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Top 10 Home Buying & Mortgage Related Considerations
September 26, 2020 | Posted by: Danny Duong
- Title Insurance - more and more, lenders are making title insurance a standard requirement to protect them as a lender. As the homeowner, for an extra few hundred dollars make sure to get coverage for yourself as well!
- Closing costs - depending on your province, there are closing costs that can not be rolled into the mortgage such as Property Transfer Tax (in BC). Other costs as well such as annual property tax adjustments and of course legal fees. And if your mortgage is default insured, the insurer will also want to see that you have sufficient extra funds on top of your down payment for these potential closing costs (standard 1.5% of purchase price is what is currently used).
- Cash back incentives - offers from a bank could be a great source of funds for renovations, etc after closing, but make sure to ask and understand how clawback of the cashback works if you break the mortgage early
- Lowest interest rate does not equate to lowest overall Cost of Borrowing - consider exposure to potential a large IRD penalty and how it is actually calculated (yes the same Acronym does not mean the formula used is the same by all lenders). Are there any other restrictions attached to the low rate such as ability to pay out the mortgage ONLY if there is a Bona Fide Sales which handcuffs you from refinancing early with different lender. These things could make the overall cost of borrowing much more expensive in the long term.
- Focus on managing debt, not just getting more income to qualify - car leases, unsecured lines of credit, and credit cards can be a deal killer even if you earn a high income so try to manage the debt side of the ledger as well. A car lease of $575/month will reduce your ability to borrow approx. 100K. A 25K unsecured line of credit or credit card balance will reduce borrowing power by about and additional 130K. Managing these debts may be more achievable than getting a co-signor or waiting until you earn more income (which would be about 40K annually more needed in the examples above) agree? Oh, did I mention that acting as a guarantor for another person's mortgage or loan could also reduce your future borrowing power?
- Pre-approvals are not 100% firm approvals - you may be approved as a borrower, but the property you ultimately purchase still must be approved by the lender (and default insurers if applicable). Also, not all lenders who pre-approve actually review and verify income, credit history, and down payment at the preapproval stage so there could always be additional questions and info needed even after being pre-approved that would result in a lower approved loan amount (or decline). Thus consult with an experienced mortgage professional and share as much info openly to allow accurate assessment of your qualifications as much as possible upfront.
- History of down payment funds - lenders will usually ask for a 90 day history via bank statements to verify the source(s) of your down payment. Having a clean and clear paper trail of your down payment funds will make for a much more pleasant experience getting the mortgage approved than if you have numerous transactions coming in and out of various accounts including unverified large cash deposits that appear inconsistent with your usual banking habits,
- Acquiring the services of a Mortgage Broker is free - it should not cost you anything to consult with a Mortgage Broker about financing options. Mortgage Brokers are licensed and almost always compensated by lenders. The only situation that may require borrowers to pay any fees is if you do not qualify with any of the mainstream lenders and financing could only be arranged (by the broker) through private lenders who do not compensate the broker. If this is the case then the broker must still explain clearly all fees involved and get your agreement in writing before proceeding.
- Buying a pre-sale development - if you purchase a pre-sale property that is not scheduled to complete for quite some time (ie. in 5 months to 3 years), do not just wait until you are a few months from completion to get approved for a mortgage. There are lenders who will approve financing for up to 2 years out without the need to reconfirm income, credit, or value of the property (albeit at a higher rate). Having such an approval in your back pocket in case of employment changes, market condition changes, even credit challenges would be highly recommended.
- Start doing your research and homework early - build your team of professionals including experienced Real Estate agent, Mortgage professional, Financial Planner, Lawyer/Notary, Accountant in advance. Figure out how to best save for your down payment, what tax implications there might be for buying the property (capital gains), the best way to register the ownership if applicable, etc.