PREPARATION OF THE MORTGAGE APPLICATION
Once you find the house you want and you
have signed a Purchase and Sales Agreement, you will set up an
appointment with your Mortgage Agent to begin the process of
finding a lender who will best meet your particular needs.
You will bring in your Purchase and Sales
Agreement so that we can see the terms of the deal.
There are times when you might bring this
in to your mortgage agent even before you settle on the final
terms. This may be necessary if there is something unusual about
the terms. For example, your mortgage agent will explain some of
the options you can consider such as Vendor Take-Back mortgages
in order for you to be able to make the purchase. Our goal is to
help you purchase your property.
You will need to provide all of the
information you can about the house. Usually an MLS feature
sheet provided by the realtor will be suitable for this purpose.
You will most likely require an appraisal
for your new house, but we recommend that you hold off on that
until we find the lender. Some lenders have their own preference
when it comes to appraisals, so we ask that you hold off until
we have some idea of the most likely lenders for your situation.
It doesn't take long to get an appraisal, so there is no need to
spend money on an appraisal and then find out that the Lender
does not recognize that appraiser. It is better to wait until we
find you a Lender and then you can get the property appraised in
a manner that will satisfy the Lender.
We will also need to consider the amount of
down payment you intend to put on the purchase. This may require
a discussion about whether you have the cash in hand; need to
convert some investments into cash; or if you will be receiving
a gift to help you with the down payment.
Your mortgage agent will explain that many
lenders are becoming much more vigilant when it comes to
disclosure and they look for warning signs of fraud. Your agent
will be able to advocate on your behalf by adding notes to the
mortgage application explaining any peculiarities, such as money
that has only been deposited from an unknown source for less
than a few months.
SOURCE OF DOWN PAYMENT
We are finding that more borrowers are
either borrowing the down payment from elsewhere or they are
receiving the down payment as a gift from family and/or friends.
If you borrow from another lending institution, that amount will
show up on your credit record. So if you have a good credit
record, it should not be a problem.
If you borrow from family and/or friends,
you will require them to sign a gift letter stating that the
money is a gift and there is no expectation of repayment. It is
important that this money is designated as a gift so that it
does not show up anywhere as a debt that you are carrying.
There are also some lenders who are giving
borrowers cash back mortgages. In this case, the borrower
borrows the money for the down payment and then the lender loans
the borrower the money as part of the mortgage so that the
borrower can pay the money back. This sounds nice, but it does
increase your mortgage and your monthly payments, so a mortgage
agent will make sure you understand the consequences of a cash
One of the things we find is that lenders
are extremely flexible when it comes to the down payment. They
want to loan you the money, and they are very concerned about
your ability to pay the monthly payments, but they will consider
many different options when it comes to the downpayment.
In addition to the down payment, many
lenders require that you have at least 1.5% of the purchase
price available for closing costs.
We too want to make sure
that you are able to handle the costs of getting into new
mortgage. We do not want to set you up for failure. Our
reputation depends on it so we would rather be truthful with you
than get you a mortgage that will result in extreme hardship for
you and your family.
CMHC DEFAULT INSURANCE
You will be required to have at least 5% of
the property’s value for a down payment. This means that if the
cost of your house is $300,000, you need $15,000 for a down
payment. That would mean you could qualify for a high ratio
mortgage and you would be required to pay default insurance to
Mortgages are defined as being either
conventional or high ratio. In order to determine whether your
mortgage is conventional or high ratio, you take the value of
your mortgage and the value of your house/property and if the
loan-to-value ratio is less than 80% it is a conventional
mortgage. If it is higher, it is a high ratio mortgage.
Mortgage lenders such as banks, trust
companies, credit unions and insurance companies are regulated
by either the Federal or Provincial governments and are not
normally allowed to provide a loan that is more than 80% of the
market value of any property unless the mortgage is insured by
mortgage default insurance for up to 95% of the property value.
Mortgage default insurance provides protection for the lender in
case you default on the mortgage.
If you have 20% for the down payment, you
may be able to avoid the default insurance.
There are some lenders who want
you to take out default insurance even if you have more than 20%
down payment on the house. Your mortgage agent will try to find
you a lender who will provide you the best rate without charging
the insurance, but that is where your agent’s experience and
knowledge of the lenders comes in. There are some lenders who
will rely upon a recommendation of the agent and may refrain
from this requirement.
This default insurance can cost thousands
of dollars, but most borrowers simply have the amount added to
the principal of the loan so you don’t need to come up with the
cash to pay the premium. The actual fees range from zero if you
put down more than 20% of the value of the house to as high as
2.75% if your down payment is only 5%.
Once we have all of the above in place, we
then need to verify the income of the borrowers. This can be
fairly simple if you are an employee with a wage or salary and
are issued a T4 slip every year. If you are on salary you will
typically need a letter from your employer verifying that you
are employed and confirming the salary you have reported. The
mortgage agent may even contact your employer to confirm the
information on the letter and indicate that he has done so to
the lender, saving the lender from having to do the same. You
may also be required to provide a couple of pay stubs, so you
should bring those in with you.
