owned, the company will send it to collections. This is essentially why a lender includes property tax, heating, and 50 percent of the monthly condo fee (if applicable) into the calculations to determine what the borrower qualifies to spend.
These ratios are general guidelines that lenders use to qualify and pre-approve you for a mortgage. However, some lenders are willing to approve a conventional borrower with a credit score of 680 or higher using a 44 percent TDS ratio. If you have 20 percent or more for a down payment, you are considered a conventional borrower and there will not be an insurance premium in most circumstances. Understand that a combination of your credit score, the amount of your down payment, and your employment are used to confirm and approve your mortgage loan. Again, lenders may have some discretion to slightly modify the ratios if you are a conventional borrower with a 680 or higher credit score. Speak to your mortgage professional regarding your individual mortgage situation.
Be careful about purchasing a vehicle, participating in long-term “don’t pay” events for furniture or appliances, or incurring any other indebtedness because it may affect your TDS ratio. Always be aware of how borrowing will affect your credit score.
To finalize the maximum purchase price that you are able to spend you need to determine how much of a down payment you have, with 5 percent of the purchase price being a minimum amount. Again, if you have less than 20 percent down payment, you are considered a high-ratio borrower, and you will likely be required to obtain mortgage default insurance (also called mortgage loan insurance), which you will get from either CMHC or Genworth Financial Canada. This insurance does not protect the borrower, rather this insurance protects the lender against the borrower defaulting, thereby reducing the lender’s exposure to loss. There is a one-time fee you pay for this insurance, due up front, and is subject to provincial sales tax where appropriate. If you do not have the money to pay this insurance premium, it is borrowed and added to your mortgage.
The fee varies depending on the down payment using the following guidelines:
• 5 percent down payment: Multiply the mortgage amount borrowed by 2.75 percent
• 10 percent down payment: Multiply the mortgage amount borrowed by 2 percent
• 15 percent down payment: Multiply the mortgage amount borrowed by 1.75 percent
Add 0.2 percent to each of the above scenarios if you decide to take a 30-year amortization.
Now take your total down payment amount and add this to the mortgage amount you qualify for. This amount equals your maximum purchase price. For example, if you qualify for a mortgage of $185,000 and your down payment is $15,000 ($185,000.00 + $15,000 = $200,000.00), the result is your maximum purchase price.
Occasionally, a buyer wants or needs a mortgage amount that is slightly higher than what the ratios allow, but due to other debt obligations (e.g., credit cards, student loans) that affect the ratios, the buyer simply doesn’t qualify. Understand that I do not advocate or recommend that a buyer exceed his or her qualification limits; however, sometimes it is possible to find a lender that will allow a debt consolidation or similar program. Another option or necessity to free up money could be to pay off a loan or credit card completely. The less non-home related debt you have will result in more income available to qualify for a mortgage.
It is recommended that you speak with a mortgage professional about all the options, and carefully read the fine print. It is important to understand to what you are agreeing. Seek legal advice prior to signing any agreements.
3. How to Shop for a Mortgage and Get the Best Deal
Mortgages are products, and they have different terms and conditions. Don’t be fooled into thinking that all mortgages are simple boilerplate documents that differ only by the interest rate offered. Break the mortgage into two components: the interest rate based on the length of the term, and the terms and conditions.
Your mortgage document is normally several pages in length and outlines the numerous terms and conditions. Different lenders can offer different terms and conditions and the interest rate may be negotiable. The key is finding the best mortgage for your needs, your long- and short-term goals, and a competitive interest rate.
Traditionally, borrowers obtain a mortgage pre-approval either directly from a bank or through a mobile mortgage representative or mortgage broker. If you choose to work with a specific bank, you may have the option of working with a mortgage representative located within a branch; some banks have “mobile” mortgage representatives that will meet with you outside the branch at a time and location convenient to your needs. Some mobile mortgage representatives also have offices located in real estate brokerages.
Bank mobile mortgage representatives are usually not salaried and, therefore, do not earn money unless they offer and you accept a mortgage from them. It is in their best interest to find and offer you a great deal. Being open to bundling other bank financial services and products may assist you in getting a better mortgage offer.
When dealing directly with a bank, don’t forget that you are also dealing directly with the company that is lending the money (as opposed to dealing with a mortgage broker). How you present yourself to a bank can make a difference as to whether you obtain a mortgage and how good of a deal you are offered. Banks are interested in serving your financial needs — a mortgage is one product amongst several other financial products that they offer. You may be able to get a better mortgage deal if you are willing to use other financial products they offer such as bank accounts, credit cards, vehicle loan, insurance, RRSPs, and other investments.
In-branch bank staff normally work on a salaried basis, and often the mortgage representative can and will offer you a menu of other bank-related products and services. If you have an established relationship with a bank, especially if the branch staff know you personally, you might consider speaking with the mortgage representative to determine what he or she will offer. The mortgage representative will still need to go through an application process and will need to adhere to bank underwriting and risk assessment policies; however, having a personal banking relationship may help.
It is important to understand that if you go from bank to bank in an attempt to “shop” around for a mortgage, each prospective bank may do its own credit check, and this will affect your credit score as multiple hits or inquiries are recorded.
Mortgage professionals are also trained to work with the self-employed and new immigrants. This is a more specialized process. Some lenders offer specific mortgages and programs created specifically for self-employed people and new immigrants.
The mortgage market is competitive and mortgages are usually negotiable. Remember it is not only the interest rate that you may want to negotiate — terms such as prepayment privileges (on closed mortgages), portability options, early renewal, penalties, and a host of other options should be discussed.
Occasionally, lenders offer promotions for their mortgage products such as cash back, rate discounts, and prepayment options. It is important to assess the value and importance that their offerings have to your needs, or if you would prefer more of a no-frills mortgage. Be sure to read the fine print because occasionally special terms and offers carry specific rules that must be followed. Understand what the product is; don’t simply choose a mortgage product based on the interest rate alone. Again, consult a lawyer prior to signing any contract or agreement.
It is a good idea to ask the mortgage broker or bank mortgage representative for an outline of all mortgage costs as well as an estimate of your mortgage payment (i.e., principal, interest, and taxes). Some will even help you prepare a housing budget.
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