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The-Mortgage-Gal

Mortgage closing costs

You’ve done your homework:

  • saved your down payment
  • met with your mortgage broker and are pre-approved for a mortgage
  • connected with a reputable realtor
  • chosen a lawyer

You’re off to a great start. You will also be covering a few extra costs when your purchase is finalized. Being prepared for these closing costs in advance avoids last-minute stress.

If you are putting the minimum five per cent required to buy your home, your mortgage professional will explain that you need to have 6.5 per cent on hand to cover your closing costs.

It is a good idea to gather estimates of these fees and expenses so you are fully prepared.

You will normally sit down with your lawyer at least a week before your purchase completes to sign all the required documentation. At that time, you will need to provide a draft or certified cheque to cover the balance of your down payment and closing costs.

The following list covers typical expenses you’ll encounter when your purchase is completed or “closed."

Mortgage default insurance

Mortgage default insurance, commonly referred to as CMHC or Genworth insurance, protects the lender in case the borrower defaults on the mortgage. Mortgage default insurance is required on all mortgages with down payments of less than 20 per cent, which are known as high-ratio mortgages.

Property transfer tax

Some provinces levy this tax whenever real estate changes hands. This tax is calculated as a percentage of the purchase price of your property, so the more expensive the property, the larger the amount of tax paid.

First-time home buyers may be exempt from paying all or part of the property transfer tax. Exemptions are also available on newly-built home purchases. 

In B.C., the tax is charged at a rate of:

  • one per cent on the first $200,000,
  • two per cent on the portion of the fair market value greater than $200,000 and up to and including $2 million, 
  • three per cent on the portion of the fair market value greater than $2 million.

For example, if the fair market value of a property is $450,000, the tax paid is $7,000.

GST

New homes are subject to GST, but used homes are not. There are rebates and exemptions available, so your lawyer will calculate your tax payable. This can be added to your mortgage.

Home insurance

This insurance, especially fire, must take effect from the moment you are the owner of your home. Certain types of properties can be more challenging to insure, so it is a good idea to do some research prior to purchasing a home.

Home insurance typically costs around $1,200 per year, but costs will vary depending on the type and location of the property. This insurance must be renewed annually, and most insurance companies provide the option of monthly payments. 

Home inspection fee

This is a fee payable to an inspector you hire to check out the physical structure and mechanicals of your house before you decide to buy it. Again, it is a good idea to do your research before hiring a home inspector. Your realtor may be able to recommend someone, or you can check with friends or family to see who they have used.

A good home inspector will spend three to four hours going over your home, then spend time with you explaining his/her findings. Inspectors provide a written report documenting any concerns that need to be addressed. You can expect to pay $400-$500 for an inspection.

Appraisal fee

Your lender may require an appraisal to confirm that the property is accurately valued. The cost of the appraisal is sometimes passed on the you. 

Depending on the location and complexity of the property, an appraisal can cost $300-$1,500. Some lenders use an automated system to value the property. In this situation, an independent appraisal is not required.

Survey

A legal survey of your land — its borders, perimeters, house placement, etc. — is sometimes (rarely) required by the lender, and will be performed by a professional surveyor. A typical survey can cost approximately $1,000. More commonly lenders require title insurance instead of a survey.

Title insurance

This covers any number of oddball situations that could threaten the title to your property. Title insurance is mandatory with most lenders and is much less costly than a new survey. Title insurance typically costs about $250, but varies based on your purchase price.

Homebuyers can purchase a personal policy in addition to the policy mandated by the lender. The additional policy covers many unusual circumstances and is relatively inexpensive if the two policies are purchased together. 

Legal fees and disbursement

Ask for a written quote to get a better idea of how much legal fees will be. On a straightforward purchase, legal fees typically run about $1,200-$1,400. Your lawyer will also calculate any money you’ll need to refund to the seller that has already been paid out on your behalf. These adjustments include portions of municipal property taxes for the months you’ll own the home, utility bills paid in advance, etc. 

