Frequently Asked Questions About Mortgages

Every year, several first-time homebuyers opt for mortgages to buy a home. However, as they are new to this financial option, there are a ton of questions on their minds, and the answers are often difficult to come by. To arm you with the most accurate information about mortgages and the processes involved in obtaining an ideal one, mortgage specialist Audra Kish has answered in detail some of the most frequently asked questions about mortgages.

1. What is default mortgage insurance?
If you have less than 20% to put down for a downpayment, your bank or lender must insure your mortgage with a default insurer. Currently, there are three insurers that provide mortgage default insurance. They are CMHC (Canada Mortgage and Housing Corporation), Genworth, and Canada Guaranty. If the lender is forced to foreclose on you and they lose money, then they will go to the default insurer and make a claim.

The insurers will charge a premium for their coverage, which is a one time cost that is typically added to your mortgage. You have the option of paying it upfront or out of your pocket if you’d like. Some provinces also charge PST (provincial sales tax) on the insurer premium, and this will be collected with your closing costs, as it cannot be included in the mortgage.

The premium charged to you is based on the risk to the lender and will take into account factors like:

a. How much you have available for your down payment
b. Where your down payment money is coming from
c. How you earn your income

In most cases, you can avoid paying the insurance premium if you’re able to put down 20% as your down payment. At the same time, there are some cases where a lender will require coverage in place, even with 20% as down payment.

2. What funds can be used for a down payment?
When buying a home for your primary residence, you will need a minimum of 5% down payment. With a rental, a minimum of 20% down will be required. To fund your down payment, you can use:

a. Savings, investments, or RRSP (registered retirement savings plan)

b. Grants or incentives through your city, employer, or other agencies can even be used. Just remember that some of these are repayable, and it’s essential to read the fine print ahead of time.

c. Borrowed money can serve as a source of funding for your downpayment. Depending on your debt load and credit score, many lenders will let you borrow a 5% downpayment from a credit card or credit line.

d. Gifted funds from an immediate family member is another option you can try.

e. Money from the sale of a property is another option. If you sell a house and have equity available, this can be used towards your downpayment

3. What are closing costs? How much money should I put aside?
The term “closing costs” usually refers to funds needed (on top of your downpayment) to complete your purchase. Closing costs can include, but are not limited to, the following:

a. Legal fees

b. Cost of land transfer to the new owner

c. Fees for registering a new mortgage on the title

d. Title searches

e. Title insurance

f. Property tax searches

g. Courier charges, postage, copying, and other miscellaneous charges from the law office

Before you take possession of a property, your bank or lender will ask to see that you have additional funds available to cover closing costs, fire insurance, moving expenses, etc. Lenders want to be sure you haven’t spent every dime you have on your downpayment.

Typically, if your budget for 1.5% of the purchase price of the home you’re buying, you should have all you need. For example, if you buy a property for $300,000, you should budget $4,500 on top of your downpayment to cover your closing costs.

4. What should my credit score look like to get a mortgage?
Credit reports are used by lenders to determine how reliable you are with managing money. They can tell a lender how trustworthy you are at making payments on time and how well you manage your debt load. They will also report on any past consumer proposals, bankruptcies, collections, or maintenance enforcements. Lenders like to see at least two trade lines (for example, a credit card and auto loan) reporting to your credit report for at least two years, showing perfect repayment.

Credit reporting agencies (for example, Equifax and TransUnion) issue you a score each month. And this score can be negatively impacted by things like:

a. Late or missed payments

b. Collections

c. Past bankruptcies or consumer proposals

d. Multiple declined credit applications, indicating that you might be struggling to make ends meet

e. How close you keep your balances compared to the credit limits on your credit cards, credit lines, etc.

A credit score can be anywhere from 400 up to 900. The higher your credit score, the more strength you will bring to your mortgage application. The minimum acceptable score is 600 on a purchase, but a higher rating is often preferred. A score over 680 with good repayment history, low revolving debt (credit card/credit line) balances, and no past collections, bankruptcies, or consumer proposals is an excellent place to start. Often, lower scores or past credit damage can limit your lending options or require the addition of a cosigner with strong credit.

To boost your credit score, you can try to:

a. Pay all your bills (even cell phones bills) on time every month

b. Keep your credit card or line of credit balances far below their limits as possible

c. Avoid multiple or frequent credit applications if possible

d. Beef up your credit score by having at least two pieces of credit reporting to the bureaus each month.

e. Close down any credit accounts that you’re no longer using, but make sure you keep at least two pieces of credit active.

f. Monitor your score regularly. It does not harm your credit to check it yourself, and there are many agencies that will allow you free credit monitoring (for example, Credit Karma, Borrowell, etc.).

5. Why would I need an appraisal done on the property I’m looking to buy or refinance?
Appraisals help to make lending decisions by confirming the current market value, property condition, and property details. It also shows lenders what other comparable properties in the area have been selling for. Lenders usually want to ensure that they are not lending more than the property is worth and that there are no significant issues with the condition of the property. Appraisals are not always required, but there are certain situations when lenders will typically ask for one. These situations include:

a. Private sale or spousal buy-out: When there is no information on the MLS (multiple listing system), the only way the lender has to verify the current value and details of the property would be to do a full appraisal. The MLS system is used by real estate agents to post accurate property information, listing price, and pictures.

b. Refinance or equity take out: Again, over here, there is no MLS listing to confirm the property details, condition, or value.

c. Second home or vacation property: Many lenders will require an appraisal in this instance.

d. Property not insured with a default mortgage insurer: Many lenders will want a closer look at the property before they make a decision. An appraisal will help them to make a decision if CMHC or another default insurer is not involved in protecting the lender in the event of a foreclosure.

e. Volatile or declining housing market: If your local housing market is undergoing a correction or prices are all over the place (volatile), the lender may want an appraiser’s assessment before making a lending decision.

