Choosing a Mortgage Broker/Mortgage Agent is a critical first step when you are planning to purchase and finance a home. A mortgage broker is an intermediary between the borrower and the pool of lenders. Using a mortgage agent eliminates the need for you to shop around trying to find the best rate and mortgage product to suit your short-term and long-term needs and goals. Why not leave it up to a professional that deals with lenders daily and is educated in every aspects of the mortgage industry? Most people looking to purchase a home do not know all the details that go into applying for a mortgage & securing financing; therefore it is important to be confident and trust your mortgage broker. Many questions will come to mind throughout the process. Some of the most common questions are as follows:
What is the best price range for me when looking for a home?
Your mortgage broker will be able to do a pre-approval for you. A true pre-approval requires the borrower to provide specific income documents. Additionally, a credit bureau will be pulled to evaluate what the debt situation is and what the credit score is sitting at. These elements are better to be evaluated upfront because lenders are specific as to a minimum credit score and debt ratios in relation to income. The credit bureau will also show debt repayment and utilization. Once a mortgage agent assesses the overall file, a maximum purchase price amount will be released.
How much money should I use for my down payment?
There are a few things to consider when deciding on your down payment amount:
- The minimum amount you must have for a down payment in Canada is 5% of the purchase price of the property. The more money you use for a down payment the less your mortgage loan amount will be. Any amount between 5% and 19.9% is called a High Ratio Mortgage and requires the lender to get approval from a default insurance provider for the mortgage. For more information on the different types of insurances associated with mortgages stay tuned for an additional blog post I will be doing, specifically on insurances.
- What can you afford? You do not want to leave yourself “cash poor” as you always need to keep cash on hand for unexpected emergencies.
- You will need cash for the closing costs at the end of your transaction. These would be things such as lawyer fees, possible appraisal fee, home inspection, home insurance, utility hook-up fees, etc. Be sure to ask your mortgage agent what the approximate costs would be for your particular scenario. As a mortgage broker in Grande Prairie, I prefer to get a few different quotes from lawyers for my clients so they can choose the best option if they do not already have a specific lawyer in mind.
- There are options for coming up with the funds for a down payment. You may have enough cash in a savings account, a family member may give it as a gift (that is not expected to be paid back), proceeds from the sale of a property, RRSP’s…always confirm with your mortgage broker or agent for what would be acceptable for a down payment.
Should I choose a fixed interest rate or a variable interest rate?
Going with a variable interest rate means your rate can fluctuate throughout the term of your mortgage. The variable rate is based on the Bank of Canada’s prime rate, meaning the payment amount can vary throughout your term. With a fixed interest rate your rate is just that, fixed. It means the payment amount will always be the same for the length of your term. There are pros and cons to both and it does come down to personal situations as to what would be best. As a mortgage agent, I go through several options with my clients by finding out what their plans are and assess their situations to determine the type of rate that will best suit their needs.
What is a prepayment penalty?
Each lender has their own stipulations when someone wants to pay off their mortgage in full or put a lump sum of money towards their mortgage principal. This is referred to as prepayment privileges and it will be stipulated in your mortgage commitment. If prepayments are allowed with your lender they will state a percentage of the loan amount that may be put towards the loan each year that would be considered penalty free. Once you go over that amount with a lump sum or pay your mortgage off completely, you will be charged a prepayment penalty. Each lender is a little bit different and it is important for you to understand how your particular amount would be calculated as it can end up costing you thousands of dollars. It is very beneficial to make lump sum payments on your loan but it is critical to know how much money those payments need to be and when they should be paid. Make sure you have your mortgage agent break down the different options and possible penalty amounts for you.
Should I use a Realtor for a home purchase?
The answer to this question is simple…absolutely YES, always enlist the services of a trusted realtor when purchasing a home. A home purchase is a huge investment and can be a very emotional transaction. Realtors are professionals in home sales the same way that a mortgage broker is a professional with home financing. Home buyers do not pay a commission to real estate agents, their commission is paid by the seller, so there is really no reason not to use a realtor and have them handle the negotiations, paperwork and legalities of your home purchase.
Acquiring the services of a realtor, mortgage broker and lawyer are very important steps in the process of purchasing a home. They work solely for you, the client, and will provide you with great advice and guidance throughout the process, eliminating much of the stress and definitely saving you countless hours of time.