Things you need to know about mortgages
Understanding Your Credit
Incurring debt is part of life for most people. Understanding how best to handle credit will help you maintain control of your overall financial situation.
Strong credit leads to quick credit approval at the best possible terms. Your credit history must clearly show your willingness and ability to pay your debts.
Your Credit Report
During the second mortgage application process, lenders look at your credit record and credit score to check how you’ve managed your debts.
It's a smart idea to review your own credit report and score before applying for a loan.
For a small fee, a credit bureau will provide an instantaneous, complete online credit report and credit score that details your current debts and payment
history. They also detail what your score level means, how you compare to others, and provide tips to improve your score.
You also may receive your credit report (without the credit score) by mail for free by contacting the credit bureau.
When you receive your credit report, ensure that all the information and amounts are correct. Look carefully for any past-due or written-off amounts.
Uncertainty and ambiguity on your credit report can be dangerous to your financial health.
Correcting Credit Problems
If you have never had a loan or credit card, you can still show a good record of timely payments of your utility bills, property taxes or rent.
You can establish minor credit relationships, such as short term installment loans or a credit card, and maintain a record of prompt payments.
If you have a credit problem because of an unusual situation, write a letter of explanation. Your lender may overlook a credit problem if you can give a
good reason for not having made your payment.
If you're constantly struggling to pay your bills, seek professional help. Remember: creditors don't want to lose money. Let them know if you are having
trouble with your payments. Most creditors will work out alternative payment arrangements to help you maintain a good credit rating.
Plan major purchases carefully and do not accumulate excessive amounts of debt.
Pay down existing debts and ensure bills are paid on time, especially minimum payments on credit cards. If necessary, postpone major purchases until
you can save the money required.
Avoid large purchases before buying a house, since the added debt will affect your mortgage qualifications.
Use credit responsibly. Establishing a track record of on-time payments will improve your credit rating.
Avoid skipping bills to make other payments since missed payments appear on your credit report and create longer-term problems.
Avoid defaulting on payments. Delinquent payments, collection items, and court judgments stay on your credit file for six years, even if you subsequently
Save money regularly for financial emergencies. You also can arrange for credit lines to cover short term cash flow payments, but resist utilizing them on a
long term basis.
Should You Rent or Buy?
Before you get too far in the home buying and mortgage process, make sure you really want to own a home. Begin by reviewing the general advantages and
disadvantages of home ownership. Then think about your own personal pros and cons.
Millions of people enjoy the rewards of home ownership. Here are the advantages of buying a home. Think about the ones that are most important to you.
A sound investment. When you carefully choose a home you can afford, the payoff can be great. Each month when you make your mortgage payment,
you're building equity in a place of your own. Equity is the portion of the property that you actually own through your payments, versus the portion that you
still owe the mortgage lender. The longer you stay in your home and the more mortgage payment you make, the more equity you'll have. And unlike most
things you buy, a home can actually appreciate, or increase in value, as time passes, building more equity (but remember, there's no guarantee that your
home's value will grow; sometimes home values go down).
A first step. As you build up equity in your current home, it's usually easier to afford another home in the future.
Satisfaction and security. As a home owner, you can decorate and improve your home any way you like. Owning a home can also give you a new sense of
pride in your surroundings. You and your family may feel stronger ties to your community.
It's easy to get caught up in the excitement of buying a home, and to forget that home ownership may have drawbacks. Here are some disadvantages of owning a
home. Think about which ones may apply to you.
Bigger costs and a mortgage: If you're now renting, you can expect to pay more per month for your mortgage, plus the added costs of home repairs and
Tying up cash. Your home might increase in value as time goes by, but don't count on getting a big return quickly. During the first few years of ownership,
you're likely to lose more money than you gain if you should need to sell your home, because your home may not appreciate enough to cover the
commissions that go to the real estate agent.
Tougher moves. After you've bought a home, you may not have as much flexibility in choosing a new location or job.
No guarantees. There's no guarantee that your home will increase in value, particularly during the first few years.
Home ownership isn't for everyone, so you should think carefully about the advantages and disadvantages before signing an agreement to buy.
Renovating for yourself
• If you are simply upgrading your home for yourself or your family without expecting an immediate return, then the benefits are obvious. You are living in a more
modern, comfortable home.
• By upgrading your home, you may also be avoiding insurance-related problems. Today, many insurance companies are refusing to insure homes with knob and
tube and/or aluminum wiring and are also expressing concerns about old oil tanks, certain types of siding, asbestos insulation and other home-related deficiencies.
Replacing these functionally obsolete characteristics will also make your home much more saleable in the future.
• While beneficial, home renovations can sometimes run into cost overruns and unexpected upgrades, particularly in older homes. It’s good to get detailed quotes
but then anticipate for some extra costs for unexpected upgrades and additional work.
Upgrading to sell
• Be careful not to over improve your home for the location of your property. It’s not advantageous to have the most expensive house on the street.
• Get a valuation by a qualified appraiser or a real estate agent to determine the approximate value of homes in your area.
• After the upgrades, if the value of your home does not dramatically exceed that of other homes in your area, it may be a good idea to renovate. If it does, it may be
better to move to a new home in a new location that better suits your needs.
Buying another home has a host of costs other than the purchase price. These include real estate commissions, legal fees, moving costs, utility and carrying costs,
and perhaps even costs to redecorate and refurnish the new home.
By taking into account what you want to do, why you want to do it, the costs of the renovations and upgrades, the value of your renovated home in relation to other
homes in your neighborhood versus the costs of buying a new home, you can determine which option is best for you.
