While the journey to first-time homeownership can be full of dizzying highs and lows, understanding the mortgage process can make the trip a lot smoother.
There are generally five things first-time home buyers should do before applying for a mortgage:
• Talk to a mortgage specialist
• Build a realistic budget
• Get pre-approved
• Organize your financial statements
• Start the search
Let’s take a more in-depth look at what you need to know when prepping for a mortgage application.
Mortgage 101
In simple terms, a mortgage is a loan used to buy real estate. It typically involves multiple parties who all play an essential role in the application process: The lender (this could be a bank, credit union or private institution; mortgage advisor or broker; and the borrower.
A buyer can start a mortgage application once their offer on a home has been accepted. However, there are things you can do in advance to set yourself up for success (more on that in a minute).
When a borrower approaches a lender for a mortgage, the lender will grant the loan by applying a lien on the property. This means if the borrower fails to make the necessary payments for the home, the lender can sell it and pocket the money owing on the property. This process is known as “foreclosure” or “power of sale.”
Below are some other important terms related to mortgages.
• Amortization period: This is the length of time it takes to pay off a mortgage in full.
• Interest rate: The cost you pay to borrow money. Your mortgage payment can fluctuate as the lender’s interest rate goes up and down.
• Payment frequency: The number of payments you make over a year is known as the payment frequency. Payments can be made monthly, bi-weekly, weekly, or even daily. Some lenders also allow for double-up payments which takes money off the principal directly.
It’s important to note the details of a mortgage are unique to the borrower. A mortgage agreement can be impacted by many factors, including credit score, debt-to-income ratio, and salary. A mortgage advisor can shed light on the nitty-gritty details of a mortgage application.
1. Talk to a mortgage specialist
Connecting with a mortgage specialist is the first, and arguably most important step, in the mortgage application process. A borrower can choose to connect with a lender directly, or work with a mortgage broker.
“The second someone starts thinking about purchasing a home, they should reach out to an advisor,” says CIBC mortgage specialist Kaitlan Bock in Ottawa, Ontario. “Maybe nothing happens right away, but at least you start accumulating the knowledge you need so you’re comfortable with the process along the way.”
Not only will a mortgage specialist help clarify the application process, they can also help buyers figure out the loan amount they might be qualified for. This is known as pre-qualification. Your REALTOR® will be able to recommend mortgage professionals they’ve worked with in the past, but you’re under no obligation to choose to go with them.
2. Build a realistic budget
Budgeting is one of, if not the most important element of preparing yourself to apply for a mortgage. Getting pre-qualified can give you a rough idea of what you might be able to afford, which can give you a good starting point.
“First-time buyers need to figure out how much they can comfortably allocate towards mortgage payments,” says Bock. “Buyers should also ensure they have enough funds to take care of any unexpected expenses that come with owning a home each month.”
Just because a buyer is pre-qualified for a certain loan amount, doesn’t mean they’d be comfortable making those mortgage payments at the current interest rate. The REALTOR.ca Mortgage Calculator can give buyers a sense of the total costs associated with purchasing a home, including land-transfer and property tax.
3. Get pre-approved
Unlike pre-qualification, a mortgage pre-approval is when a lender formally reviews a borrower’s income, debts, and assets. Pre-approvals are typically valid for three to four months, giving a potential buyer time to shop around. This is an exciting step in the mortgage application process because buyers can use this information to make serious offers on properties. Some sellers prefer when buyers are pre-approved, as it’s less likely the deal will fall through due to financial issues.
Pre-approval is also a great time for buyers to consider the pros and cons of the different mortgage types available to them.
4. Organize your financial statements
First-time home buyers should organize all the necessary financial documents early on in the mortgage application process. Lenders will need this information to process the loan. The financial documents required typically include:
• Employment and income verification (i.e. copy of recent pay stubs);
• Confirmation of your down payment (i.e. savings or investment statements);
• A pre-approval certificate;
• Bank account statements; and
• Credit history (credit report).
Once an offer is accepted, the mortgage application process tends to move swiftly. Having the right documents in place ensures first-time home buyers can finalize their purchase as quickly as possible. It’s also important to secure these documents in advance in the event that a home purchase takes place during a holiday when banks and major financial institutions are closed.
5. Start the search
When offering home buying advice to her clients, Bock recommends “narrowing down homes that are within your price range.”
Here’s where the realistic budget comes in handy. A lender may refuse to finance a home if the offer price is higher than what the buyer can afford. Sticking to a budget can help first-time buyers avoid rejection. While shopping around, buyers should also consider what kind of home they want to live in. Fixer-uppers or unfinished homes have very different financing implications than move-in-ready properties.
For first-time home buyers, getting the right mortgage can be as important as finding the perfect property. If you’re looking to purchase your first home or property, a REALTOR® can help with everything from house hunting to selecting a qualified mortgage specialist.
For mortgage rates and a handy mortgage calculator, visit winnipegregionalrealestatenews.com
The above is for information only and is not financial or legal advice or a substitute for professional counsel.
— REALTOR.ca