A Reputation Built On Trust
Mortgage Insurance Premium
This is an insurance premium on the mortgage for the bank of finance Company's benefit not the Buyer's. Mortgages in Canada with less than a 25% equity position by the Purchaser must be insured. Canada Mortgage & Housing Corp. and GMHC are insurer corporations. CMHC loan insurance is portable (on mortgages placed since April 1997) to all areas of Canada under certain terms and conditions. The following is a table of fees relative to the percentage equity, the greater the down payment the less the fees are. Fees are added to the mortgage amount, they do not increase the down payment.
Premium - Single Advance: Payable to CMHC at the time the loan is advanced.
Premium -More Than One Advance: Due and payable to CMHC as the mortgage funds are advanced. The mortgage loan insurance premium may be added to the amount of the loan. Where provincial sales tax is payable on the CMHC mortgage loan insurance premium, the amount of the tax is not to be added to the mortgage amount.
Select one of the following to learn more about mortgage qualification:
Pre-Qualification The first step
Actual Qualification Usually after you have found your new home
The Lender's Criteria The ground rules
A visit to your lender is a smart step to get started with even before you go out to look at homes. Be sure to organize beforehand to make your time more effective. Do some brainstorming and write down any questions that you may have before your meeting. Your loan officer can be a great source of information. One thing you must be aware of though is that this is just what it says it is and no more. It is a "PRE"-approval. The financial institution will only "crunch" the numbers with you at this time and review the actual approval process. The bank usually will not check references or credit ratings until you actually have found your new home and have a signed Offer to Purchase. But pre-qualifying will help to set the boundaries for budgeting for your new home.
Keep in mind that the bank will often lend more money than you are comfortable borrowing. Your true maximum mortgage amount oftentimes is lower than what the lender will offer. Your personal mortgage payment limit needs to be a payment that you will feel comfortable making and still be able to enjoy your lifestyle and meet your other goals.
Request a letter stating what you qualify for. It can be a valuable tool later when making an offer on a property.
Once you have an accepted Offer to Purchase contract made on the home you want to buy the following is a list of what you will need for the actual application. The "PRE" qualifying process is only preliminary; once you have found your new home the process becomes more detailed. For the actual qualifying process you will need to work with your lender to complete the application procedure. You will need a letter confirming your employment. This should include your position, number of years with that employer, your prospects for the future with the company and your current salary, wage or anticipated earnings. Photocopies of your T-4 slips for the past few years are also helpful.
Make a list of your assets (cars-even if you owe money on them-stocks, savings accounts, bonds, etc.); include their present estimated value (and location, where appropriate); add up the total dollar amount of assets held.
Make another list of your liabilities (car loans, student loans, credit card balances, etc.); include the current balance owed, name of the party to whom you owe money and account numbers; add up the total dollar amount of liabilities. Subtract your total liabilities from your total assets to determine your net worth. Itemize the source(s) of your down payment, giving account numbers where appropriate. The lender will need to verify that you have these funds before granting the mortgage. If you borrow a portion of the down payment from family or friends, the lender will want to know how you intend to pay back the loan. If there's a payment involved, it may be used in calculating your debt-service ratio and if it has to be paid back it may even eliminate your chances for a mortgage depending on your equity situation. If you purchase with the minimum 5% down payment the funds must be unencumbered (not repayable).
Come with your social insurance number, chequing account information and contact information for your lawyer. Your co-applicant should bring similar information and be present when you visit the lender to fill out the application. Bring a copy of the listing details of the home you want to buy and a copy of a current survey or Real Property Report, if available. If you have a completed Offer to Purchase, bring it too.
Be sure to tell the bank who your lawyer will be. You want a lawyer looking out for your interests first not the banks. Your lawyer will register their mortgage and be sure title is in order for the bank. You need to tell them so you don't end up paying for two lawyers.
After you are approved personally, the lender will need to verify the value of the house, and will usually need to have it appraised. The appraised value is an independent expert's estimate of the market value of the house. This will hopefully be close to the price you've agreed to pay, but it may not necessarily be the same. When calculating the maximum size of a mortgage the lenders will issue against a property, it will be based on the appraised value or the selling price, whichever is less.
How Your Lender Will Qualify You
(you may also refer to the Mortgage Calculator)
When lenders qualify you for a mortgage amount they use two ratios that are relative to your income. These ratios are the G.D.S. (Gross Debt Service Ratio) and the T.D.S. (Total Debt Service Ratio). The G.D.S. is 32% of your combined gross pay before any deductions and the T.D.S. is 42% but with the T.D.S. all non-typical outstanding debt payments are subtracted after the 42% is calculated. The final qualifying mortgage payment has two other expenses subtracted from it. These are an estimate of the monthly property taxes for your new home as well as less a heating allowance of $60 to $120 depending on the size of home you plan on purchasing and the guidelines of the lender you are using.
