Financing Your Home

When you're looking to buy a home, it's important to understand the steps for getting a mortgage.

Mortgage terminology

Before approaching lenders, you should get to know some basic mortgage concepts. You can start by visiting the Glossary section and read up on mortgage-related terms.

Get pre-approved

Pre-approval of a mortgage is when your lender has reviewed all your financial information and has determined the maximum amount of money you can borrow. The advantages include that you:

•know how much you can borrow, so you don't waste time looking at properties you can't afford
•don't have to worry about rising interst rates while shopping for a home, as usually the mortgage borker will guarentee the current interest rate for 60 to 90 days
•have an edge when you make an offer, because the seller knows you're more likely to get a loan
•save time when you apply for your loan because you've already assembled your paperwork

Where to get pre-approved

Many banks and financial institutions are competing for your business so it makes sense to shop around for a mortgage. Most lenders will reduce their posted interest rate so don't be shy about bargaining. Your ability to bargain for a low rate and a flexible mortgage will often depend on how much business you have with the institution. You can contact banks and credit unions directly, or work with a mortgage broker. A broker will help you find a lender and the best mortgage package.

Once you have selected your lender, you will need to provide your financial information. Your lender will want the following:

•Personal information such as number of dependents and marital status
•Details of employment, including a letter from your employer verifying your salary
•Banking and investment information
•Details of your assets (i.e.- a car, other property)
•Information on loans and other liabilities
•Permission to do a credit check
After your application is complete, you will know how much you can borrow and you will be ready to start searching for a home.

Mortgage payment tips

Whether you're a first-time buyer or you've decided to refinance your home, consider the following money-saving steps when calculating your mortgage payments:

•By shortening your loan repayment or amortization period to 20 years from 25 years, you'll pay your mortgage off five years sooner. You'll pay higher monthly payments, but you'll build equity faster and you'll pay less in interest over the long term.
•Apply for a prepayment option. If you receive one, you can directly pay down some of your principal before it's due. Make sure to check for prepayment penalties.
•By paying biweekly instead of monthly, you'll make 26 payments in a year or 13 months instead of just 12 months and reduce your amortization to about 20 years from 25 years.
 
 

Glossary

A

Amortization
The number of years it takes to repay the entire amount of a mortgage.
Appraisal
An estimate of a property's market value, used by lenders in determining the amount of the mortgage.
Appreciation
The increase of a property's value over time.
Assessments
The value of a property, set by the local municipality, for the purposes of calculating property tax.
Assumable Mortgage
A mortgage held on a property by the seller that can be taken over by the buyer, who then accepts responsibility for making the mortgage payments.

B

Benchmark property
A property against which other properties can be evaluated.
Blended Mortgage
A combination of two mortgages, one with a higher interest rate than the other, to create a new mortgage with an interest rate somewhere between the two original rates.
Blended Mortgage Payments
Equal or regular mortgage payments, consisting of both a principal and an interest component. With each successive payment, the amount applied to interest decreases and the amount applied to the principal increases, although the total payment doesn't change. (Exception
Buy-Downs
When the seller reduces the interest rate on a mortgage by paying the difference between the reduced rate and market rate directly to the lender, or to the purchaser, in one lump sum or monthly installments.

C

Closed Mortgage
A mortgage that cannot be prepaid, renegotiated or refinanced during its term.
Closing
The real estate transaction's completion, when the parties involved agree that all legal and financial obligations have been met, and the deed to the property is transferred from the seller to the buyer.
Closing Costs
Expenses in addition to the purchase price for buying and selling a property.
Closing Date
The date on which the title and keys to the property are transferred from the seller to the buyer, and the money is paid.
Common Elements
The portions of a condominium development owned in common (shared) by the unit owners.
Condominium
Shared ownership in property. Owners have title (ownership) to individual units and a proportionate share in the common elements.
Conventional Mortgage
A mortgage loan that does not have 80 % of the lending value of the property..
Counter-offer
One party's written response to the other party's offer during negotiation of a real estate purchase between buyer and seller.

D

Debt Service Ratio
The percentage of a borrower's gross income that can be used for housing costs, including mortgage payment and taxes. (andcondominium fees, when applicable)
Down Payment
The part of the purchase price of a property that the buyer pays in cash and does not finance with a mortgage.

E

Easement
A legal right to use or cross (right-of-way) another person's land for limited purposes. A common example is a utility company's right to run wires or lay pipe across a property.
Encroachment
An intrusion onto an adjoining property. A neighbour's fence, storage shed, or overhanging roof line that partially (or even fully) intrude onto your property are examples of encroachments.
Equity
The difference between the price for which a property can be sold and the mortgage(s) on the property. Equity is the owner's stake in the property.
Estoppel Certificate
A written statement of financial and legal status.

F

First Mortgages
The first security registered on a property. Additional mortgages secured against the property are "secondary" to the First Mortgage
The first security registered on a property. Additional mortgages secured against the property are "secondary" to the Foreclosure
A legal process by which the lender takes possession and ownership of a property when the borrower doesn't meet (defaults on) themortgage obligations.

G

Gross Debt Service Ratio
A general rule is that your housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable) should not be more than 32% of your gross monthly income.
Grow-op
A marijuana-growing operation, usually located in a house.

