Buying a house can be exciting! If you’re finally at that stage where it’s time to settle and have a place you get to come home to every day that’s yours, then you’re about to go through a wonderful change. Along the way, however, you’ll have to go through a process that almost overshadows the happiness – getting a mortgage.
Breathe, it’s going to be ok. Even though it can seem daunting, this article will help put aside some of the confusion about getting a mortgage. We’ll go one step at a time and help you get that dream home.
How to Get a Mortgage
1. Set Your Budget
This might seem self-explanatory, but the very first thing you need to do is know exactly how much house you can afford. Dust off your budget app, go through all of your expenses and make sure you know exactly what your top-most number is for a mortgage before going any further.
It’s not just about figuring out if you can afford that number on the advertisement, though. You need to figure out if you can afford the home price, the insurance, and taxes, and the upkeep costs that come with the house.
That last one trips up some people. What you don’t want is to buy your dream house, settle in, and the boiler breaks down. Even worse, if you don’t have an emergency account saved up for costly maintenance, you’ll be in quite a pickle.
2. Save Your Down Payment
Now that you have your budget refreshed, it’s now time to start finding the money for the down payment. The down payment is the cash that you pay at closing in good faith showing that you have at least some equity in the house right from the start.
The minimum required down payment is 5% of the home price. If you’re buying a $300,00 house, then you’re going to need at least $15,000 in cash ready to pay for the house at closing. There’s almost no way around this – it has to come from you.
Bear in mind that the down payment can have a bit of an effect on your mortgage payments. If you manage to save up even more and pay at least 15% of the home price, your monthly payments could still be several hundred dollars less.
If you save at least 20%, then you will also be able to avoid the Private Mortgage Insurance (PMI) that may cost between 0.6% and 4.5% of the mortgage, which brings your monthly payments down even more.
A down payment doesn’t cover everything at closing, but more on that later.
3. Shop For Mortgage Lenders
Shopping for mortgages can be the most stressful part of this process. Let’s help with this and leave you with confidence when you get to this step.
You can certainly get a mortgage directly from many of the various banks in Canada, but there are several categories of mortgage lender.
Your local bank branch might be one of the most convenient places to start, especially if you’ve been banking with them and you have your accounts there.
While banks typically don’t require you to bank with them in order to take out a mortgage, it may help them give you a better rate if you already bank with them.
Depending on your bank and what the marketplace looks like, a bank mortgage interest rate may be higher than that of other mortgage lenders.
However, they may also provide you with longer interest rate guarantees. This means that, after you get pre-approved and they give you the best rate they can, it will be valid for a longer period of time.
There are mortgage brokers who specialize in particular marketplaces. Most larger cities will be littered with mortgage brokers. It may even be that one of your friends who recently bought a house knows a mortgage broker and would recommend them.
Once you find one, they have connections with several mortgage lenders and can give you several interest rates quotes as long as your pre-approved.
Lastly, you may consider the convenience of an online mortgage broker to your liking. Going through their process, you may be able to compare several rates right from your screen.
Mortgage lenders have several different terms you’ll need to know:
– Insured, insurable, and uninsurable – this is dictated by the size of your down payment and refers to PMI
– Open vs closed – make sure you pick the right one for you. Open means you can repay the mortgage in full at any point and comes with a slightly higher rate. Closed limits how much you can pay on top of your regular monthly payment.
– Fixed vs variable – In our low-interest rate environment, always go with a fixed rate. A variable rate mortgage can open you up to much higher rates in the future, though they typically have a very enticing introductory interest rate.
4. Get Pre-Approved
This is the part where you’ll want to make sure your credit score is as high as you can get it. Getting a mortgage pre-approval provides you with the maximum amount that you could potentially qualify for with a mortgage lender.
It does not, however, guarantee that you will get that amount from a mortgage lender.
When you pick either a bank or a mortgage broker, they should be able to guide you through the pre-approval process, but you’ll need to provide them several pieces of information.
They will need you to provide:
– Proof of employment (i.e., pay stubs or notices of assessment)
– Proof you can pay the down payment and closing costs. This will come from their review to see what assets you currently have.
– Information about debts and other financial obligations. They will do a deep dive into your current financial standing to find out exactly what your debt obligations are before they pre-approve you.
The last two points are where the credit score comes in. They’ll pull a full credit report to get all of the details they need to complete their assessment. They may come back with several questions, but don’t be alarmed. Just read their comments and try your best to answer them as well as you can.
Once you get pre-approved, this will come in the form of either a letter or e-document that you provide to your preferred mortgage lender. It is only valid for a certain period of time, usually between 90 and 120 days, so get a pre-approval around the time you think you might be buying a house.
5. Make An Offer on a House
So, you’ve found a mortgage lender, you’ve gotten pre-approval, and you’ve found the dream house. In order to actually get the mortgage, you’ll need to make an offer on the house.
Once the offer is accepted, you’ll start finalizing the mortgage with your lender. This process can move very quickly, but the mortgage finalization process is usually handled by a real estate lawyer.
On a $300,000 house, paying $15,000 seems like it should cover everything, right?
Wrong. Unfortunately, when you close on a house, there are several additional fees that are not covered by the down payment. This includes the legal fees, home inspection fees, and other items referred to as closing costs. You should plan to have between 1.5% and 4% of the home cost saved up on top of your down payment to cover all of the closing costs.
Buying a house can be a bit stressful, especially if you dive in without knowing what you’re getting yourself into. Some of these steps come under a time crunch, but there are professional people in this business who are only too willing to help you end up in your new home. With a bit of preparation on your part, you can make the process go relatively smoothly.