How to Secure a Home Mortgage
Mortgages are specific to each home and each borrower, which is just one of the reasons why it can be difficult for prospective buyers to obtain them. Part of deciphering the rules of the mortgage starts with borrowers understanding the underlying principles before researching amortization formulas and predicting interest rates 15 years into the future.
Broker vs. Bank
Brokers and banks are the two most common ways for borrowers to secure a mortgage, and it often makes financial sense for borrowers to explore both options. While the borrower's bank will look at fast numbers such the borrower's credit score, they might also be more flexible with the rates and terms they offer (compared to a comparable bank).
On the other hand, brokers provide access to a wider range of products on the market. These financial professionals will work with up to 50 lenders at a time, a number that can quickly multiply the options for a buyer who doesn't want to leave any stone unturned. Brokers can save their clients the time of shopping around, all while providing helpful advice about how a borrower should go about sorting through their choices.
The recommended minimum for a down payment in Canada is usually at least 5%, though it's possible to find lenders who will accept less. However, part of securing a home mortgage is for the borrower to prove they have the funds to pay it back.
For some buyers such as investors, it may make sense to put down as little as possible for a home, allowing them the opportunity to invest in more lucrative paths. However, for most people, it really does pay to save up before putting anything down.
A lender who pre-approves a home buyer is essentially signing off on the amount the buyer is allowed to borrow. The number represents the upper limits, so it's important for borrowers to stick to homes that are within the given price range. Each lender is allowed to determine their own policies for pre-approval, but it can last for around 6 months, which gives the buyer plenty of time to shop around for properties.
A pre-approval is not a promise for a mortgage, and it could potentially fall through for any of the following reasons:
- A loss of job or drastic change in employment
- A negative item is added to a credit report
- The appraisal value of the property is far lower than the pre-approved amount
- The lender changes their guidelines
- The borrower takes on additional debt
While a pre-approval is a good indication for the buyer that they have secured the financing they need, it's important for them to understand it is not a guarantee.
The Stress Test
A stress test is a process where the lender will attempt to predict what will happen in the event that interest rates rise for the borrower. They look to see if a buyer has enough in either income or assets to cover a higher mortgage premium and will likely deny a borrower if they fail the test. (Adjustable-rate mortgages (ARM) typically start out with attractive interest rates, but not all buyers are prepared for those rates to climb in the event of a shift in the economy.)
Fixed-Rate Mortgage Advantages
While there are benefits to choosing either an ARM or a fixed-rate mortgage, buyers who know that they're likely going to stay in their homes for the next several decades usually benefit from choosing a fixed-rate mortgage. This mortgage type ensures that the buyer will always have consistent mortgage payments, whereas an ARM can fluctuate entirely on the whims of the market.
Buyers interested in a fixer-upper home may want to consider a HELOC with variable rates, as long as they can pay off the loan in a reasonable amount of time. Finally, part of securing a home mortgage is anticipating the road ahead. Therefore, borrowers should ask their lender if they can allow them to pay more than their regular mortgage payment without imposing penalties.
From the first meeting to the final signing, the road to a home mortgage is paved with many challenges. Borrowers who arm themselves with as much information as possible and work with professionals throughout the process will have an easier time navigating this space.