Mortgage Frequently Asked Questions
1. What is a Pre-Approval?
- What is a Pre-Approval?
- IF I have a Pre-Approval does that mean I automatically qualify for a mortgage?
- What does "Ratios" mean?
- What is a Beacon Score and why is it important?
- May I use my RRSP's as a down payment?
- What is a high ratio or insured mortgage?
- What is a Conventional Mortgage?
- What is an Open Mortgage?
- What is a Closed Mortgage?
- What is a Fixed Rate Mortgage?
- What is a Variable Rate Mortgage? (also called Adjustable Rate Mortgage)
Mortgage pre-approval is important for a number of reasons:
- It helps to determine the mortgage amount you qualify for
- It assists the Realtor by knowing what price range properties to show you
- It hold the interest rate for a period of 120 days, guarding you against rate fluctuations
2. IF I have a Pre-Approval does that mean I
automatically qualify for a mortgage?
No. The Lender just skims over the application
to see if your Beacon Score is above 580 and that your ratios are in line. It
does not get under written until you have sent in a offer to purchase. The
Lender then looks at the property, the income documents - such as job letter,
pay stub, T4's, and also Down payment proof. So there is a slight chance you
can get a decline from the Lender and or CMHC if certain conditions are not
met to their satisfaction. Perhaps your T4 shows your income as less than
what was stated on the pre-approval application. , or the property does not
meet CMHC standards. That is why, even with a pre-approval you should give a
condition on financing when ever you make an offer to purchase.
3. What does "Ratios" mean?
It is a mathematical calculation used by the Lenders to determine a borrowers
ability to repay a mortgage. There are 2 calculations used.
- Total Debt Service Ratio (TDS):
Takes into account mortgage payment, property taxes, approximate heating costs
plus 50% of any maintenance fees and any other monthly obligations (I.E.
personal loans, credit cards, lines of credit, car payments, other mortgage
payments etc.) and this sum is divided by the gross annual income of the
applicants . Ratios up to 40% are acceptable.
- Gross Debt Service Ratio (GDS):
Takes into account mortgage payments, property taxes, approximate heating costs
and 50% of any maintenance fees. This sum is divided by the gross annual income of
the applicants. Ratios up to 32% are acceptable.
4. What is a Beacon Score and why is it important?
A Beacon Score is a rating that is calculated by the Credit Bureau and relied
upon by Lenders to determine your payment history on loans, credit cards and lines
of credit. It is very important because it shows the Lenders the type of borrower
you are (if you pay all your payments on time or not). There is no perfect score
but the higher the better.
Borrowers with good credit scores are typically offered more financing options
and better interest rates, but don't be discouraged if your scores are lower,
because there is a mortgage product for nearly everyone.
Beacon Scores are the single most important piece to have in putting together
the mortgage puzzle.
5. May I use my RRSP's as a down payment?
A federal government plan allows first time home buyers to use their RRSP to help
finance their home purchase. This money can be used as a down payment , or to help
with the closing costs. The RRSP home ownership withdrawal forms are available from
your RRSP holder. The criteria are as follows:
- Each applicant can withdraw up to 20,000
- Applicants cannot have owned a principle residence within the past 5 years
- You must reside in the home for at least 1 year
- The RRSP funds must have been invested for more than 90 days before withdrawal
- The withdrawn amount must be repaid, over an interest free repayment period that
can be as long as 15 years.
6. What is a high ratio or insured mortgage?
A mortgage that exceeds 80% of the purchase price or appraised value of the
property. This type of mortgage must be insured by CMHC or GE. Insured mortgages
are charged a CMHC/GE premium. The premiums are based on the amount of down payment.
The mortgage insurance insures the Lender against loss in case of default on the part
of the borrower.
7. What is a Conventional Mortgage?
A mortgage up to 80% of the purchase price or value of the property. Does not
require CMHC/GE insurance.
8. What is an Open Mortgage?
An open mortgage allows you the flexibility to repay the mortgage at any time without
penalty. Open mortgage are available in shorter terms, 6 months or 1 year only and the
interest rate is higher than closed mortgages by as much as 1% or more. They are normally
chosen if you are thinking of moving, selling your home, or if you are expecting to pay off
your whole mortgage from the sale of another property, or an inheritance. This could save
you thousands in prepayment penalties.
Warning! Not all open mortgages are created equal. Check to see just how "open"
your mortgage is!
9. What is a Closed Mortgage?
Compared to an open mortgage, a closed mortgage offers little to no privileges in paying off your
mortgage early. You cannot pay off your mortgage without paying penalties, called prepayment
penalties, from the Lender. Often though, you do have the ability to prepay up to 15-20% off
the original balance each year.
Warning! Not all closed mortgages are created equal. Check with your mortgage
specialist as to how your prepayment penalties are calculated. The difference between one
lender's definition of penalty to another lender is enormous.
10. What is a Fixed Rate Mortgage?
With a fixed rate mortgage, the interest rate is set for the term of the mortgage so that
the monthly payment of principal and interest remains the same throughout the term. Regardless
of whether rates move up or down, you know exactly how much your payments will be.
11. What is a Variable Rate Mortgage? (also called Adjustable Rate
A Variable Rate Mortgage provides a lot of flexibility, especially when interest rates are
on their way down. The rate is based on prime and can be adjusted monthly to reflect current
rates. Typically, the mortgage payment remains constant, but the ratios between principal and
interest fluctuates. When interest rates are falling, you pay less interest and more principal.
If rates are rising you pay more interest and less principal, and if they rise substantially,
the original payment may not cover both the interest and the principal. Any portion not paid is
still owed, and you may be asked to increase your monthly payment. Make sure your variable rate
mortgage is open or convertible to a fixed rate mortgage at any time, so that when rates begin
to rise, you can lock in your rate for a specific term.