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WHY USE A MORTGAGE BROKER?
NO COST TO YOU! GREAT SERVICE!
- YOU DON’T’T HAVE TO TAKE TIME OFF WORK FOR AN APPOINTMENT AT A BANK.
-BROKER’S DEAL WITH MANY BANKS AND LENDING INSTITUATIONS, AND CAN CHECK OUT ALL THE BEST RATES, TERMS AND OPTIONS AVAILABLE TO YOU.
-A BROKER WILL FIND A MORTGAGE TAYLORED TO FIT YOUR NEEDS.
-A BROKER WILL ANSWER THEIR PHONE AND IF YOU LEAVE A MESSAGE WILL GET BACK TO YOU IN A TIMELY MANNER.
-A BROKER IS AVAILABLE IN THE EVENINGS AND ON THE WEEKENDS.
-A BROKER WILL EMAIL, TEXT OR PHONE.
THE MORTGAGE APPROVAL PROCESS
This section will give you an idea of what to expect based on traditional guidelines. Remember that these are just guidelines and everyone’s situation is unique. If it appears that you may not qualify for the amount of mortgage you require, speak to me to identify if this is truly the case and what options may be available to you. To pre-qualify for a mortgage, there are three essential components: income, equity, and credit. Over the years, qualification guidelines have become fairly standard within the lending industry. While each institution may have some unique criteria, the basic qualifying criteria are the same. The following section will explain the basic requirements for mortgage approval.
What is classified as income for qualifying purposes? Some forms of income that represent revenue to your household may not count as income for qualification purposes. The important thing when it comes to income is to demonstrate consistency and sustainability. Here are some of the many sources of income and some of the guidelines for using them to qualify for a mortgage:
Employment income - If you are an employee of a company or corporation, the basic guideline for income eligibility is that you have been employed for one year with the same employer or at least one year in the same line of work with no probationary period on the new employment.
Probation period - if you are with a new company and you are still withwithin a probationary period you may have some difficulty using this income for qualifying purposes. However, there are certainly lots of cases where individuals on probation have still been considered for mortgage financing.
Overtime - If you want to use overtime for your qualifying income, most lenders will want to see a consistent history. Typically, you will be required to provide a two-year track record of your overtime income.
Seasonal income - This is acceptable, but you will likely be required to demonstrate sustainability by providing a two or three year track record. Usually an average of income over these years will be used for qualifying purposes.
Self-employed - If you are self-employed, you can still qualify, but most lenders will require a track record of consistent income. The standard is a two year average of your net taxable income. Lenders do recognize that many self-employed individuals will make legitimate tax deductions in order to reduce their taxable income. If you don’t pay taxes on the income, the lenders will most likely not accept anymore then the net declared income. A trained mortgage professional should be able to review your financial statements and find items that may be allowed to be ‘added back’ into your income.
Pension income - Guaranteed pension incomes are usually acceptable sources of income. Your best bet is to have a thorough discussion with your mortgage broker so they can advise you of acceptable income.
Child tax credit - Some lenders may consider this income. Ask your mortgage professional about which lenders will allow this if this is income you would like to have considered with your mortgage application.
The amount of mortgage you may qualify for depends on two things: income and the amount of debt you are carrying. Financial institutions use two different ratios to measure your borrowing ability. The first is your Gross Debt Service Ratio (GDSR). The second is your Total Debt Service Ratio (TDSR).
Gross Debt Service Ratio
Your GDSR is the percentage of your gross monthly income that is used toward your housing expenses. The expenses used in this calculation are Principal and Interest payments, Tax installments and Heating costs, plus half your monthly condo fees, if applicable. The following is an example of a GDSR calculation assuming a $150,000 mortgage with monthly payments of $925.59 based on a 25-year amortization.
Principal and Interest $925.59
Total for debt service $1115.59
Gross Monthly Income $3500.00
GDS Ratio calculation $1115.59/$3500.00 = .318 or 31.8%
In the above example, the homeowner is spending 31.8% of their household income on housing expenditures.
To qualify for a mortgage, traditionally, most lenders require that your GDSR be below 32%. As of October 2006, lending practices now allow a GDSR of up to 35% and in circumstances where a borrower’s credit is exceptionally strong, may allow for a GDSR of up to 44%. This coupled with the option of extended amortizations,
Total Debt Service Ratio
Your TDSR is the percentage of your gross monthly income that is used towards your housing expenses plus your other monthly obligations. The expenses used in this calculation are principal and interest, taxes and heat plus half your monthly condo fees, if applicable, plus student loan payments, credit card payments and car loan payments, etc. The following is an example of a TDSR calculation assuming a $150,000 mortgage with monthly payments of $1115.59.
