MORTGAGE EDUCATION
Are You Ready for Home Ownership?
When an area experiences a mortgage rate decline many renters make the hasty decision to purchase a dwelling before the rates jump up again. Though you could get a great deal you need to ask yourself if you’re truly ready for everything that home ownership entails.
Here are 6 key ways to decide if it’s the right time for you to buy.
Do you know what the past and current mortgage rate trends are? Have you looked into what they’re predicted to do in the future? Do you know what kind of home you want and what they’re currently selling for? These are all things you need to know before buying your first home, plus much more. Make sure to do your research to ensure your investment is a sound one.
Are you ready to take on the responsibility of a landlord? No longer will you be able to call up your manager to come unclog the toilet or fix appliances that have broken. All those tasks will fall on you and could be rather time consuming. You also need to be prepared if you plan on renting out the home to tenants in the future. This will involve collecting money and being on-call if the renters need anything.
Acceptable Down Payment Sources
The first is that the banks are mandated by the Anti-terrorism Act to make sure all funds are legally sourced. Criminal organizations do exist even here in Central Alberta and they are clever and will launder their funds however they can. I had the opportunity to attend an anti-fraud session led by the Edmonton police and he told a story of how a routine bylaw infraction led to the discovery of a criminal enterprise which involved more than 32 million dollars in mortgage fraud. Police resources, insurance proceeds, court time and on and on mean there was a genuine cost to the greater community. Increased due diligence prior to funding can help catch such things ahead of time.
The second is that your banks and mortgage lenders are accountable to the mortgage default insurers and their company’s investors and shareholders and to OSFI which oversees them all. If you default on your mortgage they have to be able to prove that they took every step possible to ensure you were in fact a solid borrower qualified for the mortgage.
Honestly, it boils down to this. If you were lending someone $350,000 wouldn’t you want to make sure they could afford to repay you?
So back to down payment sources. When you are providing documentation for your mortgage it is going to have to be pretty clear. It will have to show your name, financial institution holding said asset, account number and all transactions into the account for the past 90 days. Any deposits over $500 will have to be properly accounted for as per the above rationale. A quick reminder that you will have to have at least 5% to put down and an additional 1.5% for the closing costs so 6.5% all together though these days the banks and the mortgage insurers really like to see additional savings just in case you experience a job loss or illness.
Here are the most common and acceptable down payment sources and how each is to be verified. Keep in mind that you can use a combination of them but you will have to provide verification of each.
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Savings – All accounts will need to be verified via a 90-day history. -
TFSA – Must be verified via a 90-day history. -
RSP – Will require a 90-day history and in most cases verification that the funds have been redeemed via the forms to the RSP provider and have been deposited into your account. -
Gift – From an immediate family member. Need to see a signed gift letters stating it is in fact a gift which is not expected to be repaid and proof it has been deposited to your account. In some cases they will want to see the source of the gift which means a statement from the person giving you the funds. -
Loan – You can use borrowed funds for your down payment through certain lenders. They will need to verify the terms of the loan if it is new to make sure you can afford both it and your mortgage. -
Credit Card/Line of Credit – This is similar to the loan as above but in this case you usually only have to prove you can afford the payments for both. -
Sale of Asset – You can sell anything you own but make sure you document it properly. Bill of sale, copy of the cheque and proof it has been deposited to your account. -
Gifted Equity – If you are purchasing the home of a family member and they wish to, they can gift you the equity in the home and this can be used as the down payment. -
Inheritance – This is usually verified via the documents from the lawyer with corresponding deposit to your account.
So called mattress money is no longer acceptable unless you can show you have held it in a traditional account for the 90 days.
From Pre-Approval to Funding
The first step should always be to choose a great mortgage professional. Referrals from friends and family and your real estate agent can help with this. You are trusting the largest loan you are likely to take to this person so make sure they know what they are doing. They are going to take an application, pull your credit, and determine what your maximum purchase price will be. You will be asked to provide a whole bunch of paperwork to verify your information.
- Letter of employment and paystub
- Down Payment Verification
- 2 Year’s Notice of Assessment and/or T4’s
- Void Cheque
This list is the very least of what you may be asked for. If you are self-employed, separated, previously bankrupt, New to Canada, receive bonuses or many other scenarios then you will likely be asked for much more. Given the current state of the economy and the record levels of attempted mortgage fraud, the banks have to be very careful these days.
