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The Mortgage Group®

Know What You Can Afford Before Home Shopping

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Buying a new home is one of the largest financial decisions a person may make in their lifetime, as well as one of the most exciting. This excitement makes it easy to get caught up in the home shopping process and can be the reason many potential homebuyers skip the initial steps required to get you started on buying the right home for you.

The urge to start looking at real estate listings does not have to be ignored or put aside, but before you call about an ad or contact a realtor, take a careful look at your savings and accurately determine how much you really have for a down payment. Determining this, taking into consideration the other costs necessitated by homebuying, will save you time and money when looking for the right mortgage, help get you the lowest rates available, and aid you in writing your purchase offer.

Mortgage Options

The mortgage options available to a potential homebuyer are essentially dependent on the homebuyer's personal savings and the amount of money they have available for a down payment. If you do not have sufficient funds for a down payment, or to cover closing costs, then you are going to be limited in your choice of mortgage options. If you do have these funds, you will have many more options including conventional fixed-rate loans, adjustable-rate mortgages, buy-downs, graduated payment mortgages, and more.

Interest Rates

Before you start shopping for interest rates by phone or online, know that some mortgage options will charge a slightly higher interest rate if the buyer only makes the minimum down payment. Interest rates vary from one mortgage option to another. Knowing your financial standing will help you get the best mortgage option suited to your needs.

Putting an Offer in Writing

Knowing how much you have for a down payment will determine the type of mortgage you qualify for, and this will affect how your write your offer letter. Different loan types require different items to be included in the purchase offer. For example, if you want the seller to pay for all, or a portion, of the closing costs, you must know ahead of time if your mortgage option allows the seller to do so. When making a minimum down payment, lenders are stringent and will most likely have you conform to their underwriting guidelines. The greater the percentage value you are able to put down on the property, the more lenders will tend to make beneficial allowances when you are writing your offer.

Verifying Your Financial Situation

Lenders will base their decision to grant you a mortgage on your financial situation. This does not just mean having enough money for a down payment or being able to make the monthly loan payments. To foster their confidence in you, as a borrower, lenders want to have your entire financial background. If you can verify that you have assets in addition to those being used for the down payment, the lender will be confident that you have the reserve funds needed to draw upon in emergency situations, and still be able to meet your financial commitment to them.

Having your complete financial history documented is an asset, but it is not always necessary. There are mortgage options available that do not require this information, but these are usually attributed a higher interest rate.

Being able to illustrate how your down payment funds originated will be very beneficial. Consider the following as you verify and document your assets:

  • Bank accounts
  • Investments (stocks, savings bonds, mutual funds, etc.)
  • Monetary gifts
  • Retirement accounts (RRSPs)
  • Personal assets
  • Additional property

Bank Accounts

The easiest way to verify your funds is to provide current bank statements, from the last two to three months, to the lender. Some lenders may send a Verification of Deposit to your bank, but generally bank statements are sufficient.

The money being used for your down payment, and other associated home buying costs, should be seasoned. This means that the funds should be in your bank account for the entire period covered by the bank statements. If your current bank statements, as supplied to the lender, show any unusual deposits, you will be required to explain where those came from.

Investments

Copies of the most recent monthly or quarterly statements you have received, within 60 to 90 days, regarding any stocks, bonds, and/or mutual funds you possess need also be given to your lender. If you hold stock or bond certificates, as oppose to a brokerage account, copies of the certificates should be provided to verify these assets to the lender. If necessary, you may also provide copies of your tax records to show you have held these stocks, or bonds, over a long period of time.

Using income from the sale of stocks, savings bonds, or other investments as part of your down payment is permissable. However, you must provide copies of all the documentation regarding the sale of these to your lender for verification purposes.

Monetary Gifts

Cash gifts are often received from family, friends or acquaintances to aid first-time home buyers in amassing their down payment. Your lender will ask the monetary provider to sign a gift letter stipulating that the money is a gift and does not have to be repaid. The letter may also include information about the gift giver, such as their relationship to the borrower, the address of the property being purchased, the amount of the gift, and where the funds originated. The lender might also require verification from the gift giver to prove they are financially able to give the gift. It is a good idea to keep records of the deposit when you, the borrower, deposit the monetarty gift into your account.

Retirement Accounts

There are some mortgage options that allow you to borrow from your RRSPs to use as a down payment. If you choose to use the Homebuyer Plan option, it is important to provide the necessary documentation to your lender.

Having a retirement account also shows the lender that you have a solid history of saving and that you have reserve funds to draw upon in case of an emergency. It is in your interest to have these assets verified.

Additional Assets and Personal Property

Additional assets and personal property can include vehicles, boats, furniture, antiques and collectables, electronics, clothing and accessories, and so on. These assets can encompass nearly everything you own, excluding real estate. Your lender will ask you to estimate the value of these assets when filling out your mortgage application to verify that your income matches your spending habits. If you are spending beyond your means, the lender will be more cautious when deciding whether or not to approve your application.

Note: You are not required to document the value of these additional assets unless you intend to sell them as a way to make your down payment. Lenders are stricter about documentation of asset sales when a borrower resorts to this method for procuring a down payment, as these types of funds are more difficult to verify.

Want to Save Money and Cut Years off your Mortgage?

Most homeowners agree that saving money and paying off their mortgage faster is appealing, but most have no idea where to start. It can be as simple as making bi-weekly mortgage payments instead of one monthly payment. By allowing half of your mortgage payment amount to be deducted from your bank account every two weeks, you will make 13 payments in a year oppose to 12. The extra payment goes directly to the principal, and your loan amortizes faster with fewer payments in the long run.

How quickly you pay off your mortgage depends on your interest rate and when you start making the bi-weekly payments. For example, a $100,000 mortgage, amortized over 25 years at an interest rate of 4.74 per cent, will be paid off 40 months sooner, with a total of $10,982.02 in interest savings, if you choose a bi-weekly accelerated mortgage payment plan.

Mortgage Amortization Calculator
An amortization is the amount of time scheduled to completely pay off a loan, and the amortization length you choose is important in shaping how much you'll end up paying for your home. While the Government of Canada's national housing agency caps the amortization period for high-ratio mortgages at 25 years, and that is the most popular amortization length in Canada, amortizations can range anywhere from 5 to 30 years for uninsured mortgages. Try our easy to use mortgage calculator to see how changing the amortization length affects your loan payments.
Mortgage Amortization Calculator
 
Mortgage Rates
Wait! Before you apply for a mortgage through your bank, make sure you aren't leaving money on the table. Compare the best mortgage rates in Canada right now. It'll only take a minute, but you'll be surprised just how much you can save!
Mortgage Rates
 
Mortgage Brokers
With all these new terms flying around -- terms like mortgage rates, amortizations and down payments -- the prospect of buying your first home can be downright overwhelming, especially if you're doing it all by yourself. Thankfully, new buyers like you can hire one of our experienced mortgage brokers to help you buy your first home.
Mortgage Brokers Help New Buyers