Your mortgage specialist will give you an overview of what to expect for expenses. Taking some time upfront to gather estimates and knowing what your costs will be at closing goes a long way to reducing stress and anxiety. 





10 guidelines of financing

You’ve written an offer on a home, and gone through the nail-biting process of being approved for your mortgage.

You’ve jumped through hoops and provided all of the documents necessary to demonstrate that you qualify for your mortgage. You did the happy dance and told everyone you know that you are buying your dream home.

A week before you are supposed to get your keys you find out there’s a problem.

You went shopping for new furniture to put in your home, and your car died unexpectedly. You started a new job with a higher salary. Not a big deal, right? You signed loan documents and were on your way in a new vehicle and your furniture is scheduled to be delivered the day after you get your keys.

What many people don’t realize is that during the mortgage process, significant changes to their finances can affect their approval. Lenders can cancel a mortgage any time before it closes if the client’s situation changes.

This list has been floating around for a long time. I’ve seen it in a few different places under the heading “The Ten Commandments of Buying a Home." It might be more accurately called “Ten Things Not to do Before Your Mortgage is Finalized."

I initially felt it was a bit condescending, but now feel that properly explained these points are important for home buyers to know.

Here is the list, along with a brief explanation of why these points are important:

  • Thou shalt not change jobs, become self-employed, or quit your job. You qualified for your mortgage based on your employment history. If an incredible job offer comes along, hold off until after your mortgage is finalized. Your new job most likely has a probation period which could mean you no longer qualify with your particular lender.
  • Thou shalt not buy a car, truck, or van (or you may end up living in it). In some cases this may not be an issue, but if your new mortgage payment puts you at the top of your debt servicing, an additional payment may make you ineligible for the mortgage you need. A general rule of thumb is that every $500 in loan payments reduces your home buying power by about $100,000. It’s a lot easier to buy a vehicle after you buy a home than the other way around.
  • Thou shalt not use credit cards excessively or let them fall behind. When your application is submitted, a payment of three per cent of the outstanding balance on your credit cards is factored in for qualification purposes. If your mortgage lender checks your credit report shortly before closing, a dramatic increase in balances could affect your approval.
  •  Thou shalt not spend money you have set aside for closing. As part of the approval process you need to demonstrate that you have your down payment set aside, as well as funds to cover your closing costs. About a week before your mortgage finalizes you will need to provide those funds to your lawyer. If you suddenly don’t have the money available, your mortgage may not close as scheduled.
  • Thou shalt not omit debts or liabilities from your mortgage application. Early on in my career I worked with a co-signor that told me his house was mortgage-free. Three days before closing the lender discovered there was a large credit line secured by his house. This meant that we had to re-work the entire application and my clients almost lost out on their purchase.
  • Thou shalt not buy furniture. It's tempting, on the home stretch to owning a new home, to take advantage of offers like zero percent financing or no payments for a year, but if you do and your lender discovers this, a payment needs to be added to your application. Best to wait until you have the keys to go shopping.
  • Thou shalt not let new creditors pull your credit report. Your mortgage lender may be concerned that you have a new payment they are unaware of.
  • Thou shalt not make large deposits without making your mortgage broker aware. Your lender will ask to confirm the source of any large deposits. They need to know that you have not borrowed money (another payment) or that the funds are not from an illegal source.
  • Thou shalt not change bank accounts. Not necessarily a big issue, but it may mean more paperwork required to confirm your down payment is adequate and available.
  • Thou shalt not co-sign a loan for anyone. You may trust the person you are co-signing for completely, but as a co-signor you are legally responsible for any payments due should they not be made. It goes without saying that this could affect your ability to make your mortgage payment.

These points also apply if you have been pre-approved for a mortgage but have not yet made an offer. It’s a good idea to touch base with your mortgage broker (or banker) to let them know you are considering making a change.

They can look at your particular situation and let you know how it might impact your buying power. A five-minute phone call may save you a great deal of stress down the road.



