Smart Mortgage Tips
You've heard it all
before: A mortgage
is the single
largest debt most people hold in
their lifetime. Buying a home is
a major life decision. Let's
face it: applying for and obtaining
a mortgage
is stressful: there's
the paperwork, the fees, the forms,
the decisions, the uncertainty...pretty
daunting stuff!
The best thing you
can do in the face of so many things
potentially going wrong is to learn
as much as you can about the process
and how you can mitigate against
mistakes. Here we offer 7 key tips
to help make the whole experience
run a little more smoothly.
Tip #1: Fix your credit
First and foremost - before
you even think about applying for
a mortgage
- obtain copies
of your credit report! By doing
this several months in advance,
you will have enough time to review
it, challenge any errors that appear
on them and get them fixed, and
start working on aspects of your
credit report that may be weak and
need some overhaul. This can be
as simple as paying off a bill that's
overdue or paying off a credit card.
For more information on credit reports,
visit the Credit section of this
site.
Amazingly, many consumers don't
think twice about their credit:
they think that if they have a good
job and can put down a decent downpayment
that their mortgage application
will be approved in a heartbeat.
As you can read in the article
Qualifying for a Mortgage,
your credit history is one of the
four factors that will be considered.
Tip #2: Consider using the Home
Buyers Plan
The Canadian government offers first
time homebuyers the opportunity
to use a portion of their RRSP savings
to help purchase a home. See our article Using
Your RRSP as a Downpayment
for more information on this program.
Tip #3: Get pre-approved for a loan
Don't confuse your terminology:
getting pre-qualified for a mortgage
by a lender does
not mean that you are pre-approved.
Pre-qualification simply means that
a lender has told you what you are
likely to get for a mortgage if
you apply - they simply look
at what your income is, what your
current debt situation is, and how
much of a downpayment you can make
and do a rough assessment, often
on the spot.
A pre-approval, on
the other hand, is much more involved
since during this process you actually
apply for a loan and submit documentation,
such as tax returns and pay stubs.
The lender then verifies the information,
checks your credit, then will approve
or reject your loan.
If you are pretty certain that you
will get approved, you may be inclined
to wonder why you should bother
going through the pre-approval process,
instead of simply pre-qualifying
and then starting to look for a
home?
Consider this: in a warm or
hot real estate market, realtors
and home sellers, all other factors
considered equal, would much rather
sell a home to a pre-approved buyer
than a pre-qualified one, since
the pre-approved buyer already has
his or her mortgage
lined up. Imagine
losing your perfect house to another
buyer for this reason!
Tip #4: Borrow the right amount
of money
Don't just apply for the biggest
possible loan that you can get.
Don't assume, either, that
your income will keep increasing
so that eventually payments will
be more comfortable. There is nothing
more disheartening than being a
new homeowner who is 'housebound' - someone who has a nice home
but who can't even go out
for dinner because his mortgage
payment eats up so much of his income.
Don't assume, either, that
owning is cheaper than renting (See
Should I Buy or Rent? if you are not sure what to do).
Remember that you will have to cover
things like closing costs (see tip
#7!), property taxes, insurance,
utilities, and of course maintenance
and repairs.
Be wary of your lender, too: they
will let you overextend, knowing
full well that you will forgo things
like retirement savings, evenings
out, and vacations to make that
huge mortgage
payment.
It's
better for you to sit down, evaluate
your situation and determine exactly
what you can afford before you go
in to see the lender. Don't
get caught up in the moment and
agree to anything beyond that amount
you have set for yourself!
So how do you determine what you
can afford? The article How
Much Mortgage Can You Afford? gives some good tips. In a nutshell,
try to limit your housing costs
(mortgage payments, property taxes
and homeowners insurance) to about
25% of your gross household income.
That will give you some breathing
room instead of opting for the 33%
that lenders are typically willing
to (and wanting to) extend to you.
Tip #5: Shop around for rates and
terms
If you have good credit, don't
get stuck with a 'subprime' loan meant for someone with poor
credit! Educating yourself and shopping
around will help mitigate against
a lender or broker trying to take
advantage of you. Want to verify
whether or not you have good credit?
Order your credit report to find
out.
Tip #6: Watch out for extra (unnecessary)
fees
Some additional fees are legitimate,
but some lenders also try to squeeze
some extra cash out of you. Look
for things like 'document
preparation' or credit check
fees that seem to be too out of
line - if something seems
fishy, it probably is. Again, by
educating yourself and shopping
around you will have some comparison
points and will be able to get a
good idea of what is out there.
Be sure when shopping around that
you ask about not only the interest
rate, but also the "points" charged to get that rate (each point
is 1% of the total loan amount),
plus any and all additional fees
the lender charges. Then you can
compare terms.
Wherever possible, try to negotiate
on any fees that seem excessive - and if that lender won't
negotiate, use your judgment and
consider going elsewhere. Above
all, be wary: many borrowers complain
that they still face higher costs
than were originally estimated.
Tip #7: Factor in extra money for
closing costs (and afterward)
On your closing date – which
is another name for the day you
actually get your mortgage, plan
on paying for a number of extra
fees, including legal fees, taxes,
title insurance, homeowners insurance,
points and other lenders' fees. All told, these closing costs
can add up from around 2-7% of the
selling price of the house.
Some
sage advice: budget generously for
this when determining what mortgage
(and downpayment) amount you can
afford. Your lender should also
be able to give you a good-faith
estimate of what total closing costs
will be, so get this info as soon
as possible in the process and set
the money aside.
Once you've paid off those
hefty closing costs, be prepared
for even more cash to come flying
out of your pockets. After all,
just because you've finally
got the mortgage
finalized and closing
costs are paid, don't assume
that you're out of the woods
yet! Often, consumers will scrape
together every last penny they have
to not only make as large of a downpayment
as possible, but the closing costs
then tap them out completely. Experts
(and experienced homeowners) all
say that something unforeseen always
happens. This can be as simple as
a faucet springing a leak and a
call to a plumber a week after you
move in.
In fact, some people are so short
on money when they finally get the
up front costs paid that they are
unable to make their very first
mortgage
payment - not such
a great start! As such, more and
more lenders are requiring that
their customers (that's you
as a lender) have three months' reserves in living expenses after
closing. This is a good idea anyway,
since it allows you a bit of room
if (when) various expenses pop up
unexpectedly.
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