Understanding the financial jargon associated with buying a home can be overwhelming for even seasoned business owners—so if you’re feeling confused, don’t worry! We’re here to help you understand what’s going on behind the scenes with mortgage lenders, insurance companies and brokers so you get the best possible deal when buying a home.
Your mortgage lender won’t tell you everything, and that’s why you need to do some preliminary research.
The longer it takes you to repay your mortgage, the more money your lender earns. In fact, everyone involved in the home buying process—from mortgage brokers and insurance providers to the agent who signs your contract at a financial institution—will earn money from your transaction. That’s why they are unlikely to be completely transparent about the procedure.
If you're in the market for a home, or if you have one and are thinking about refinancing, it's important to pay attention to the fine print. This is especially important for mortgages with a very low, very attractive interest rate. There will be clauses within the agreement that actually cost you more money in fees if you aren’t careful.
There are stipulations included in your mortgage agreement that go beyond finances. For example, your mortgage lender may require you to buy a certain kind of home insurance and perform regular maintenance to keep the house up to code and in marketable condition.
Even if your lender promises to lock in that low interest rate for a couple of months, it might not apply by the time your application gets approved. If, for example, your mortgage application isn’t fully processed and given the go-ahead by your financial institution within that 30 or 60-day lock-in, you’ll be very lucky to see those mortgage rates take effect at all.
A bank’s annual percentage rate (APR) is meant to consolidate all fees and interest to show you exactly what a year’s payment will look like. You should, theoretically, be able to compare the APRs of all loans to see price comparisons—but you can’t! According to Keith T. Gumbinger of HSH Associates, a New Jersey mortgage research and tracking service, "We have studied it and determined that (the APR) is fairly meaningless."
Some of the fees included in your mortgage contract could be negotiable, or at least cause to move on to another lender. When requesting your estimated closing costs, ask that all fees be itemised, so they are easy to assess. If something looks off—say, a $150 “messenger fee”—ask about it. If you aren’t happy with the lender’s explanation, it’s perfectly okay to move on and find a better contract.
On closing day, take a look at the “amount financed” on your paperwork. The amount financed should only equal the amount of the principal loan, minus any prepayments—no fees. Make sure you are only agreeing to pay interest on the amount of the loan, not any fees that have been tacked on.
If you’re buying a home with a down payment of less than 20 percent of the home’s value, you’ll be required to buy mortgage insurance (also called mortgage default insurance). In Canada, the three main providers of such insurance are the Canada Mortgage and Housing Corporation, Canada Guaranty and Sagen. When purchasing mortgage insurance, you may be told that you can cancel the policy once you’ve made enough payments to reach 20 percent equity—and that may not be true. Check with the provider to make sure, since government-backed loans are probably not eligible.
Has a mortgage lender pre-approved you for the money to buy a home? Yeah, probably not. Like those pre-approved fake credit cards that come in the mail, pre-approval notifications are usually just a way for lenders to attract potential borrowers, no matter the credit rating or employment history, and sort through them later.
The minimum credit score necessary to obtain a mortgage is 600—but that’s not going to get you a good deal. It’s probably in your best interest to take a little time and improve that score before looking into buying a home, because the lowest interest rates are reserved for borrowers with a credit rating of about 700 or more. As long as you have an income that covers all your monthly expenses, and you are making regular repayments on your personal debts, it won’t take long to get a poor credit rating up into the 700s. In as little as 3-6 months you could see the improvement you need.
It's not just your credit rating that affects how lenders look at your application. They’ll also want to see that you are employed—probably full-time, depending on the salary—and that you have been working for the same company for a minimum of two years. Things can be a bit more complicated if you are self-employed, so if that’s your situation, be prepared to show at least two years’ worth of tax returns that show regular income.
Ultimately, the right mortgage for you is the one you can afford in the short and long term. Sounds simple, doesn’t it? And yet, after months of financial paperwork, applications, confusing conversations, fees, insurance quotes, browsing the market and checking credit scores, it’s not difficult for unprepared potential homeowners to lose track of that primary goal.
As you move forward in the search for an affordable mortgage, remember one thing: Vendors and brokers and agents are not there to save you money unless you are the one who hires them! Get the market facts for yourself to determine the best mortgage rates of the day and do yourself the favour of achieving a high credit rating to gain access to those rates.
When you’re ready to start looking at properties, start with our real estate Niagara listings page, or read our Top 5 Places to Live in St. Catharines, Ontario. We look forward to helping your find your new home!