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Buying a home in Ottawa comes with a lot of different decisions, it is extremely important to determine the type of home you'll like and how much you can afford before initiating your search. We can help with all aspects of your home buying process and even help you find a trusted Mortgage Professional.
If you have any questions or would like more information about mortgage information please Contact Us. If you are interested in buying a home or property please visit our Ottawa Buyers Page or if you are interested in selling your home please visit our Ottawa Sellers Page.
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1. How a Pre-Approval Will Help
Whether you are buying your first home or 10th investment property, it pays to be pre-approved and obtain a letter of pre-approval from your financial institution. In today’s marketplace, it is especially important! It shows the sellers you are a serious candidate to purchase their home. It will differentiate you from the other people that are looking at their home as it will show you have taken the necessary steps to get your finances in order. Seems logical, you would be surprised how many people skip this crucial step. It will also allow your realtor to put their best foot forward for you knowing that you have been fully pre-approved. They can concentrate on what they do best; negotiating the best price on the home of you have been dreaming about.
In today’s current marketplace, with the competition for homes rising, your letter of pre-approval can be leveraged as a bargaining chip. When positioned properly by your team, it can help your offer stand out from the rest, and could be the major difference between winning the bid on the home of your dreams, and losing it.
2. The Difference Between a Pre-Approval and Pre-Qualification
There are a couple of items buyers and sellers must be aware of, one of them being the difference between a pre-qualification and a pre-approval. A pre-qualification is solely based on the information provided by the applicant. There is no supporting documentation provided to back up the information the applicant relays to the financial institution. Just because your pay cheque goes into the same account with the same financial institution you are looking to secure your mortgage from does not constitute your income being qualified.
A pre-qualification does not hold the same weight or merit as a pre-approval as its a very high-level look at someone’s finances.
The pre-approval is built on all three pillars of a mortgage application - two of which are verified: verified income, full credit check - and the last piece of the puzzle, a fictional property with a price tag. With the government constantly changing the mortgage landscape with new regulations every year, it is even more important to verify as much information up front as you can. A common thing I hear is “do you have to pull my credit? I do not want it to affect my score.” These people are usually the ones with the best credit as they are actively concerned about their credit situation. When looking at credit for a mortgage, the score is never negatively impacted. With the new changes to Equifax, they have algorithms that tell them why the report has been pulled. The credit score plays into how much you are able to afford. If you do not have your credit report reviewed prior to a pre-approval, this would deem it a pre-qualification. The credit report tells the financial institution a lot about the prospective client and plays into your government regulated ratios. It also provides an accurate representation of your monthly obligations that you are responsible for outside of the mortgage, more on this later.
When it comes to income there are a lot of different items that factor into qualifiable income and non-qualifiable income. Depending on your situation, your financial institution will ask for documentation to back up the income submitted in the application.
Are you self-employed? Two years T1 Generals, two years notice of assessments showing your taxable income and no taxes owing. A business license may be also be requested to show you have been self-employed more than 2 years. Just because you don’t have a two-year history doesn’t mean you can not get a mortgage, just means it will be a little different.
Are you a salaried employee? Job letter and pay stub will be required. Part-time or hourly income? Job letter, pay stub, and two years T4 and Notice of Assessments or a job letter stating your guaranteed hours to work in a single week. That is just a quick sample of the documents you can expect to be asked for.
3. Locking in Mortgage Rates
Once you are fully pre-approved you will have a rate hold for 120 days. During the 120 day period, if rates were to decrease, you will be given the lower rate. If the rate increases during the 120 day period, you are protected. If you have someone who is really on the ball looking after your pre-approval, they will have an opportunity to re-extend your pre-approval during a small window when they know rates are about to increase. This will re-lock you in for another 120 days from that point protecting you once again.
4. The Perks of Using a Mortgage Agent/Broker
There are several benefits to using a mortgage agent/broker, first and foremost is the wide variety of options available to you. With access to over 67 different lenders, you can rest assured you are getting the best product, rate and terms, all with unbiased advice. Imagine trying to book 67 different appointments to ensure you are getting the product that is best suits your financial needs. That would be a full-time job in itself. When using a mortgage agent/broker they will save you all the running around and provide you with access to these lenders with one-stop shopping convenience.
A mantra most agents/brokers live by is “What is best for the client is always what is best for the agent/broker”. A good mortgage agent/broker will always be sure to have your needs as their number one priority. We build our business off of repeat clients and referrals to friends and family. A good agent/broker will always go above and beyond to ensure the client has the best experience possible and to ensure it was a positive one. Expert advice is one of the biggest perks you will notice and appreciate when dealing with a mortgage agent/broker. They will discuss things with you that no other person in the mortgage/finance industry has ever talked to you about before. They will take the time to educate you on different options, and will dive deeper into more than just interest rates. You would choose a financial planner based on the strategies they have to grow your assets, you will also want to choose an agent/broker on the strategies they have to shrink and manage your debt. A strategy should always be put in place for clients to take advantage of. The biggest mistake homeowners tend to make is take a mortgage product and term, without any knowledge of why they are taking it, and no strategy in place.
You will also have someone who you can build a relationship with for the long run, your continued personal, go to an expert that you can call on when you have questions regarding anything related to a mortgage. The ongoing support and consultation is an important factor to consider. Your mortgage agent/broker should be versed in a wide variety of different financial strategies, as well be surrounded by a team of other professionals and experts, to make these financial goals and strategies a reality.
5. What is this stress test I keep hearing about and how does it affect me?
The government of Canada has been regulating mortgage lending practices under what they call B-20 guidelines. There has been a major change to mortgage regulations every year since the economic crisis in 08/09. The latest one that has been in the news is the mortgage stress test on all new applicants. Remember before I was talking about government-regulated ratios? This where we test the affordability of the home against the clients' financial situation. What are these ratios you ask? There are two: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). This is where your credit score and credit report comes into play. If you have a credit score over 680 your GDS ratio can be a maximum of 39% and your TDS ratio can be a maximum of 44%. Now the credit score doesn’t tell you everything, the report is key as lenders and financial institutions are going to see your credit repayment history. If your score is under the 680 those ratios are pulled back to GDS maximum of 35% and TDS to 42%.
These ratios are calculated by the following:
GDS = PITH + 50% of condo fee (if applicable)/Income
TDS = PITH + 50% of condo fee (if applicable) + all other monthly debts/ Income
PI is your principal and interest payment (mortgage payment).
T is the annual property taxes
H is the annual heating costs
There are two different stress tests you have to be aware of. There is one for less than 20% downpayment and another for above 20%. Complicated enough yet?
With a minimum down payment, your PI payment is calculated as if you are paying the benchmark rate of Canada (currently at the time of writing is 5.34%). This is not the interest rate on your mortgage but it is the stress test that the government requires. For example, let’s take a mortgage amount of $300,000. When using a hypothetical interest rate of 3%, your monthly payment is $1,420. When this payment is annualized it comes to $17,040/year. Now when we apply the stress test your payment increases to $1,804/month or $21,648/year. This is the figure that must be used as part of your PI in the above-noted ratios.
Wait, there is more!
When putting 20% down or more your stress test is slightly different. If going for a fixed rate your stress test would be the greater of the contract rate + 2% or the qualifying rate of Canada (again currently 5.34%) whichever is greater. Let’s use a hypothetical contract interest rate of 3%. When you add the 2% to the contract rate bringing it to 5% total, the qualifying rate of Canada at 5.34% would be used. If the contract rate was hypothetically 4%, adding the 2% would make it 6% thus we would use the higher rate.
6. This seems complicated, should I be worried?
You have nothing to worry about, we will be sure to take great care of you!