Principal and Interest $1115.59
Car Loan $200.00
Total for debt
Gross Monthly Income $1565.59
GDS Ratio calculation $1565.59 / $3500 = .4473 or 44.73%
In the above example, the homeowner is spending 44.73% of their household income on housing expenditures and other debt.
In order to qualify for a mortgage, traditionally lenders have required that your TDSR be below 40%. Since October of 2006, lenders can process and approve up to 42% TDSR. In the case where a borrower has exceptional credit, the lender may allow for a TDSR of up to 44%.
Credit is a critical component but is also one of the easiest to improve, given time. If you do not know your credit status, review your credit report to learn more and ensure accuracy.
What is a Credit Report?
A credit report is a history of how consistent you have been at meeting your financial obligations. A credit report is created when you first borrow money or apply for credit. On a regular basis, the companies that lend money or issue credit cards to you (banks, finance companies, credit unions, retailers, etc.) send the credit reporting agencies specific and factual information about their financial relationship with you including: when you opened the account, if you make your payments on time, if you have missed payments or have exceeded your credit limit. Credit bureaus receive this information directly from the financial and retail institutions and report it. They do this to assist new, inquiring lenders in making decisions about granting you credit. Your credit report is a history that will help lenders determine what kind of lending risk you are and how likely you are to repay your obligation on time.
What is a Credit Bureau?
A credit bureau is a private, for-profit business that gathers and reports your credit information, for a fee, to whomever has been given permission to request it. There are two major consumer credit bureaus in Canada, Equifax and Trans Union.
What is reported?
Personal identification: Name, address, date of birth and Social Insurance Number (SIN).
Consumer statement: Allows the consumer to add a brief comment about any information in the report.
Credit information: Details of credit accounts, transactions and history of late payments.
Public record information: Secured loans, bankruptcies and/or judgments.
Third-party collections: Any involvement with a collection agency trying to collect on a debt.
Inquiries: All organizations or individuals that have requested a copy of the credit report in the past three years.
What is a credit rating?
A credit rating for each trade item is reported on your credit report as well as an overall credit score. Ratings range from 1 to 9 (one being the best rating and 9 being the worst). Your credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit score. In order to understand how your credit is scored, contact one of the credit reporting bureaus or you can request more details from your mortgage professional.
Improving your credit score
Pay all of your bills on time. Paying late, or having your account sent to a collection agency, has a negative
Impact on your credit score.
• Do not run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.
• Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why. Most scoring formulas will not penalize you if, for example, you are shopping for the best rate on a mortgage or car loan.
Rebuilding your credit
The best place to start rebuilding your credit is through a secured credit card. In order to re-establish your credit you need to have some creditors report that you are paying as agreed. In time, these new current accounts will help rebuild your rating. Your mortgage professional can provide you with a secured Visa application to get you started.
Where can you view your credit report?
There are two sources of credit reports: Equifax and Trans Union.
Improving your current situation
If you find that we are temporarily unable to qualify you for the mortgage amount you require, there are steps you can take to improve your situation and possibly increase the amount that you may qualify for in a short period of time. The first step is to identify the obstacles to approval and to pinpoint the areas that need improvement. From there, we can develop a plan to overcome those hurdles. Here are some tips for improving common roadblocks when it comes to mortgage approval.
Income and Debt: If your debt ratios are the problem, there are two options for you: increase your income or reduce your debt. One way to increase your income may be with the assistance of a co-signer. By having someone co-sign for you, you may be able to include their income when calculating the debt service ratios.
Credit: Ensure that you always make, at least, the minimum payment on all of your bills. Every late payment that is recorded on your credit bureau report has a negative impact on your rating. If you are still having trouble, credit-counseling services can also be of assistance when trying to repair or rebuild your credit.
Currently 5% is required for a down payment on residential homes and 20% down payment required for revenue property. A good household budget coupled with a strong savings plan is one of the best ways of saving for a down payment. Sometimes a gift from a family member can be used as down payment. Giftor may be required to provide proof from their financial institution they have the funds to gift .
You may also be able to use your RRSP as a savings vehicle. If you are a first time homebuyer, you may be eligible to use up to $25,000 of RRSP savings toward the purchase of a new home under the Home Buyers’ Plan (HBP). By saving through your RRSP, you also receive a tax deduction that may give you a refund at tax time allowing you to add even more to your down payment savings pool. The Home Buyers’ Plan is a program that allows you to withdraw up to $25,000 from your registered retirement savings plan to buy or build a qualifying home for yourself.
RRSP – Homebuyers Plan
Tax savings aren’t the only reason to invest in an RRSP. With the Federal government’s Home Buyers’ Plan (HBP), first-time homebuyers have the opportunity to put that tax-free cash towards a new home. Each individual involved in the purchase of the home may withdraw a maximum of $25,000 from their RRSP — provided it is the first home for all parties involved. The home must be used as a principle residence, and all funds must be withdrawn from the RRSP within 30 days of the property’s closing date.
