10 Common Questions About Mortgages
1. How Much of a Down Payment Do I Need?
The minimum down payment required to buy a home in Edmonton is 5% of the overall purchase price. To calculate exactly how much you’ll need, we recommend using a down payment calculator. Keep in mind, first-time homebuyers are eligible for down payment help through a variety of federal programs including the Home Buyers’ Plan and the First-Time Home Buyer Incentive.
2. What is Mortgage Insurance?
Mortgage insurance is mandatory for down payments between 5 and 19.99%. Often referred to as mortgage default insurance, this additional monthly fee generally ranges between 2.8 – 4.00% of your overall mortgage amount. This type of insurance serves a dual purpose in that it makes homeownership more affordable for Edmonton buyers and protects lenders from defaulted loans.
3. How Does My Credit Score Impact My Ability to Get a Mortgage?
As with any loan, your credit score can affect your eligibility. Edmonton homebuyers with a credit score of 700+ are generally considered low-risk candidates and are more likely to be approved for a mortgage with a better rate. While that’s not to say you can’t obtain a mortgage with a lower credit score, you may be subject to higher interest.
4. Is a Pre-Qualification the Same as a Pre-Approval?
While both will give you an idea as to how much home you can afford, there are some major differences between the two:
Pre-Qualification –A lender will take a high-level view of your current income, debt and assets and come up with a ballpark figure as to how much they’d be willing to lend you (an estimate, not a guarantee).
Pre-Approval - A lender will take a more in-depth look at your income, debt, assets and credit history. From here, if you meet the lender’s requirements, you’ll be issued a pre-approval letter. Good for 30-120 days, this letter means you have been approved for a home loan at a locked-in rate.
See our previous post, Pre-Qualification vs. Pre-Approvals: What’s the Difference? for more information.
5. How Much Will I Be Approved For?
Mortgage affordability is based on two factors (or calculations):
Gross Debt Service Ratio (GDS) – Your overall housing costs including your mortgage payment, condo fees, taxes and heating costs (should be no more than 32% of your gross monthly income).
Total Debt Service Ratio (TDS) – Your total debt commitment(s) including credit cards, loans and housing costs (should be no more than 40% of your gross monthly income).
Your lender will take a look at both your GDS and TDS ratios when determining how much you can reasonably afford and your approval will be based on this amount.
6. What Documents Do I Need?
Here’s what you’ll need when seeking a mortgage pre-approval from a lender:
- Proof of employment
- Proof of down payment (and ability to cover closing costs)
- Information about your other assets (i.e. your car)
- information about your debts
To learn more, see the Government of Canada website, Getting pre-approved and qualifying for a mortgage.
7. Should I Hire a Broker to Help Me?
If you’re comfortable enough to shop around and approach lenders on your own, you may opt to skip working with a broker. However, mortgages can be tricky and if you’re unclear on the terms and conditions, you could end up paying more than you bargained for. Working with a broker may also be a good idea if you have less than optimal credit as they’ll help improve your chances with a lender.
See our previous post, What Does a Mortgage Broker Do? (Should I Work With One?) for more information.
8. What is the Mortgage Stress Test?
Those applying for a mortgage in Edmonton must undergo a mortgage stress test. In short, the test is meant to ensure you can continue to afford your mortgage in the event of a rate increase. To pass, mortgage applicants must prove they can qualify at the contracted mortgage rate (established by the lender) plus an additional 2% or the Bank of Canada’s conventional five-year mortgage rate (whichever is greater).
9. How Long Will It Take to Be Approved?
While the timeframe will vary based on your unique situation (the documents you’ve provided, the type of mortgage you’re seeking etc.), approval can take a few hours to a few days.
10. What Kind of Mortgage Rate is Best for Me?
Most mortgage applicants will choose between a fixed and variable rate loan:
Fixed-Rate - Your mortgage rate is locked-in for a fixed term. Despite rising or falling market interest rates, you’ll pay a set monthly amount.
Variable Rate - Your mortgage interest rate will vary along with market interest rates. This means you could end up paying less or more than the average fixed rate depending on current conditions.
Be sure to talk to your Edmonton broker or lender about which mortgage rate is best for you.
BONUS: Can a Real Estate Agent Help Me?
Yes! In fact, you may want to consider talking to a qualified Edmonton REALTOR®® before you even think about talking to a lender– especially if you’re a first-time buyer. Not only will an experienced REALTOR®® be able to refer you to the right lender (or broker), they’ll be able to provide you with advice and assistance related to the mortgage process, how to choose the right home, the best time to buy and much more.
Didn’t find the answer you were looking for? Get in touch! We’ll be happy to help in any way we can.