Complete Home Buyer's Guide For Canada - Geraldine Santiago Reference Series

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you continue making the monthly payments at the same interest rate as the vendor has, for the remaining term of the mortgage. You will still need the lender’s approval, and you will have to pass a credit check, just as you would if you applied for a new mortgage.

      When interest rates are high, you may assume a mortgage that the vendor had obtained several years earlier, when interest rates were lower. By assuming the mortgage, you may also be helping the vendor, because he or she can pass the mortgage along to you instead of repaying the lender. Most lenders charge a penalty if a borrower repays a mortgage before its term expires. Some of the money that the vendor saves by avoiding this penalty can be deducted from the price of the home.

      Condominium mortgage

      In a condominium mortgage, the buyer of a condominium unit receives legal title to the unit he or she is purchasing as well as an undivided interest in the common area. This means that you can sell your unit and your share of the common area without having to ask permission from everyone else who owns a unit in the building.

      Blanket mortgage

      The first mortgage registered against the entire condominium project is a blanket mortgage. That means that the mortgage is registered over the entire property. The blanket mortgage is placed on the project by the developer, who uses the funds from the mortgage to build it. As the developer sells individual units, the lender removes the mortgage from each individual unit. Meanwhile, the buyer can obtain a condominium mortgage to pay for the individual unit, if necessary.

      Open mortgage

      An open mortgage means that you can repay the loan, in part or in full, at any time without penalty. Interest rates are usually higher on this type of loan. An open mortgage can be a good choice if you plan to sell your home in the near future. Most lenders will allow you to convert to a closed mortgage at any time. Many experts suggest taking an open mortgage for a short term in times of high rates and converting to a closed mortgage when rates fall.

      Closed mortgage

      A closed mortgage usually offers the lowest interest rate available at any given time. It’s a good choice if you’d like to have a fixed rate to work your budget around for a few years. However, closed mortgages are not flexible, and there are often penalties or restrictive conditions attached to prepayments or additional lump sum payments. It may not be the best choice if you might move before the end of the term.

      Portable mortgage

      A portable mortgage means that the lender will arrange a mortgage loan that can be transferred to another property if you decide to move. Note that not all lenders offer portable mortgages.

      Amortization Period

      Typically, the size of a mortgage loan payment is calculated as if the loan payments were going to be paid over a period of 20 to 25 years. This is called the amortization period. Each payment will repay the interest due up to the payment date along with some of the principal owed. The longer the amortization period you choose, the lower the regular payment will be. Remember, however, that the faster you repay any money borrowed by choosing a shorter amortization period, the more you reduce the total cost of borrowing.

      Term

      Most mortgage loan contracts permit the regular payments to continue only for a specified term that is shorter than the amortization period. The term can be as short as six months, or it can be up to five or ten years. The length of the term you choose will depend partly on whether you think interest rates will go up or down. At the end of the term, you may renew your mortgage at that day’s rates or repay the full unpaid balance. If you don’t have the cash required to pay the balance, it is necessary to refinance the loan. Note that the lender is not obligated to renew your mortgage loan at the end of the term.

      A pre-approved mortgage can help you gauge the amount you can afford to spend on a new home.

      A Pre-Approved Mortgage and Its Advantages

      A pre-approved mortgage is very common. It means that your lender approves the amount of your mortgage and gives you a written confirmation or certificate for a fixed time period before you start looking for your home. The pre-approval term, usually lasting from 60 to 120 days, sets the mortgage rate the lender will offer you. If rates go down in that period, the lender should offer you the newer, lower rate. Pre-approval gives you a head start on house hunting, but your final approval is still subject to a review of the property and a credit review of your finances.

      A mortgage approval should take only a few days if you have the proper documents ready (see the next section for proper documents needed). During this process, the lender will do a credit check and spot check other information you have provided. In addition, the lender may ask you to obtain an appraisal of the value of the home you intend to purchase. It may also ask you to obtain mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC) or a private insurer.

      Many lending institutions will pre-qualify you for a specific size and type of mortgage loan before you begin searching for your new home. Taking the time to apply for a pre-approved mortgage will give you the security of knowing how much you can afford to spend. You will be able to shop confidently for a home in your price range and avoid any last-minute complications.

      When you place an offer on a property, if you need a mortgage to purchase the property, you will need to be approved by the lender. Although you have been approved for the price, you must also be approved for the property. Your financial institution needs to know that you are paying fair market value for the property in order for it to lend you the money. If it thinks that you are paying over market value for the property, the institution might not approve your mortgage. The lender will usually ask for an appraisal of the property, and will choose its own appraiser to do the job.

      What documents do I need to provide to a lender?

      Lenders want plenty of financial information about you and your co-buyers to assess your ability to repay the loan. This ability is based on your gross debt service and total debt service ratios and on your assets, liabilities, earnings, employment history, and past record of repaying loans. Specifically, your lender may want the following information:

      • Personal information — age, marital status, dependants

      • Details of employment, including proof of income (T-4 slips, personal income tax returns, a letter from your employer stating your position)

      • Other sources of income, such as pensions or rental income

      • Current banking information

      • Verification of your down payment

      • Consent to run a credit investigation

      • List of liabilities, such as credit card balances and car loans

      • Total amount owed and monthly payments

      • Fees for an appraisal or for a copy of a valid appraisal report, if recent

      • Copy of the property listing

      • Copy of the agreement of purchase and sale on a resale home

      • Plans and cost estimates on a new home

      • Condominium financial statements, if applicable

      • Certificate for the well and septic tank, if applicable

      Understanding Where You Stand with the Lender

      Criteria for the self-employed or those earning commissions

      The lender looks at three critical areas when determining a person’s maximum qualifying amount. It considers your gross

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