You May Have To Pay Mortgage Insurance
Unless you put at least 20% down on a conventional loan, youll likely need to pay for private mortgage insurance . This coverage protects the lender in case you default on your mortgage.
FHA and USDA loans charge their own type of mortgage insurance which includes an upfront premium as well as annual premiums which like PMI get added to your monthly payment.
These extra charges seem annoying, especially considering the insurance protects the lender and not the buyer. But this coverage also helps the buyer by allowing the lender to offer a lower mortgage rate or lower down payment. If youre a military member or a veteran, you can avoid mortgage insurance altogether with a VA loan. VA loans charge an upfront funding fee but no ongoing premiums.
Determine The Right Mortgage
Not all mortgages are created equal. There are actually several different kinds of mortgages to choose froma fixed rate vs. an adjustable rate a traditional loan vs. a FHA loan etc. Even within the same mortgage type, you’ll have to make decisions:
- Whether to pay points, which can help you land a lower interest rate
- Whether to pay certain closing costs or roll them into the mortgage
A good financial advisor or mortgage advisor can help you answer these questions.
Find Out How Much You Can Borrow
Understanding how much you could borrow can help you work out your budget to buy a property.
The Central Bank mortgage measures, set Loan to Value and Loan to Income limits for first time buyers, and those who already own a property.
Our how much you could borrow calculator works out the most you might be able to borrow and explains what affects this amount in more detail.
Dont forget to factor in stamp duty and solicitors fees into your total costs.
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Apply For A Mortgage Agreement In Principle
You can test the waters of how much you can borrow by asking for what is known as a mortgage agreement in principle .
An AIP is essentially a letter from a bank or building society. It states the kind of loan amount you might get, based on an initial assessment of your circumstances. Its free to get an AIP.
Typically, an AIP will last between 60 and 90 days. If it expires before you need it, you can always reapply.
But remember, an AIP is only an estimate. It’s not a formal mortgage offer and the lender who issued it can still decline to give you one.
Why Is It Important To Get Pre
Getting pre-approved for a mortgage gives a home buyer bargaining power since they already have mortgage financing and can therefore make a reasonable offer to the seller of a home in which they are interested. Otherwise, the prospective buyer would have to apply for a mortgage before making an offer and potentially lose the opportunity to bid on a home.
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Do Mortgage Lenders Look At Spending Habits
Mortgage lenders do look at your spending habits. They do this to see if you are a responsible borrower.
They will do this by looking at your bank statements, but more importantly, by looking at your credit history.
As mentioned, the sheet would have information on whether you have been making any payments that are due.
Decide On A Loan Type Yourself
I see it all the time a loan officer or broker will basically put a borrower in a certain type of loan without so much as asking what theyd like.
Not everyone wants or needs a 30-year fixed mortgage, even though its far and away the most popular loan program out there.
An adjustable-rate mortgage may suit you, or perhaps a 15-year fixed is the better play.
Whatever it is, do the research yourself before the interested parties get involved.
This ensures its a more objective choice, and not just a blind, generic, or biased one.
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Save A Larger Down Payment
Buying a home will always require some amount of cash up front, also known as a down payment. The bigger your down payment is, the better, for a few reasons. The main reason is simply that the larger your down payment, the less youâll need to borrow, and therefore the less interest youâll pay. However, just getting approved for a mortgage relies on the down payment as well.
Whatâs the minimum down payment for mortgage approval? In Canada, there are minimum down payment requirements based on the homeâs price:
- Less than $500,000: The minimum down payment is 5% of the purchase price.
- $500,000 to $999,999: Youâll need 5% of the first $500,000, and 10% for the portion of the purchase price above $500,000.
- $1 million+: 20% of the total purchase price at minimum.
In Canada, a down payment of less than 20% of the homeâs purchase price requires the buyer to buy mortgage loan insurance. Paying these insurance premiums will increase your monthly mortgage payment.
Overall, youâll want to save up as much as you can for your down payment. Of course, thatâs easier said than done when homes in cities like Toronto and Vancouver can run north of a million dollars! However, the more cash you put down up front, the more likely you are to get approved by a mortgage lender. Using our mortgage payment calculator can help you test down payment and amortization scenarios, and compare variable and fixed mortgage rates.
What To Do After Your Mortgage Application Is Approved
Once your mortgage application is approved, it’s time to sign on the dotted line to make things official. You’ll typically do this at the same time that you complete the rest of your loan closing when the title transfer takes place and you get the keys to your new place.
