Understanding your First Mortgage – The blog of a first time home buyer
The mortgage and pre-approval process is a scary one, at least for me it was. Just like you realise that public school didn’t prepare you to file your income tax, getting a loan for the biggest purchase of your life can easily seem daunting! I’d like to break down some of my knowledge on the subject and also touch on the pre-approval process.
Please note, I am not a mortgage professional. What I am about to write out is my understanding of the current mortgage process (late 2019). Do not use this as legal or financial advice, rather, use this as just a little preparation and clarification. For lots more information, the government has a handy website:
Seriously, this website is going to give you much better advice than I will, but I’d still love if you read the rest of my article too!
So … whats a mortgage? A mortgage is a secured loan against your property. All that basically means is that if you stop paying at any time during the amortization period (more on that later), the bank has the right to repossess it. (Andy’s Pro Tip: remember to pay your mortgage!) Now the bank isn’t going to show up the day after you miss a single payment, but you absolutely need to be sure that you get a mortgage you can afford, even if you experience some hard times!
When you hear about mortgages, you hear terms like equity, 5 year fixes, amortization, mortgage rates, First Time Homebuyers’ Incentive (more next week), down payment… the list goes on! Here’s some of the most important things to know:
- A type of loan that allows the lender to take possession of secured property if you stop repaying the loan.
- Down Payment
- The money you put down as your purchase a home. The current minimum is 5% of the price of the home. Down payments that fall under 20% of the home value are subject to creditor insurance (Often referred to CMHC fees), which protect the lender in the case where you can’t pay the mortgage. This fee is added to your mortgage amount and paid off just like the rest of your mortgage. The amount of this fee depends on how much money you’re able to put down on the house.
- The amount of the loan. When you pay your mortgage payment, some of the money goes towards interest, while the rest pays down your principal, building equity
- The value of your home, minus the remainder of the loan. This is the money you’ve “built” up with your mortgage payments, and you can think of it as the money you’d receive when you sell (minus some fees, like paying your REALTOR®).
- Amortization Period
- The amount of time it will take to fully pay the mortgage at your minimum payment. Most commonly this is 25 years, meaning that if you don’t increase your payments, you will fully own your home 25 years after the start of the mortgage.
- Interest Rate
- Your interest rate is the rate set by your lender (most often your bank) which controls the amount of interest you pay. You can have a fixed or variable rate mortgage.
- Fixed rate will mean your payments remain the same, regardless of the current loan rates. EG: A 5 Year Fixed, 25 Year Mortgage means that the first 5 years of the mortgage, the rate will stay the same, before switching to a 20 year variable mortgage.
- Variable rate will change as the market fluctuates, up or down. When the rate drops, your mortgage payment decreases. When it increases, you pay more.
- Open vs Closed Mortgage
- An open mortgage can be repaid in full at any time without penalty, while a closed mortgage has a limit on how much extra you can pay per year before incurring a penalty. An open mortgage will be at a slightly higher interest rate, but can save you money if you expect you’ll be making a large payment (for example, you buy a new house before your old one sells and you’ve built considerable equity)
There’s so many more details that can be explained, but the most important thing to do is to have a discussion with a mortgage professional. Don’t be afraid to ask as many questions as you need! Not only will they help you prepare for the eventuality of your mortgage, but they can also get you pre-approved!
So… what is Pre-Approval?
Getting pre-approved means meeting with a mortgage lender to have a look at your credit, look at your debt ratio (your debts compared to your income, among other factors) and determine how much they will be willing to lend you for a home. While you may be able to afford a very expensive house, if you have a lot of outstanding debt (think student loans, cars, credit cards) you may not qualify for as large a loan as you might think. Conversely, if you have great credit, you may be able to afford more than you expect!
I was a little nervous when I went in to be pre-approved. Now, full disclosure as always, I actually went in to get approved for the specific house I found, rather than find out the maximum we could qualify for, but the process is the same. I was nervous because as someone self employed, my income is more variable than most. My actual pre-approval actually went smoother than I expected. I brought in 3 years of Tax Returns and proof I paid my taxes, while my partner brought in a few pay stubs and a letter of employment. We’re fortunate enough not to have any outstanding debt, so after a few minutes with our mortgage specialist, we walked out with a letter of pre-approval, locking in a rate for the next 60 days. That means we could make an offer any time in those 60 days and be guaranteed the rate and mortgage we were offered, pending a letter of finance.
A letter of finance is a condition of sale (more on that in a few weeks) which is when your lender actually checks everything fully, and offers to loan you the amount requested. They may need additional documents, proof of employment, etc., to ensure you’ll be able to pay your mortgage. Be sure not to significantly change your financial situation between your pre-approval and your actual offer, since you might get denied your loan at the last minute. That means, don’t go financing a fancy new car that will look great in your driveway until AFTER your house closes.
Once again, this is just meant as a jumping off point, but I hope it’s helpful as you begin the financial side of your home search! Next week I’ll discuss what to do when you find “the one”, or at least a house that could be your next home!
Andy Tree is a professional Wedding Photographer, marketing expert, coffee lover, millennial, board game enthusiast, and overall nerd. Over the next weeks he’ll fill you in on every step of his search and first home purchase.
Send us a message on Facebook if you have any specific questions or if you’re ready to start your own search!