The other real benefit to the preapproval is that you can house hunt with confidence knowing that your entire situation has been assessed. You will not look at homes out of your price range either which can save you the heart ache of falling for a home you cannot afford. It also makes your offer very strong if you find yourself in a competition with another buyer.
Hopefully you provided the bulk of the paperwork for the pre-approval but you may be asked for updated information such as a more recent paystub or bank statement. At this point your application is reassessed by the lender. They will take a look at the property you are purchasing and make sure it fits their guidelines. Then it is sent off for mortgage default insurer approval and once then you will get the official approval to sign. Make sure that you do not remove the financing condition until all lender conditions are met. Your mortgage professional will tell you when that is.
Once you have met all of the conditions, the lender will send the paperwork over to the lawyer’s office. It takes the lawyer a few days to get things ready for you to sign and when you go you will be asked for:
- Balance of the down payment in the form of bank draft
- 2 forms of ID
- Void Cheque
The day of funding, the lender sends the funds to the lawyer who sends them to the seller’s lawyer who upon receipt of the funds gives the all clear and you will be given the keys to your new home.
It is a great idea to call your lender a bit after the mortgage closes to make sure everything is set up the way you wanted.
How to Kill Your Mortgage Approval
Unfortunately all too often we see people make this mistake and so this week we are going to look at the things you must never do during the mortgage process. Or at least you should never do any of them without first asking your mortgage professional how it will affect your approval.
There may be an amazing opportunity for you at a new company but before you accept please keep the following in mind:
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Will you be on probation? Lenders will not accept probationary employment. -
Is the new income paid the same as your current? By this I mean if there is any bonus, overtime or commission aspect to your pay you may be killing your approval. These types of income require a 2-year history before they are acceptable to the lenders and CMHC. -
Are you now considered as a contractor or even self-employed? Once again we require a 2-year history unless you are working in the exact same field as before and have an amazing contract in place and even then things have become tricky. -
Have you decided that you are simply unable to continue for personal reasons? Here’s the thing, the lender has approved you based on the information you provided and they verified. Unfortunately for you that means that you need to maintain the status quo until you take possession of the new home.
Your car may finally have given up on you and you have to buy a new one but before you do call your mortgage pro to make the monthly payment will not put your affordability ratios out of line.
Do not pay for 12 months, 18 equal payments, a new line of credit or maxing out your credit cards can all affect your affordability ratios and kill your mortgage approval. Again, a quick call to your mortgage professional is all that is needed to find out if any of these things will be a problem.
The other thing to watch is that you make all of your payments on time. If you have chosen to build a home the lender will be pulling your credit again prior to possession and if your credit score has dropped because of late payments or maxed out credit cards they have the right to cancel the approval.
The Mortgage Process
The application – At this point you are going to answer all sorts of questions about yourself. Lenders are looking to find out just who you are before they loan you a whole bunch of money.
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Employment – They need to know all the particulars including how long and how you get paid. If you are self-employed, commissioned or regularly receive bonus or overtime they will want to see a 2-year history before they will allow this income to be used to qualify you for the mortgage. -
Credit Bureau – Consider your credit history as a sort of report card if you will. You need to show that you have managed your current debts obligations satisfactorily. Lenders are looking for a 24-month history on 2 types of credit such as a credit card and a vehicle loan. Keep in mind that late payments on your cell phone, cards, loans or even a previous mortgage better have a very good reason. -
Assets – More and more lenders want to see that you have a safety net of some additional savings just in case.
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Letter of employment outlining all the particulars and a recent paystub -
Last 2 year’s Notice of Assessment from the CRA and proof that all tax bills have been paid -
3 month history on all accounts you are using for the down payment with explanations of any large deposits -
Mortgage statement, property tax bill and lease agreements on any other homes you own -
You may also be asked for T1 Generals and Business Financials if you are self-employed -
Various other documentation as required
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What are the pre-payment privileges on my mortgage and do I have to wait for the first anniversary to make the extra payments? -
Is my mortgage portable across the country and to a wide variety of properties? How long do I have to port this mortgage? Porting is where you can take the mortgage from one house to another without penalty. Some lenders do not lend on rural properties for example and so if an acreage is in your future then you want to make sure yours does. Other lenders require the port to happen on the same day which can be trick to navigate. -
How are the prepayment penalties calculated? In Canada, there is no rule about how a lender has to calculate this number. I have seen them vary from $3,000 to $18,000 on the exact same mortgage amount with the only difference being the lender. Life happens and you want to make sure that if you have to break your mortgage that it will not cost you all your hard earned equity.