Improve your credit score

It can be frustrating to find out that your mortgage application has been affected by a low credit score or potentially incorrect information reporting on your credit report.

If you have had problems with credit in the past, tell your mortgage specialist right away. They can then review your credit report and offer suggestions and advice as to how to improve your score, as well as possible options (ie: larger down payment, co-signer, etc).

When you apply for a mortgage, your mortgage specialist will pull your credit report. What they are looking for is your Beacon score.

A Beacon score (also called a credit score) is a rating used to rank your credit-worthiness. This number tells lenders how likely it is that you will repay your mortgage.

In Canada, we have two credit reporting institutions: Equifax and TransUnion.

Your beacon score is a very important part of the application process. Beacon scores range from 300 to 800 plus, with the average Canadian scoring in the 700 range. The minimum credit score for insured mortgages (less than 20 per cent down payment) is 600.

Most lenders require that your score be 680 or higher. 

Beacon scores are calculated based on several factors. Here is a quick overview:

PAYMENT HISTORY — Factors in the frequency of, and number of, payments over 30 days late, collections, judgments, and bankruptcies. A single 30-day late payment can drop your score 15-20 points.

CURRENT DEBTS —  Considers how much you owe (in absolute terms and compared with your credit limits), how many creditors you owe money to, and how much you could owe if you obtained all your available credit.

AGE OF ACCOUNTS — The longer your accounts have been open the better. The minimum requirement (in most cases) when applying for a mortgage is two active accounts that are at least two years old.   

TYPE OF CREDIT — Bank loans, credit cards, and revolving credit accounts all impact your score differently.

CREDIT INQUIRIES — Numerous credit applications in the past 12 months affect your score significantly and is definitely not advised. This is the advantage of using a mortgage broker as your credit is only pulled once for multiple lenders. 

Accounts such as cellphones, loans, credit cards, mortgages and some utilities report your payment patterns. It is crucial that you make all of your minimum payments on time to ensure your credit score stays high.

It is also important to try not to carry significant balances on your credit cards or lines of credit. Having credit available, but unused helps increase your credit score.

Many people don’t realize that having creditors access their credit report can actually lower their score. If you are an avid credit seeker (applying for numerous credit cards, or at multiple car dealerships), this will be reflected in your score.

Often when you pop in to try out a vehicle, the dealership pulls your report while you are out on the road. Make sure you read the fine print before you sign off to go for a test drive.

I recommend that you check your credit report annually to ensure that everything is being reported correctly. Identity theft is much more common than it used to be, and by checking yourself you may catch this early.

If you have a common name, you may see someone else’s information showing on your credit report. If you find this to be the case, it is important to contact the credit bureau to have it corrected as soon as possible.

If you pull your own credit report, it does not affect your score. If a creditor pulls your credit report, it can drop your score a few points.

HOW TO IMPROVE YOUR CREDIT SCORE

If you have had credit difficulties in the past, there are ways to improve your score. There are no easy fixes, so beware of companies that promise they will help you improve your score quickly.

Unfortunately there are many companies out there that charge significant fees but don’t deliver.

Here are some suggestions from the Office of Consumer Affairs that will help bring your credit score up:

  • Always pay your bills on time. Although the payment of your utility bills, such as phone, cable and electricity, is not recorded in your credit report, some cellphone companies may report late payments to the credit-reporting agencies, which could affect your score.
  • Try to pay your bills in full by the due date. If you aren’t able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
  • Try to pay your debts as quickly as possible.
  • Don’t go over the credit limit on your credit card. Try to keep your balance well below the limit. The higher your balance, the more impact it has on your credit score.
  • Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short period of time, this may have a negative effect on your score. However, your score does not change when you ask for information about your own credit report.
  • Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card. 

If you have had credit issues in the past, don’t despair. Although you may not qualify for a mortgage right now, by following a structured plan it is possible to get yourself back on track.