If your purchase is insured by one of the default insurers, the insurer will usually cover the appraisal cost. Otherwise, the cost of an appraisal is to be paid by you, the borrower. Some lenders will reimburse all or some of the cost of an appraisal. An appraisal can be beneficial to you as a buyer, as you will receive an unbiased opinion of what the value of the property is. This way you don’t have to worry about paying more than the market value.

Just remember, lenders will not accept your municipality’s property tax assessment or a realtor’s market evaluation in place of an appraisal. They will only accept an appraisal from a certified appraiser when it comes to assessing property value and property condition.

6. Can I include the cost of improvements or renovations in my new mortgage?
Yes, you can! Many lenders will allow you to borrow up to 10% of the purchase price to use toward improvements to your property. For example, if the property you are buying costs $300,000, you can generally include up to $30,000 worth of improvements.

But, please keep in mind the renovation has to be something that improves your property and can’t be used to buy furniture or appliances, or for paying off other debt. The amount of the improvements will be added to the purchase price of the property, and then that new amount is considered to be the new property value.

This means that your down payment will be based on the new amount. Using the same example as above, if you’re buying a home for $300,000 and including $30,000 worth of improvements, then your new property value would be $330,000, and your down payment would be a minimum of 5% of $330,000.

Lenders will require quotes for any work you are going to have done upfront before deciding on your mortgage approval. Be sure that your quotes have the property address listed on them.

Your lender will need to know what you’re planning on doing and how much it will cost to complete. You will only be able to get funds in the amount of the quotes that you provide. For example, if you get a quote for a furnace and air conditioning for $5,800, you can’t borrow $6,000. You could only borrow $5,800, which was the amount of the quote.

Your lawyer will hold back the extra money you’ve requested for your improvements until they are all done. In other words, you won’t get any money to pay for your improvements until the work is 100% complete. This is because lenders don’t want to give people money upfront and then have them use it for something else. Lenders must make sure that the value of the property is correct for the amount of money they’ve loaned. This means you’d need to find a contractor willing to do the work and be paid at the end of the project, or you’d have to find a form of short term financing to pay for the work.

Once the renovations are done, the lender will require an inspector to come out and make sure that everything you said you were going to do has been done. Some lenders will also ask for paid receipts for the completed work, so you can show that you’ve done what you said you were going to do. For example, if you sent in quotes for hardwood floors and you end up installing laminate flooring, the lender will only release the funds for what you actually paid for. That is the cheaper product.

Once we can prove that the work has been done, the lender will tell your lawyer that he can release the funds to you, and then you can use the money accordingly to pay off your expenses as per the way you financed the initial improvements.

7. Can I include other debt in my new mortgage?
If you are buying a home, then you cannot include other debt in the mortgage. Under lending rules, the maximum a lender can lend is 95% of the property value. The only way to include debt in a mortgage is to refinance an existing home, using the equity to pay out the debt(s) in question. Some lenders offer cashback or secured credit lines on purchases to help pay out debts. You can talk to your mortgage broker for more information or reach out to me.

8. How long should I wait after starting a new job until I can apply for a mortgage?
There are a few things to consider when looking at income from a new job. Here are a few aspects you’ll need to look at:

a. New full-time job: If your new job is going to be full-time, once your probationary period has passed, we can use your income to qualify for a mortgage. If there is no probation or you have many years of experience working in the same industry, we can typically use the new income right away.

b. New part-time, seasonal, or casual job: If your part-time hours are guaranteed by your employer in writing, then we can typically use the income to obtain a mortgage. In the case of casual, seasonal, or where your employer will not guarantee a set number of hours, lenders will want to see you working there for two years before they will consider your mortgage application.

c. Receipt of commissions, overtime, or bonuses as part of income: Again, most lenders will want to see a two-year average salary in this position before they can be included in your mortgage application.

d. Second job: If you work two jobs, a big salute to you! To use the income from both jobs, you’d need to show that you have been working two jobs for at least two years. It’s a challenge to juggle multiple jobs, so lenders will want to see you doing it for at least two years to know that this income is sustainable for you.

e. Self-employment: This one can be more complicated to prove to lenders. Typically, you will need to show your earnings via two years of tax returns. But, sometimes, exceptions can be made.

Just keep in mind that sometimes income exceptions can be made, depending on what the rest of your mortgage application looks like. For example, if you have a large downpayment, or if you are moving to a new job where you have years of past experience in your industry.

If you have any more questions about mortgages, get in touch with Audra Kish. I am an experienced mortgage associate in Saskatoon, SK, and have been voted as the best in the area. I proudly serve people all over Canada to finance their dream homes as a licensed mortgage associate. I’m passionate about helping people save money as well as obtain a mortgage that works for them.

To learn more about how my team and I can help you, please click here or contact us by clicking here.