If you are a commissioned salesperson or a
self-employed business owner, lenders will usually ask for the
last two or three years Notices of Assessment from the Canada
Revenue Agency. You will be required to bring those documents to
the meeting with you since it can hold up the application
process if you don’t have them.
If you do not have the required Notices of Assessment,
then it is going to be very difficult to qualify for a mortgage
on your own because you will not have any income to factor into
the debt ratios which will be explained later. However, this
will not be a surprise if you are dealing with an experienced
mortgage agent. For example, all mortgage agents with HQ
Mortgages Inc. ask about your income source when you first make
contact with us. If you disclose the fact that you are just
starting out in business and you do not have any proof of steady
income, we will let you know right from the start what you are
There are two ratios that lenders will be
most concerned with in deciding on whether to give you a
mortgage or not. Your agent will explain them more carefully
when you meet and he will also ask a lot of questions to
determine if all of the information is being provided. Your
credit record will provide most of this information.
The first ratio is your gross debt service
ratio (GDS). This includes all of the costs associated with your
house. For example, you take your monthly mortgage payment
(principal plus interest), your property taxes and your cost of
heating your house. If you are buying a condominium, you include
half of your condo fees.
You then take this total and divide it by
your Gross Qualifying Income, which is all of your income from
all sources before taxes. Generally, lenders require that your
GDS be less than 32% in order for you to qualify for the
If you are applying for a high ratio
mortgage, where you are making a down payment of less than 20%,
then the mortgage default insurance premium is also included in
the GDS calculation.
The second ratio that needs to be examined
is called the total debt service ratio (TDS). Basically, this
includes all of the payments that a borrower will be paying to
service all of their debt. In order to calculate the TDS, you
take all of the amounts used in calculating the GDS, plus all
other debt payments such as bank and other loans, credit card
payments, car payments, personal loans from family and friends
or some other individual/lender, and any other regular
commitments such as spousal and child support.
It is important to know that items such as
home insurance, life insurance, car insurance and other monthly
obligations that do not repay a borrowed amount are not included
in the TDS calculation. The key question that your mortgage
agent will ask you is, “If you stopped making the regular
payment, would you still owe an outstanding amount?” If the
answer is “no”, then it would not be included in the TDS.
In order to qualify for a mortgage, the
lender will want the TDS to be no higher than 40% of your Gross
Qualifying Income. If this is a high ratio mortgage you are
applying for, then the default insurance premium will be added
to the total expenditures. If it is a condominium, then half of
the condo fees will be added as well.
If your credit score is good, then a lender
may allow the GDS and/or TDS to be a bit higher than the 32% and
40% threshold. Your mortgage agent will likely advise against
going higher than the recommended limits in order to help you
avoid any future problems with the mortgage in the event of
unforeseen problems or expenses.
This is an important benefit of having a
mortgage agent who you can trust and who you feel comfortable
with. Mortgage Agents are held to a very high ethical standard
and will not intentionally give you bad advice. They want you to
be a long-term client. They also do not want to submit mortgage
applications that have a good chance of being turned down
because lenders also keep track of the success ratio of mortgage
agents and tend to deal only with agents who provide them with
complete packages and with applications that meet their
So your mortgage agent is acting in your
best interests. If he tells you that in his opinion your GDS or
TDS is at a dangerously high level, even if he can get you a
mortgage, you should listen to him and either look for a house
that is less expensive or wait another year or two before
purchasing. You don’t want to get into a five year mortgage and
find out that at the end of the term your mortgage payments are
going to go up because of an increase in interest rates and then
find yourself unable to carry the mortgage.
FIXED OR VARIABLE RATE MORTGAGES
Your mortgage agent will have a very
serious discussion with you about whether you would like to
apply for a fixed rate mortgage or a variable rate mortgage.
This is a personal decision, so your agent will make sure that
you fully understand the advantages and disadvantages of both.
Traditionally, variable rate mortgages have
had the better track record, coming out ahead of the fixed rate
mortgages over 80% of the time. Variable rate mortgages are also
about 1.5% lower on average than fixed rate mortgages.
Your mortgage agent will be able to let you
know what the mortgage rate trends have been over the past
several years and what the projections are for the coming few
years. If you think the economy is going to remain rather slow,
then interest rates are not likely to go up much. In that case,
a variable rate might be best for you. If, on the other hand you
think the interest rates are going to jump by 2 or 3% in the
coming years, then a fixed rate might be the best decision.
Your mortgage agent will get a feel for
what you are looking for and when the application is made, he
will take that into consideration. All the while, your agent is
searching for the Lender who is willing to provide you with the
best rates and the best terms.
Your mortgage agent will talk to you about
some options you have regarding the frequency of payment. For
example you may want to pay monthly, or you may want to pay
bi-weekly. The payment schedule impacts the length of
amortization but it may require you to pay more each month, so
you must be careful when deciding on the strategy that will work
best for you.