the mortgage amount is greater than 80% of the value of the property, and insures for a variety of other specialty lending situations. A premium is charged for the insurance.

 

Credit Bureau – an organization that collects payment data.  For more information, see our FAQ page.

 

Construction Mortgages – If you are building a home here in BC, we can arrange a construction mortgage for you. Typically, there are three or more disbursements made by the mortgage lender as construction of the building progresses. The mortgage lender will conduct appraisals during the course of construction and will advance funds in accordance with the appraised value of the partially completed building. Course of Construction Mortgages are often at a slightly higher rate than a standard mortgage, but the advantage is that the borrower is not paying interest on the whole amount of the mortgage at the beginning of construction. Instead, the advancing of funds as the project moves along saves interest costs, particularly where construction takes an extended period of time.

 

Conventional Mortgage – A mortgage where the mortgage amount is 80% of the property value or less.

 

Discharge – Process where lawyer removes mortgage from title registered at Land Titles.

 

Debt-Service Ratio – The percentage of the borrower’s gross income that will be used for monthly payments of principal, interest, taxes, heating costs and any strata fees.

 

Deposit (Purchase Deposit) – A sum of money paid by the purchaser when making an offer to be held in trust by the vendor’s agent, broker, lawyer or notary until the closing of the transaction.

 

Equity – The value the owner has in a property over and above all mortgages against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.

 

Home Equity Line of Credit (HELOC)  – An Equity Line of Credit gives you access to the equity in your home, usually up to a maximum of 80% of its appraised value. The advantages are that if you need to renovate, travel, pay down other debt, etc., the rate of interest on home equity loans is generally less than other types of personal loans and credit cards. Lines of Credit are generally tied to the prime rate, see rates.

 

Fixed-Rate Mortgage –  A fixed rate mortgage is a mortgage has the rate set for a specific period of time. Generally known as the mortgage term, these terms can range from 6 months up to 10 years. Whether you should lock in for a long term or stay short depends on the interest rate trend in the market, as well as your financial situation and degree of risk tolerance.  Most fixed-term mortgages allow you to make partial prepayments towards the principal balance during the term; however, these privileges vary from lender to lender. We will assist you in making the best decision and can set you up on an accelerated payment plan that can save you thousands of dollars in interest. See current rates.

 

Foreclosure – A process undertaken by lawyers where the lender obtains ownership of the property after the borrower has not made regular payments per the loan agreement.

 

Gross Debt Service (GDS) Ratio – The percentage of gross income required to cover monthly payments associated with housing costs. Most lenders recommend that the GDS ratio be no more than 32% of your gross (before tax) monthly income.

 

High Ratio Mortgage – Mortgages of less than 20% of the lesser of the purchase price or appraised value of the property. Contrasted to conventional mortgages, high ratio mortgages require default insurance.

 

Hold-back – Money withheld by the lender during the construction or renovation of a house to ensure that construction is satisfactorily completed at every stage.

 

Inter Alia Mortgage – A single mortgage covering more than one property. The term is Latin for “amongst other things.”

 

Interest Adjustment Date – is a date from which interest is calculated when mortgage funds are advanced before a regular payment cycle. For example if a mortgage is advanced March 29th and regular monthly payments commence May 1st, there will be an interest adjustment for 3 extra days.

 

Interest Rate Differential (IRD) – is a common prepayment penalty method where the difference between current interest rates and the mortgage interest rate is charged for the remainder of the term. IRD is generally only applicable if current interest rates are lower than that of the original mortgage and are intended to compensate the lender for the difference in interest income it will receive.

 

Interim Financing – Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

 

Maturity Date – Last day of the mortgage term.

 

Mortgage Insurance – Both mortgage life insurance and mortgage disability insurance are available and should be considered by all buyers. Many buyers are qualifying based on two incomes and they should consider how they would pay their mortgage payments if one income ceased due to disability or death. If mortgage insurance is declined, it is common practice to have a waiver signed to protect all parties.

 

Mortgagee and Mortgagor – The lender is the mortgagee and the borrower is the mortgagor.

 

Mortgage Term – The length of time the current mortgage agreement applies between mortgagee and mortgagor, usually range from 6 months to 10 years.

 

Open Mortgage – A mortgage which can be prepaid at any time, without penalty. Interest rates are usually higher for open mortgages.

 

Payment Frequency – How often you want to make payments: weekly (52 payments), bi-weekly (monthly mortgage payment is multiplied by 12 months and divided by the 26 pay periods in a year – 26 payments per year), accelerated bi-weekly (monthly mortgage payment is divided by two and the amount is withdrawn from your bank account every two weeks – 26 payments per year but the payment amount is slightly more than a regular bi-weekly mortgage payment), or monthly (payment is withdrawn from your bank account on the same day of every month (i.e. on the 1st) – 12 payments per year).

 

Principal, Interest and Taxes (PIT) – These make up the regular payment on a mortgage if the lender is including property taxes in your mortgage payments.

 

Porting – This means that you can take your mortgage with you to another qualifying property without having to lose your existing interest rate and avoid prepayment penalties.

 

Prepayment Charge – A fee charged by the lender when the borrower prepays any part of a closed mortgage beyond what is allowed in prepayment privileges set out in the mortgage agreement.

 

Prepayment Privileges – Lenders generally offer some prepayments without penalty like 20% per year lump sum plus 20% increase in regular payment but vary based on the mortgage agreement.

 

Principal – The amount of money borrowed for a new mortgage.

 

Private Mortgages – In some cases, borrowed from a private lender can make the most sense.  Financial Institutions have fixed policy guidelines that work for most people, but not all cases.  Where a borrower’s situation falls outside the box, a private mortgage may be the best solution.

 

Property Transfer Tax – Provincial Tax when a property changes hands. Tax is calculated at 1% of the first $200,000 and 2% thereafter.

 

Refinancing – Renegotiating your existing mortgage agreement. You may be increasing the principal or paying out the mortgage in full and arranging a new mortgage.

 

Renewal – At the end of a mortgage term, a mortgage can be renewed if the terms and conditions acceptable to both the lender and the borrower. Otherwise, the lender will be repaid in full and the borrower will arrange financing elsewhere. It is never advisable to just renew without having your mortgage broker review available options.

 

Term – The length of the current mortgage agreement. This is different than amortization which is the length of time it will take to pay off the mortgage in full. The term is the length of time that the existing terms and conditions (like interest rate and prepayment privileges) apply.

 

Title Insurance – Title insurance is different from all other types of insurance. Policies are available for lenders AND for homeowners. Lenders often request title insurance to protect their interests if a property survey is not available (title insurance is usually faster and less expensive than getting a new survey done). A homeowner policy protects your ownership or title against losses incurred as a result of undetected or unknown title defects, for as long as you own your home. Even if you are the rightful owner of your home, there are instances such as real estate title fraud, when your title can come into question.

 

Total Debt Service (TDS) Ratio – The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations.

 

Variable Rate Mortgage – A variable-rate mortgage often allows you to take advantage of the lowest rates available. The variable rate is usually tied to a mortgage lender’s prime rate and are generally the same as the Bank of Canada prime rate. These rates are often quoted as prime minus .5% or prime plus 1%, etc.  Variable-rate mortgages have been attractive when market experts feel that rates will drop or stay level for a period of time. Variable rate mortgages have the downside of offering little security in a rising-rate environment and payments and interest expense can rise when rates rise.