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Mortgage Insurance – If you are purchasing a home with less than 20% down you will have to pay this which is based on a set percentage of the purchase price depending how much you are putting down and is added to the mortgage. -
Legal Fees – The lawyer will have to complete the final paperwork and register the mortgage for you and this can cost up to $1,750 -
Title Insurance – Many lenders now require this in lieu of an RPR – The cost is about $250 and will be collected at the lawyer’s office.
Types of Mortgage Lenders
Mortgages seem to have been in the news a lot in the last few weeks. The federal government came in and made some more changes to the mortgage rules. The reason for these changes is basically this: They guarantee, through their backing of the mortgage default insurers, that in the case of default the mortgage lenders have 100% assurance they will not lose any money. That’s why the government keep a very close eye on the housing industry. Taxpayers will have to cover the losses should they occur. The last round of changes saw the implementation of a stress test. Borrowers have to qualify at a higher rate than the one they are actually getting to ensure they can afford their mortgage payments when the rates go up. It looks like there will be additional changes coming soon but we will have to wait and see what those entail. Thankfully for the government we Canadians are a good bet on the whole and arrears are still very low. Approximately 1/10th of those in the United States.
So they keep referring to mortgage lenders which seems to me to leave some room for clarification. Given how rarely we go through the mortgage process and how quickly things seem to change, a quick recap of the types of mortgage lenders in Canada seems to be in order and the pros and cons of each.
Banks
Pro – You have the ability to walk into the branch and have all of your borrowing neatly in one place. There is a peace of mind knowing that you are dealing with a company you drive by.
Monoline Lenders
Alternative Lenders
Private Lenders
So there you have a brief summary of the types of mortgage lenders in Canada. They all have an important role to play and enable many Canadians to achieve and retain their status as homeowners. And hey, let’s face it, we are Canadians. We are historically a group who sees the benefit in owning our own homes so isn’t it great that we have so many lenders to help both us and our neighbours.
Your First Mortgage Renewal
Mortgage renewals are mailed out months before the renewal date. This gives you plenty of time to shop around for the best rate. Many mortgage professionals recommend a 4-6 month window to negotiate because that’s how long a lender may guarantee a discounted rate. By planning ahead you could find yourself a rate significantly lower with another lender or have a nicely discounted rate to fall back on.
Mortgage research isn’t a one-time process you perform when buying you first home, it’s a topic you should revisit each year. The reason for ongoing research relates to the changes that occur in the marketplace. It is important to keep up-to-date with mortgage trends so you don’t get swindled into a higher rate than you deserve. The key thing to avoid when shopping for a new rate is signing with a bank’s posted rate. These rates are usually the highest the bank charges and all that extra interest will accumulate quickly, adding thousands to your mortgage total. Take the time and know what trends are doing so you can recognize a good rate when it comes along.
Most people only negotiate the interest rate when they’re applying for or renewing a mortgage, but all variables are open to discussion! Make sure you know the importance of the amortization period, fixed versus variable rates, and payment schedule flexibility so your negotiation power is up to its full potential. All these variables can help reduce your payments, interest rate, and overall payment period.
Some mortgagees find all this information rather overwhelming and some simply don’t have the time to do the necessary research. If you find yourself fitting into one of these two categories then consider hiring a mortgage professional. These brokers work for you and will handle all the shopping and negotiations required to make your mortgage more manageable.
RRSP Home Buyers Plan
The Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw amounts from a Registered Retirement Savings Plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal. Budget 2009 increased the HBP withdrawal limit to $25,000 from $20,000.
For HBP purposes, an individual is generally considered to be a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year in which the HBP withdrawal is made or in any of the four preceding calendar years.
Special rules apply to facilitate the acquisition of a home that is more accessible or better suited for the personal needs and care of an individual who is eligible for the disability tax credit, even if the first-time home-buyer requirement is not met. These rules have also been modified to provide the same $25,000 withdrawal limit.