You’ll also pay a certain amount into your escrow fund to kickstart its balance if your lender requires it. Your lender uses this account to pay your homeowners insurance and property taxes for you, so having money already in there helps when the payments come due. You’ll be responsible for maintenance and repairs, so it’s a good idea to start a fund for these expenses now.
Your lender will tell you when you’ll need to start making your mortgage payments. It’s highly recommended to set these up on autopay so you don’t forget. Last but not leastenjoy your new home!
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Next Steps: Can You Afford To Buy A House
Your lenders goal is to assess you as a borrower and ensure you can make your payments on time.
If youre thinking about a home purchase in the near future, these are some good questions to ask yourself to prepare for the home-buying process.
- How much down payment can you afford? A higher down payment is often a good sign for the lender about your finances.
- What is your debt-to-income ratio? Youll likely need to keep this number below 43%.
- What monthly mortgage payment can you comfortably afford in your budget?
- Are you prepared for closing costs, such as an appraisal or prepaid property taxes?
Attack Credit Card Balances Now
The most actionable way to improve your credit scores is to pay down your credit card balances. 30% of the points in your FICO credit scores are based on your debt, and a large portion of that 30% is based on your revolving utilization ratio. The revolving utilization ratio is the relationship between your credit card limits and your account balances as they appear on your credit reports.
You can typically reduce your revolving utilization ratio by paying down credit card balances and waiting until the next time your card issuer updates your account information with the credit bureaus, which is usually once per month to coincide with your statement cycle. If you pay down a sizable portion of your credit card balances and can reduce your revolving utilization ratio on your credit reports, as a result, its almost a guarantee that your scores are going to improve.
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Calculate The Total Cost Of Your Mortgage
The lender or the broker will do this for you, but make sure they explain all the charges and fees, including any conditional charges and fees, such as early repayment penalties.
Some brokers will charge a fee for advice, receive a commission from the lender or a combination of both. They will tell you about their fees and the type of service they can provide at your initial meeting. In-house bank and building society advisers dont normally charge a fee for their advice.
You will be shown the total yearly cost of a mortgage expressed as a percentage of the loan. This will be shown as an Annual Percentage Rate of Charge calculation and includes any fees such as valuation or redemption fees associated with your mortgage. This APRC will help provide a more thorough comparison between the different mortgages deals available.
Getting a mortgage is about more than just the monthly payments. You also need to budget for the other costs such as solicitor fees and Stamp Duty.
Find out more in A guide to mortgage fees and costs
Save For A Down Payment
Unless you have VA or USDA loan eligibility, youll need to make a down payment. Conventional loans require at least 3% to 5% down, and an FHA loan will need at least 3.5% down.
So if the purchase price for your first home is $300,000, you may need at least $9,000 to $15,000 as a down payment.
Youre also responsible for closing costs which are roughly 2% to 5% of the loan amount .
When applying for a mortgage loan, your lender will ask for copies of your bank statements to confirm you have enough cash reserves for your down payment and closing costs.
If you dont have enough cash, some mortgage programs allow borrowers to use gift funds to cover all or a percentage of their mortgage-related expenses.
There are also down payment assistance programs in every state. These offer grants or loans to qualified homebuyers who need help with their down payments. So if you need a little extra help with your out-of-pocket costs, ask your loan officer about local DPAs for which you might qualify.
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How Much Does Applying For A Mortgage Affect Your Credit Score
Applying for a mortgage generally only lowers your score by around five points or less and the effect is only temporary, lasting around a year. If you complete all of your rate shopping within 14 days, it will be recorded as a single inquiry on your credit report, limiting the hit to your credit score.
Keep In Touch With Your Lender
Your lender will schedule a home appraisal and complete additional due diligence checks during this time frame. Your lender may update your Loan Estimate now, depending on what they find. It’s important to stay in close contact with your lender during this stage of the mortgage application process, so you’re aware of what’s going on and whether anything further requires your attention.
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Applying For A Mortgage How To Prepare Your Credit
Preparing to purchase a home can be an exciting process. However, in the midst of determining the right price range, square footage, and school district, it is important to remember that your credit is going to need some special attention during this time, as well.
The condition of your three credit reports and scores is not only going to impact whether or not you are able to qualify for a mortgage but also your interest rate and monthly payment. In general, the better your credit, the better your interest rate. In fact, the difference between poor credit scores and excellent credit scores could mean a savings of hundreds of dollars every month and tens of thousands of dollars over the life of your mortgage.
It is in your financial best interest to make sure your credit is in the best shape possible before you apply for a mortgage. Here are three expert tips to help you get started.
