Mortgages in Canada

The process

When you decide you want to buy a home in Canada, you would normally start looking on a real estate website and over the course of weeks or months you would narrow down your criteria. You would decide which area of the city you want to live in, and whether you wanted a house, townhouse or condo.

Once you have an idea of what you want to buy, you need to figure out how much you can afford. This is when you need to go see your bank or mortgage broker. They will look at all aspects of your finances and based on your income, will give you a maximum house price.

Pre-approval

I would highly recommend that you use a licensed mortgage broker instead of going directly to your bank. Here are some reasons to use a mortgage broker

  • They work for you, and not the bank
  • Will shop around and get you the best rate
  • Have access to up to 50 lenders
  • Your bank representative may not be a mortgage specialist
  •  Brokers are paid by the lender you choose, and cost you nothing
  • Mortgage brokers typically get things done faster

So, what is a pre-approval?

There are basically two parts to it

  • The lender holds an interest rate for you – usually for 90 or 120 days.
  • The lender looks at your finances and tells you how expensive your home can be.

The rate hold is always important because it protects you if rates were to go up in that 90 or 120 time period, but if rates were to go down you would still get the lower rate.

The amount you can afford to pay for a home is a little more complicated. Some lenders, like the big banks may only do a rate hold and a pre-qualification.  A pre-qualification is just a rough estimate of how much you can afford. Whereas most mortgage brokers will ask to see your pay-stubs, notice of assessment (NOA) employment letters, and bank statements so that they can be sure what your income is and what your monthly payments are.

They will check your Gross Debt Service (GDS) and Total Debt Service (TDS) to make sure that you can afford your home payments every month. GDS is the percentage of your income that is needed to pay all your home related bills every month such as mortgage, taxes, insurance, and heat. While the TDS encompasses those items and any other non home related expenses you have like a car payment or credit card payments.

In general a score of below 32% is required for the GDS and below 40% for the TDS.

The broker will also pull your credit report to make sure you have an adequate score to get a mortgage.  You will need a score of at least 600 and maybe higher if you want the best available rates.

 The Purchase

Once you have your pre-approval and a maximum house price, you can contact your realtor and start the fun part – finding your dream home.

Your realtor will take you through all the homes you want to see and when you find the one you love, you will make an offer to purchase. Make sure the offer contains conditions that must be met before the deal is a firm sale.

  • Financing condition – this gives you a week to 10 days to get your financing firmly in place
  • Home inspection condition – a licensed home inspector will check the home for major problems
  • Condo document review condition – If you buy an apartment style condo or a townhouse.

The Financing condition is critical even if you have a pre-approval in place. This is because the lender must also approve the property you are buying whether it is a house or condo. They need to know that it is worth what you are paying for it. This is true whether you have a conventional or insured mortgage.

If you are putting down less than 20% for a down payment you will need to pay for CMHC insurance to cover the banks losses if you fail to pay your mortgage and they have to foreclose on your home. Read more about insurance here

You will need to get a deposit cheque in the form of a bank draft within 48 hrs of the offer being accepted. This deposit is usually for $5,000 to $10,000 and is applied to your downpayment once the deal is a firm sale.

The home inspection is always a good idea, especially If you are buying a single family detached house. For apartment style condos, it is more important to get the condominium documents reviewed so you can be sure that the condo corporation is healthy and has enough money to operate without coming to you for extra money on top of your condo fees.

Removal of Conditions

Once the lender has unconditionally approved you and your property, you will sign a mortgage commitment and you can waive your financing condition. If the home inspection was satisfactory and no major issues were found, you can also waive that condition. In the case of the condo, if you had the condo docs reviewed by a professional condo document review company, and the building ‘s finances were found to be in good condition, you can remove that condition as well.

Once all of your conditions are removed, it will be a firm sale and there is no way to get out of the deal. Well, you could back out of the deal but you would lose your deposit which would be around $5,000 to $10,000 .

It is critical that you do not make any major purchases before you take possession of your new home.  Banks have been known to check your credit  a few days before, and if you bought a new car or some furniture, it could cause problems with the mortgage because you would no longer qualify.

See the Lawyer

About a week before the possession date, you will be called in to your lawyer’s office to sign all the papers. The lawyer will cost you around $1200.

Possession Date

This is the most exciting part – all you have to do is show up to the new home and your realtor will hand you the keys.

If you need more details or want to get started on your pre-approval call Shane Voth at (403) 668-1216 www.timelesslenders.ca

If you need a great realtor try Carmen Paradis of RE/MAX Real Estate Central at 403-703-8516 www.carmenslistings.ca

For Investors

If you like to buy properties for rental income, the process can get a lot more complicated. Lenders will take into consideration the rental income of your existing properties and apply that to your total income, but some will only let you use 50% of the actual rent you receive. In addition you will probably need to put 20% down on a rental unit, so you need to come up with a lot more cash to start. This makes it all the more critical to use the right mortgage professional that has done this before.

Also, you need to use a good small business bookkeeper to keep track of everything for you. Daniela Hops of Padgett Business Services can help you with this. She can be reached at (403) 220-1570

 

 

Canadian Mortgages explained