Notes on the Program
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Withdrawn funds must generally be used to acquire a home before October of the year following the year of withdrawal. -
Amounts withdrawn under the HBP are repayable in instalments over a period not to exceed 15 years. -
To the extent that a scheduled repayment for a year is not made, it is added to the participant’s income for the year. -
A special rule denies an RRSP deduction for contributions withdrawn under the HBP within 90 days of being contributed.
What Documents Will I Need to Bring?
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Most recent pay stub -
Letter of Employment – on company letterhead, detailing length of tenure, job title, rate of pay, guaranteed number of hours -
Last two years T4s -
Last two years Notices of Assessment from the Canada Revenue Agency – with the most recent year showing no taxes outstanding -
Bank Statements – 90 days’ worth of statements from each account that down payment funds will be drawn from – please ensure that all accounts show your name and account number clearly at the top and that they are unaltered -
If down payment is to be gifted, please send in a statement showing the account number, name and corresponding deposit, to line up with the amount on the gift letter. Letter will be forwarded to you once a lender has been chosen, as each lender has a specific letter.
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Articles of Incorporation -
Last two years of accountant prepared company financials -
Last two years Notice of Assessment – with the most recent year showing no taxes outstanding -
Last two years complete T1 Generals -
Most recent Mortgage Statement from current home -
Property Tax Assessment from current home -
Most recent Mortgage Statement from current home -
Property Tax Assessment from current home -
Rental agreements from all rental properties -
Bank Statements – 90 days’ worth of statements from each account that down payment funds will be drawn from, if not all down payment will be coveted from the sale of your current home – please ensure that all accounts show your name and account number clearly at the top and that they are unaltered -
If a portion of the down payment is coming from a gift, please provide a bank statement with the gift amount being deposited, to correspond with the gift letter. Gift letter will be forwarded to you once a lender has been chosen, as each lender has a specific letter required
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Most recent Pay Stub(s) -
Letter of Employment(s) – on company letterhead, detailing length of tenure, job title, rate of pay, guaranteed number of hours -
Last two years’ Notice of Assessment – with the most recent year showing no taxes outstanding -
Most recent Mortgage Statement from current home -
Property Tax Bill from current home -
Most recent Mortgage Statement from all rental properties -
Property Tax Bill from all rental properties -
Rental agreements from all rental properties -
Bank statements – 90 days’ worth of statements from each account that down payment funds will be drawn from, if not all down payment will be covered from the sale of your current home – please ensure that all accounts show your name and account number clearly at the top and that they are unaltered -
If down payment is to be gifted, please send in a statement showing the account number, name and corresponding deposit, to line up with the amount on the gift letter. Letter will be forwarded to you once a lender has been chosen, as each lender has a specific letter -
If you are self-employed please also provide last 2 year’s full T1 Generals and Financial Statements
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Most recent pay stub(s) -
Letter of Employment(s) – on company letterhead, detailing length of tenure, job title, rate of pay, guaranteed number of hours -
Last two years’ Notice of Assessment – with the most recent year showing no taxes outstanding -
Most recent Mortgage Statement from current home -
Property Tax Bill from current home -
Most recent Mortgage Statement from all rental properties -
Property Tax Bill from all rental properties -
Rental agreements from all rental properties -
Home Insurance policy
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Complete Divorce or Separation Agreement -
Proof of collections paid -
Void cheque for the mortgage payments
Canada Guaranty, CMHC and Genworth
High Ratio Fees
If you are looking to purchase a property with less than 20% of the purchase price as a down payment, all banks require that the mortgage be insured through either The Canadian Mortgage and Housing Corporation (CMHC), or Genworth Financial Canada. These institutions provide mortgage insurance to homebuyers and have identical premiums of which are listed below.

*Rates as of 2019-05-07
Mortgage loan insurance helps protects lenders against mortgage default, and enables consumers to purchase homes with as little as 5% down payment — with interest rates comparable to those with a 20% down payment!
To obtain mortgage loan insurance, lenders pay an insurance premium. Your lender will pass this cost on to you. The premium payable is based on a percentage of the home’s purchase price that is financed by a mortgage. The premium can be paid in a single lump sum or it can be added to your mortgage and included in your monthly payments.
For more information try visiting CMHC’s website at: http://www.cmhc-schl.gc.ca/en/co/buho/index.cfm