Who you need to buy a home and get a mortgage:
Buying a home is a somewhat complicated transaction that involves a number of professionals who all perform different functions during the purchase process.
The real estate agent/broker – The real estate agent or broker will locate houses in your price range and in the areas where you want to live. The agent/broker will
present your “offer to purchase” to the seller until an agreement is reached, usually for a commission. There are a number of real estate agents and brokers to
choose from, so it’s advisable to shop around to find one you’re comfortable with. Talk to friends and family to get a referral. Commissions can range from three to
six per cent of the purchase price. Agents set commissions based on market conditions.
Mortgage Broker – Some purchasers retain the services of a mortgage broker to assist them with arranging their mortgage financing. The mortgage broker should
determine the best type of financing that suits your particular financial situation. You may wish to ensure your broker is a member of the Canadian Institute of
Mortgage Brokers and Lenders (CIMBL) and has obtained their Accredited Mortgage Professional (AMP) designation.
Lenders – Banks, credit unions and mortgage companies all lend money to home buyers. Find out how much you can afford before starting to look. Lenders look at
your income, debts, employment and credit histories and the value of the property you want to buy before giving you a mortgage. It pays to know how much you can
afford before looking, so consider getting pre-approved. You don’t want to find your dream home and then discover you can’t buy it because it is too expensive.
Lawyer – Your lawyer (notary in Quebec) reviews the agreement of purchase and sale, ensures all closing documents, including title search and title insurance,
have been completed properly, obtains signatures and records documents with the appropriate provincial land transfer office. Your lawyer will usually also act for
the lender and collect the money needed to close your purchase and give it to the appropriate parties, as well as ensure that on closing you have a valid and
marketable title subject only to the encumbrances you have agreed to. If you don’t have or know of a lawyer, your best referral source is family or friends, or
through the law society in your area. It’s best to get your lawyer involved early in the process to review the purchase and sale agreement prior to signing.
Property Surveyor – A property survey is undertaken to verify the property’s boundaries, measurements and structures and identify any easements, rights of way
or encroachments on your, or adjacent properties. Title insurance is often an alternative to a property survey.
Home Inspector – A qualified inspector examines the plumbing, electrical work, appliances, furnace, air conditioners, roof and structural stability of your new home.
This allows you to address any issues with the vendor prior to closing, as well as anticipate any repairs you may need in the future.
Appraiser – The appraiser determines the home’s market value based on its condition and the selling prices of similar homes in the area. You should ensure you
have obtained an appraisal for your own protection.
The hidden costs of buying a home:
Closing costs. These generally refer to legal fees, property tax and utility adjustment costs and, in some provinces, land transfer taxes.
Legal costs go to cover lawyer (notary in Quebec) fees and legal transactions such as reviewing the terms of the offer, preparing and signing a mortgage,
conducting a title search on the property, registering a new title, obtaining relevant documentation and determining appropriate adjustment costs.
You should consider hiring a real estate lawyer to handle your transaction. If you don’t have or know of a lawyer, your best referral source is family or friends, or
through the law society in your area.
Land transfer tax. In some provinces this tax is levied when property changes hands. It varies with the purchase price of the property.
Other costs. Costs other than closing costs can include but are not limited to the following:
Property Survey. This is undertaken to verify the location of property’s boundaries, measurements and structures and identify any easements, rights of way or
encroachments on your, or adjacent properties. Title insurance is often an alternative to a property survey.
Interest Adjustments. This covers any interest accrued between the closing date of the purchase and the first regular payment date of the mortgage.
Goods and Services and Sales Taxes. GST and sales taxes will depend on the type of property being purchased. Always ask if either or both of these taxes apply
before signing an offer to purchase.
Service Charges. These are charges to hook up utilities such as electricity, gas, and telephone service.
Home Inspection. It can be a good idea to have an inspection done before completing the purchase to evaluate the structural and mechanical condition of the
property. This could save you lots of money in future repairs.
Appraisal fees. Some purchasers want to ensure they are paying a reasonable market price for the home they are purchasing. You may want to condition your
offer subject to a satisfactory appraisal by a member of the Appraisal Institute of Canada.
Mortgage Life Insurance. Special insurance coverage to cover the cost of discharging your mortgage in the event of death or severe illness is available from most
Moving costs. Although it may sound obvious, purchasers may not consider moving as a cost of buying a home. Moving costs will depend on the distance of the
move and the amount of furniture and goods to be transported. Get several movers in to give you an estimate before choosing one.
Appliances. Check to see whether appliances are included in the purchase agreement. If not, you will need to go out and buy them.
Landscaping, Fencing, Decks, etc. If purchasing a newly constructed home, keep in mind that there will likely be a need to landscape and fence the yard in the
first year or two.
How can you minimize the risk?
Buy what you can afford
Make sure you buy a home that you can afford. Home buyers need to be realistic about their housing budgets. The size of the mortgage you obtain, the interest rate
and the amortization period will directly impact your monthly mortgage payments. As a general rule, your mortgage payments and property taxes should not exceed
25 per cent to 30 per cent of your pre-tax income. When budgeting, plan for other home-related costs such as utilities, insurance, maintenance, and taxes.
Mortgage planning tools are available online to help Canadians manage their loans.
Look for the best mortgage options
Find out who is offering the best mortgage terms and interest. If you understand the various rates and terms available you can determine the option that works best
for your needs. Understand the implications of variable versus fixed interest rates.
Build a monthly housing budget
Do you know where your money goes on a monthly basis? Once you are in your home, you should develop a budget to track your expenses, including all home-
related items such as utilities, property insurance, taxes and a reserve for maintenance. Make sure to leave some room for unexpected expenses.