Research Home Buying Initiatives
If you need an extra helping hand to get on the property ladder, there are some government backed schemes that could help. Different initiatives offer different benefits, such as:
- Reducing the amount you need to borrow
- Considering you if youve been declined by other lenders
- Offering the same interest rate throughout your mortgage term
The Citizens Information website includes details of the current schemes available to first time buyers.
Youll need to meet the eligibility criteria of a scheme to qualify.
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Start Saving For A Down Payment
There are many ways to do this. The easiest, perhaps, is to cut costs in your personal expenses wherever possible. So maybe instead of eating out five nights a week, try buying groceries and cooking cheap meals. Youll be amazed how much you save after doing this for a short while. The other way to save for a down payment is to pad your income. This can always be accomplished by taking on a part-time, freelance or temporary job. If all else fails, see if someone you know needs their grass cut or their car washed. While these kind of side gigs might not buy a yacht, theyll add up to something. That something will help you tremendously when it comes to making that down payment.
Pay Down Existing Debt
Taking on a mortgage means taking on some long-term debt, so youâll want to minimize your existing debt. Once you get your mortgage, paying it will be much easier if you donât have other debts to service. Existing debt will also make it more difficult to be approved for a mortgage, as lenders will look at your debt-to-income ratio when considering whether or not to lend to you.
Your balances across your , lines of credit, or student loans donât necessarily need to be at $0. However, your existing debt will impact how much youâll be able to borrow and at what rate. Keeping debt levels low is also good for your credit score in general.
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Start Your Mortgage Application
After getting your financial house in order and saving enough money for the down payment, you will have the opportunity to make an offer on the property you are interested in. When this has been accepted, you will finally be able to make the mortgage application. If you are using our mortgage services, we will arrange this for you.
Your journey wont be over at this stage as you will need to wait for your lenders approval. This can take between 24 hours and a few weeks, depending on the complexity of your application. However, if you have gone through the various steps we have discussed, your chances of a successful application should be high.
To learn more, get in touch with our team today, and we will give you all the help and advice you need when preparing for your mortgage.
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Tips To Prepare Your Credit
Once you know where your credit stands and you’ve checked your credit score, Watson recommends the below four crucial tips to make your credit score as high as possible before applying for a home loan:
And if your credit isn’t yet where you want it, know that there are credit cards that can help you raise your score. Select reviewed the best credit cards that give people with fair or average credit better qualification chances, and our top picks included the Petal® 2 “Cash Back, No Fees” Visa® Credit Card for no fees*, the Capital One QuicksilverOne Cash Rewards Credit Card for cash back and the Capital One Platinum Credit Card for travel.
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Talk To Your Mortgage Professional
Not all lenders have the same requirements. So talk to your mortgage professional before you meet with them, and ask them what theyd like you to bring to your initial interview.
Canada Mortgage and Housing Corporation offers a variety of publications, calculators and online tools to help you make informed and responsible homebuying decisions.
The information is provided by CMHC for general illustrative purposes only, and does not take into account the specific objectives, circumstances and individual needs of the reader. It does not provide advice, and should not be relied upon in that regard. The information is believed to be reliable, but its accuracy, completeness and currency cannot be guaranteed. Neither CMHC and its employees nor any other party identified in this Article assumes any liability of any kind in connection with the information provided. CMHC stakeholders are permitted to distribute the materials at their expense. The above mentioned stakeholder organization is responsible for the distribution of this document.
The First Step Is To Establish The Size Of Your Deposit
The minimum deposit you must have in order to apply for a mortgage is 5%. With a 5% deposit, you will be applying for a loan to cover 95% of the purchase price of the property this is referred to as 95% Loan To Value.
Each time your Loan To Value goes down by 5%, you will move into a new interest rate band and unlock a lower rate of interest. Ideally, you will want to save as much of a deposit as possible to take you into the next Loan To Value band available.
If you are close to moving into the next Loan To Value band then it is probably worth saving up a little more money or negotiating a slightly cheaper price on the property you want to buy.
For example, by moving from 90% to 89.9% Loan To Value, you will likely save thousands of pounds in interest repayments over the next few years.
The remainder of the loan is still subject to your affordability and the lender will need to be satisfied you are able to repay the remaining value of the property.
Help To Buy
If you are interested in purchasing a brand new home, its worth a mention here about the Government help-to-buy incentive with a 95% Loan To Value mortgage, you could increase your purchasing potential by using the assistance of a Help to Buy loan, using a little as just a 5% deposit.
Gifted Deposits
This is the term for when a family member is in a position to contribute to your deposit.
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