You have 15 years to repay your RRSP ‘loan’, and payments must start two years after the initial home purchase. Every year, you will receive a notice of assessment stating the amount you have repaid, your total balance, and the required amount for your next payment.
For more information about the HBP, visit Canada Revenue Agency’s website .
VARIABLE RATE MORTGAGE
There is some risk associated with a variable rate mortgage; you need to assess your ability to service the mortgage in the event that rates do rise. One of the things you can do to mitigate the risk of rising rates is to fix your payment at a set amount higher than the minimum requirement. For example, setting your payments based on the current five year fixed rate will allow you to provide a buffer in the event that rates rise. Setting your payments higher will also allow you to further take advantage of the lower variable rate by allocating more of your payment to pay down the principal.
Does a variable rate mortgage fit your risk profile?
Once you have decided you can afford a variable rate mortgage the next thing you will want to assess is if a variable rate mortgage fits your personality, lifestyle and comfort zone. If you are the type that can’t sleep at night knowing that your rate may change by .25% then a variable rate mortgage may not be the best option for you. Many studies suggest that from a historical perspective a variable rate is a good bet. Just keep in mind that no one can predict where rates are going to be with any certainty and none of the economists who make the predictions will be making your mortgage payments.
What should I look for when choosing a Variable Rate Mortgage?
Make sure you are aware of the options available before deciding. Some lenders may not allow certain variations of payment frequency.
Conversion to fixed rate
Does the lender allow the mortgage to be converted to a fixed rate mortgage at any time? If so what rate are you guaranteed on conversion? Will you get their best-discounted rate or their posted rates? Remember, if you are in a closed mortgage you will not have any negotiating power.
Original or expected balance for your mortgage.
Annual interest rate for this mortgage.
The number of years over which you will repay this loan. The most common mortgage amortization periods are 20 years and 25 years.
Your principal and interest payment (PI) per period.
The payment type determines the frequency of payments. Monthly will have 12 payments per year, weekly 52, bi-weekly 26 and bi monthly 24.
Accelerated weekly and accelerated bi-weekly payment options are calculated by taking a monthly payment schedule and assuming only four weeks in a month. We calculate an accelerated weekly payment, for example, by taking your normal monthly payment and dividing it by four. Since you pay 52 weekly payments, by the end of a year you have paid the equivalent of one extra monthly payment. This additional amount accelerates your loan payoff by going directly against your loan's principal. The effect can save you thousands in interest and take years off of your mortgage.
The accelerated bi-weekly payment is calculated by dividing your monthly payment by two. You then make 26 bi-weekly payments. Just like the accelerated weekly payments you are in effect paying an additional monthly payment per year.
Total of all monthly payments over the full term of the mortgage. This total payment amount assumes that there are no prepayments of principal.
Total of all interest paid over the full term of the mortgage. This total interest amount assumes that there are no prepayments of principal.
The frequency of prepayment. The options are none, weekly, bi-weekly, semi-monthly, monthly, yearly and one-time payment.
Amount that will be prepaid on your mortgage. This amount will be applied to the mortgage principal balance, based on the prepayment type.
Total amount of interest you will save by prepaying your mortgage.
The Bank of Canada is Canada’s central banking authority. Created in 1934, it is the only issuer of bank notes in the country. Every seven years, the Bank’s Board of Directors appoints the Governor of the Central Bank. The Government of Canada cannot remove the Governor from office, making the central bank an autonomous organization.
Contrary to popular thinking, the Bank of Canada doesn’t actually set Canada’s Prime Rate. The Bank of Canada’s influence protects the Canadian economy from the rise and fall that causes inflation and recessions. Its purpose is to serve as a reference point for Canadian commercial banks – the five largest Canadian financial institutions, which include the Bank of Montreal, the Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, TD Canada Trust, and the Royal Bank of Canada. Each institution will have their own prime rate (they all tend to be fairly similar), the Bank will discount the lowest and the highest of these rates, then take the average of the three remaining to calculate Canada’s Prime Rate.
So how are prime rates calculated?
Late at night, after the banks have all closed for the day, the major financial institutions borrow and lend money to each other. In order to settle their transactions for the day, the institutions with leftover money sell it to other institutions that are short. In order to make sure that the major banks trade fairly, the Bank of Canada has set up a special system. This system keeps them within a fair ‘operating band.’ This overnight market is what sets the ‘overnight rate,’ and when the Bank of Canada changes the overnight rate, it leads to changes to the prime rates at specific financial institutions.
When the key overnight lending rate increases, the cost of borrowing money will raise and therefore the prime rate will also increase.
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