H

High-ratio Mortgages
A mortgage that exceeds 80% of the loan-to-value ratio; must be insured by either the Canada Mortgage and Housing Corporation or a private insurer to protect the lender against default by the borrower who has less equity invested in the property.

I

Interest
The cost of borrowing money.

J

Joint Tenancy
A form of ownership in which two or more individuals (often spouses) have an equal share in the ownership of a property. In the event of one owner's death, his or her share is automatically transferred to the surviving owner(s), apart from the deceased's will.

L

Leverage
Controlling a large asset with a relatively small amount of cash. In real estate, $20,000 down payment (or less) can be used to purchase (control) a $100,000 home, for example.
Lien
Any legal claim against a property, filed to ensure payment of a debt.
Listing Agreement
The contract between the listing broker and an owner, authorizing the REALTOR® to facilitate the sale or lease of a property.
Listing Broker
The REALTOR® who signs a contract with an owner to sell the property.

M

Maintenance Fee
A monthly fee paid by condominium owners for maintaining the development's common areas.
Mortgage
A contract between a borrower and a lender. The borrower pledges a property as security to guarantee repayment of the mortgagedebt. Lenders consider both the property (security) and the financial worth of the borrower (covenant) in deciding on a mortgage loan.
Mortgage Broker
A person or company having contacts with financial institutions or individuals wishing to invest in mortgages.
Mortgage Insurance
Government-backed or privately-backed insurance protecting the lender against the borrower's default on high-ratio (and other types of) mortgages.
Mortgage Insurer
In Canada, high-ratio mortgages (those representing greater than 80% of the property value) must be insured against default by either CMHC or private insurers. The borrower must arrange and pay for the insurance, which protects the lender against default.
Mortgage Life Insurance
Insurance that pays off the mortgage debt, should the insured borrower die.
Mortgage Payment
The regular installments made towards paying back the principal and interest on a mortgage.
Mortgage Prepayment Penalty
Is a fee paid by the borrower to the lender in exchange for being permitted to break a contract (a mortgage agreement); usually three months' interest, but it can be a higher or it can be the equivalent of the loss of interest to the lender.
Mortgage Term
The length of time a lender will loan mortgage funds to a borrower. Most mortgage terms run from six months to five years, after which the borrower can either repay the balance (remaining principal) of the mortgage, or renegotiate the mortgage for another term.
Mortgagee
The lender.
Mortgagor
The borrower.
Multiple Listing Service® (MLS®)
A system for relaying information to REALTORS® about properties for sale.

O

Open Mortgage
A mortgage that can be prepaid or renegotiated at any time and in any amount without penalty.

P

Partially Open Mortgage
(Also called a "partially closed" mortgage.) Allows the borrower to prepay a specific portion of the mortgage principal at certain times with or without penalty.
Portability
A mortgage feature that allows borrowers to take their mortgage with them without penalty, when they sell their present home and buy another one.
Pre-Approved Mortgages
Tentatively approved by a financial institution for a specified amount, interest rate and monthly payment.
Prepayment Privilege
A mortgage feature that allows the borrower to prepay a portion or all of the principal balance with or without penalty. This privilege is frequently restricted to specific amounts and times.
Principal
The mortgage amount initially borrowed, or the portion still owing on the mortgage. Interest is calculated on the principal amount.

R

Rate (Interest)
The return the lender receives for advancing the mortgage funds required by the borrower to purchase a property.
REALTORS®
Real estate professionals who are members of a local real estate board and the Canadian Real Estate Association. Only these professionals can call themselves REALTORS®.
Refinancing
The process of obtaining a new mortgage, usually at a lower interest rate, to replace the existing mortgage.
Reserve Funds
The portion of a condominium maintenance fee that is set aside to cover major repair and replacement costs.

S

Second Mortgage
A second financing arrangement, in addition to the first mortgage.
Secondary Financing
Second, third, fourth, etc. mortgages, secured by a property "behind" the

T

Take-Back Mortgage
(also referred to as Vendor-Take-Back Mortgage) When sellers use their equity in a property to provide some or all of the mortgage financing in order to sell the property.
Term
(also referred to as Mortgage Term) The length of time a lender will loan mortgage funds to a borrower. Most mortgage terms run from six months to five years, after which the borrower can either repay the balance (remaining principal) of the mortgage, or renegotiate the mortgage for another term.
Term Mortgage
A non-amortizing mortgage under which the principal is paid in its entirety upon the maturity date. Sometimes called a straight loan.
Title
The legal evidence of ownership of a property.
Title Search
A detailed examination of the ownership documents to ensure there are no liens or other encumbrances on the property, and no questions regarding the seller's ownership claim.
Total Debt Service Ratio
The maximum percentage of a borrower's income that a lender will consider for all debt repayment (other loans and credit cards, etc.) including a mortgage.

U

Units
Term used to describe the individual home or apartment held by the owner within a condominium development.

V

Variable-rate Mortgage
A mortgage for which payments are fixed, but whose interest rate changes in relationship to fluctuating market interest rates. If market rates go up, a larger portion of the payment goes to interest. If rates go down, a large portion of the payment is applied to the principal.
Vendor Take-Back Mortgage
When sellers use their equity in a property to provide some or all of the mortgage financing in order to sell the property.

W

Weekly Payments
Mortgage payments made weekly or 52 times per year.

Z

Zoning Regulations
Strict guidelines set and enforced by municipal governments regulating how a property may or may not be used.