It will take time, patience, and dedication, but the end result of owning your own home will be worth it.





Mortgage pre-approval

Before you venture out to look at houses for sale, it is a good idea to meet with your mortgage specialist to complete an application and find out how much you are qualified to borrow.  

At your first appointment, you will complete a credit application. Information you need to have on hand includes:

  • personal data such as your legal name, birth date, and social insurance number;
  • home address and employment information;
  • a description of your assets that includes what you will use for your down payment; and
  • a list of your outstanding debts (credit cards, loans, etc).

Your mortgage specialist will access your credit bureau. Your credit bureau provides a history of how you manage your credit, and is a key factor that lenders review when considering your application.

Your mortgage specialist will confirm the information that you have provided in your application. You will be asked for documentation such as bank statements and current pay stubs, and will need to demonstrate that you have your down payment organized.

It is helpful to start gathering documentation ahead of time to avoid last minute stress. Typically you will need to organize the following:

  • Ask your employer to prepare a letter on company letterhead outlining your name, base salary or hourly rate, normal hours worked per week, position and length of service. A recent pay stub and a copy of your T4 from last year may also be required.
  • If you are a commissioned salesperson, your last two years personal tax returns and Notices of Assessment from Canada Revenue Agency 
  • If you are self-employed, your last two personal tax returns and the Notices of Assessment from Canada Revenue Agency, as well as the last two years’ business financial statements and two years’ business tax returns (if applicable) 
  • Social Insurance Numbers 
  • At least 3 years’ history of residence and employment 
  • Banking information (name of financial institutions, address, and type of accounts, account numbers) 
  • Information and statements showing your assets (what you own) and their value. i.e. cash amounts, stocks, bonds, RRSPs, vehicles 
  • If you are separated or divorced, you may be asked for a copy of your agreement to confirm any amounts owing (child support, alimony, division of assets)

After considering your particular situation, your mortgage specialist will submit your application to potential lenders. You will find out the maximum amount you are qualified for, and most lenders will issue a 120-day rate guarantee.

This rate guarantee means that even if rates go up while you are shopping, your mortgage will be processed at the pre-approved rate provided it closes within the 120-day period. If you have not purchased within the 120 days, it is possible to extend the rate guarantee based on current rates.

It is important to understand that even though you are considered pre-approved for a mortgage, final approval is still subject to the property you buy being considered suitable by the lender. As well, you must be able to satisfy the lender’s requirements for appropriate documentation.

How much can I afford?

Your mortgage specialist will be able to calculate the amount that you are eligible to borrow. The standard rule of thumb (subject to certain exceptions) is that your housing costs should not be more than 32 per cent of your gross income, and your total debt payments should not exceed 40 per cent of your gross income.

Gross income is the amount you are paid by your employer before any deductions for income tax, CPP/EI, pension amounts, or benefit plans.

Housing costs include the principal and interest portion of your mortgage, property taxes, and an allowance for heating costs.

Total debt payments means all of your monthly payments. This includes housing cost as well as any loans or credit cards that you have.

In my last few columns I talked about thinking carefully about your potential mortgage payment.

It is very important to consider your lifestyle and spending habits … just because you are pre-approved for a certain amount does not mean that you will find it comfortable to carry that particular mortgage payment.

You will want to plan for expenses such as heating, property taxes, home maintenance and renovation as required. Practice making the higher mortgage payment and additional expenses of owning your own home for a few months.

This will give you a good idea of whether you want to commit to the maximum amount, or perhaps scale back a little to allow for more discretionary spending.  

Having a pre-approval in place before you go shopping helps you to determine a realistic price range, and allows you time to deal with any issues that may affect your application. A pre-approval provides security knowing that you have a rate guarantee in place should interest rates increase.

Once you’ve booked an appointment to get a pre-approval in place, it’s a great idea to write down a list of any questions you would like to have answered.

Knowing ahead of time how much you can afford will help guide your search for a new home.



More The Mortgage Gal articles

About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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