This is how it would work:
Assuming a gross income of $5,000 per month before deductions.
G.D.S. 32% T.D.S. 42%
$5,000 X 32% = $1,600 $5,000 X 42% = $2,100
Less Property Tax Est.: $120 Less Property Tax Est.: $120
Less Heating Allowance: $80 Less Heating Allowance: $80
Qualifying Payment: $ 1,400/Month Less Charge Payments: $100
Less Car Payment Etc.: $350
Qualifying Payment: $ 1,450/Month
In this case the G.D.S. is the lower qualifying ratio so the maximum payment that the lender would allow would be $1,400 per month towards your mortgage.
From this point interest rates and the amortization period of the loan are the final variables. The amortization is the number of years that it would take to pay the mortgage out completely if the interest rate remained fixed. The term of the mortgage is the length of time the mortgage terms (interest rate etc.) remain fixed.
The following chart shows the mortgage principle amounts that the $1,400 per month would yield based on various interest rates and amortization periods. Interest on mortgages in Canada are calculated based on interest compounding semi-annually. With straight interest calculations, payments will be a bit higher and/or the amount of mortgage that you qualify for will be lower. This payment schedule does not take mortgage insurance fees into account (see Costs of Purchasing a New Home).
Interest 25 Years 20 Years 15 Years 10 Years
5.5% $229,361.00 $204,561.34 $172,082.35 $129,366.81
5.0% $240,713.21 $213,049.26 $177,637.07 $132,306.47
4.5% $252,948.22 $222,079.40 $183,517.97 $135,346.8
4.0% $266,149.47 $231,693.54 $189,691.94 $138,492.23
As you can see the interest rate has a dramatic effect on your purchasing power as well as the length of time it takes you to pay your mortgage off (the amortization period). Over 25 years a one and a half percent difference in the rate works out to over $36,000 in buying power. As far as the length of time to pay your home off; as we calculated, if you had a mortgage of $229,361 over 25 years at 5.5% the payment is $1,400 per month. If you kept the payment the same but reduced the interest rate to 4.0% you would have your mortgage paid of five years and three months sooner. Five years and three months times $1400 is a savings of $88,200 that you wouldn't have to pay the bank.
What is a Renovation Mortgage?
You might be browsing through the Calgary MLS and think, wow that home is perfect, "if only _____ was different". Or perhaps you are looking at a "handyman special" or a fixer-upper. There are always homes for sale on the Calgary real estate market that fall into either category. The homes that need a little work are usually priced more competitevely and offer excellent value. The problem for some buyers is being able to afford the home, along with the renovations.
CHMC (Canada Housing Mortgage Corp) has what is called a "Purchase Plus Improvements" Mortgage, which lets you buy your dream home, and be able to fix it up as well. With a Purchase Plus Improvements Mortgage, you lump your renovation and home purchase price together and pay one single mortgage payment, with as little as 5% down - of the "as improved" value.
For example, if you were to purchase a home for $120,000 and wanted to do $30,000 worth of renovations, CMHC will insure a mortgage based on 95% of the "as improved" value. In other words, with a 5% down payment ($7,500) CMHC will insure a mortgage of $142,500. The key for this to work is that the renovation cost has to be reflected in the "as improved" value of the house. In this given example, CMHC would have to agree that the house would have a value of at least $150,000 after the $30,000 worth of proposed renovations had been completed. In other words - your renovations have to increase your homes value by at least as much as they cost you.
The insured loan will be based on either the purchase price plus the actual cost of improvements, or the "as improved" market value - whichever was lower. Remember, however, that in the case of 90-95% financing is only available if the lending value does not exceed the price ceiling for your area. Price ceiling are either $175,000 or $300,000.
How Does It Work?
When you have decided to write an offer on a Calgary home for sale, be sure to make that offer conditional to being approved for a CMHC "Purchase Plus Improvements" Mortgage. Since the offer will be conditional to the arrangement of this financing, you are not on the hook if CMHC feels that the cost of the proposed renovations are not fully reflected in the "as improved" value.
Your second step is to have a qualified contractor put together a description and a cost estimate for the proposed repairs or renovations. Bring your "contractor's Estimate" along with the "offer to Purchase" to your mortgage specialist. They can submit your application to CMHC on your behalf.
The information in this article was researched from: www.canadian-mortgages.com