Top 10 Most Asked Mortgage Questions

By Danielle Spitters, TheRetiringBoomer.ca

When considering buying your first home, or refinancing to buy your dream home, there are many questions you may have and the whole process might seem foreign to you, even if you have done it before. I get a lot of questions from my clients and have summarized the most common ones to give you some insight to what the lenders are looking for when qualifying you for a mortgage. For first timers this is a good overview and for those refinancing a refresher.

 

1. What’s the best rate I can get?

 

The rate that you receive depends on a number of things. I get a lot of clients that are what I like to call “rate sensitive” this means that they are fixated on the lowest rate and may not understand why they cannot receive that low advertised rate. A number of those rock bottom rates you see advertised have conditions to them. For instance they may only be for a 30 day quick close, or they may not be portable. When qualifying for a mortgage a lender and the broker will look at a number of things to determine the rate you will receive. Some of these things include employment, credit score, loan to value, income and many more. Each application is unique so it is best to talk to your broker about how you feel your credit may be before determining which kind of rate you will receive.

 

2. What’s the maximum mortgage amount for which I can qualify?

 

This of course is going to be based on your income and liability circumstances.
There are two calculations both lenders and mortgage brokers use to qualify a borrower. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and 50% of strata/condo fees, if applicable). Generally speaking, this amount should be no more than 32% of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in monthly housing expenses. Second, you will need to calculate your Total Debt Service (TDS) ratio. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 40-44% of your gross monthly income. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get a pre-approved mortgage. This will help you know what you can comfortably afford, so you can go house shopping with confidence.

 

3. How much money do I need for a down payment?

 

The minimum down payment required is 5% of the purchase price. If you want to avoid having to pay CMHC fees than 20% is needed.

 

4. What happens if I don’t have the full down payment amount?

 

There are programs available that enable you to use other forms of down payment, such as from your RRSPs Home Buyers’ Plan (HBP), a cash-back product, or a gift. There are mortgage products out there that allow you to purchase with no money down at a bit a higher interest rate which is called a cash-back mortgage. You can also use a non-repayable gifted down payment from a family member.

 

5. What will a lender look at when qualifying me for a mortgage?

 

These are the most important factors a lender will look at when qualifying you for a mortgage. Employment history, income, debt, credit history and the value of the property you are purchasing make up the list. Most importantly the lender is looking to make sure you can afford the home you want to purchase. Second most important thing they consider is the value of the home. The lender wants to make sure that if you default on payments they have security in the home. What lenders like to see is stability. They want to see this through your employment. They want to see that you don’t miss payments on anything. It’s important for you to have good credit, and minimal liabilities or that you are at least never late on those payments. You don’t want to be holding a bunch of debt that you can’t afford. This shows you are responsible and less of a risk for the lender.

 

6. Should I go with a fixed or variable rate?

 

This ultimately depends on your risk tolerance. If you’re a first time home buyer you may feel a lot safer going fixed as you would know what you’re expected to pay for the term of the mortgage. Variable however can save you a lot of money, I mean thousands. This is of course if the rate doesn’t go up, and no one can predict the future. If you want to go variable I say it’s best to qualify you a bit lower than your max, this way you have room and can afford the payments if the prime rate moves up. There is also a 50/50 rate where you can go half fixed and half variable, so you can enjoy some savings but still feel a bit more secure.

 

7. What credit score do I need to qualify?

 

Generally speaking a credit score of 680 and up is an excellent credit score. The higher above 680 it is the more likely to get the best rates. There are lenders that lend on lower credit scores but you may not be able to get the lowest rate offered. Having a larger down payment can also help to increase your odds at getting a better rate. Statistics show that the larger the down payment, the less defaults on payments.

 

8. What happens if my credit score isn’t great?

 

If your credit isn’t the greatest there are ways to increase your score. Most credit reporting companies report every month. So luckily you can change your score within a month’s time if you do the right things. First most important thing is to pay down your credit cards so they are at below 70% of your limit. Pay off your credit card balance in full if possible, credit agencies do not see that you may have paid $1000 last month, all they see is the last payment and what is owing, so if you can have balance at 0, that of course is the best! Keep using cars you have had for a long time, older is better here. Make sure everything is up to date. You don’t want to find out that an old bill is still showing up on there when you paid it ages ago.

 

9. How much are closing costs?

 

Closing cost is on average 1.5% of the total purchase price. This is just a guideline to go by, but the lender will generally want to confirm you have the means to pay this. Closing costs will cover things like, inspections, lawyer fees, property transfer tax, appraisals, and title insurance.

 

10. How much will my mortgage payments be?

 

This is going to depend on many different things. The size of your down payment, the interest rate, the purchase price, amortization, whether or not you’re paying mortgage insurance and also the frequency of payments (bi-weekly, bi-weekly accelerated, or monthly).