Owning a home is many people’s ultimate life ambition. Unfortunately, if you’re not able to pay for your property upfront, you’ll need a mortgage loan, which can be tricky to navigate.
That’s why today we’ll answer questions like “What is a mortgage?”, “What types of mortgage is there?”, “How can I get a mortgage?” and many others.
So strap in, and let’s get started!
What Is A Mortgage?
Before we get into it, let’s see the mortgage definition. Mortgages, or mortgage loans, are loans used to buy or maintain land, houses, or other real estate types.
With these agreements, the buyer purchases a home without paying the lender the total sum upfront. Instead, the home is paid for in installments, which can be monthly, bi-weekly, or weekly. Furthermore, if the borrower fails to pay the borrowed money plus interest, the lender has the right to foreclose, as the property is collateral to secure the loan.
When you pay your mortgage, the money gets broken up. This allocation is called amortization and refers to how these payments are divided over the loan’s lifetime. In the beginning, higher portions go toward interest, while later, they go toward paying down the balance.
However, we shouldn’t use the terms loan and mortgage interchangeably. A loan is any financial transaction where the borrower receives money and pays it back, while a mortgage only finances property. Plus, with mortgages, the lender can actually sell your home if you don’t pay up. With loans, you just need to pay late fees without losing anything.
How Does A Mortgage Work?
If you’re itching to know how mortgages work, you’ll be happy to learn that the process is relatively straightforward. Namely, when a person gets a mortgage, the lender gives them money to buy the home. The two people agree that the borrower will pay back the loan with interest over a set (or flexible) period.
As we already mentioned previously, the gist of mortgages is paying back a set amount of money in regular periods. Therefore, if you’re missing payments, you could soon be missing your home as well, as foreclosure will be right at your doorstep.
Who’s Involved In Buying A Mortgage?
Although many people can be involved in the mortgage process, there are only two main participants – the lender and the borrower.
Many different types of institutions can play the role of a lender, such as a bank, credit union, an online mortgage company, etc. The lender has to review your information and decide whether or not you meet the standards to qualify for a mortgage loan. Unfortunately, each lender has its own standards, so you can’t effectively compare them.
Moreover, lenders usually run a credit check to ensure you’re keeping up with all your credit payments.
As the name suggests, the borrower is someone that takes out a housing loan to purchase a home. Additionally, this person is responsible for paying back their real estate mortgage in full, on time, and with interest.
However, before you commit to being a borrower, you should ensure you’re ready to bear the burden of mortgage property.
Suppose you don’t have enough finances for a more expensive home. In that case, it’s possible to sign as a co-borrower, where you combine earnings with another person and qualify for a bigger loan and lower interest rates.
What Are The Types of Mortgage?
We can’t construct a comprehensive mortgage guide without mentioning the different types of mortgages. Mortgages differ in rates, so we have fixed-rate and adjustable-rate mortgages. Moreover, they also vary in flexibility; therefore, closed and open mortgages are also available to borrowers.
A fixed-rate mortgage charges a set rate of interest for the whole life of the loan. Borrowers pay the same total payment every year, allowing for easy budgeting. Many homeowners in Canada favour fixed-rate mortgages. If you’re not sure of the impact of different rates on monthly payments, you should use a mortgage calculator.
As the name suggests, adjustable-rate mortgages have variable interest rates. A home mortgage with an ARM carries an initial interest rate below the market rate on a fixed-rate mortgage. However, as the life of the loan extends, the ARM interest rate will surpass the comparable fixed rate, as the former is continuously growing.
A closed mortgage cannot be prepaid or refinanced before the term ends without a penalty. Closed mortgages are standard in Canada as they offer lower APRs and interest rates. However, if you receive additional cash and consider putting it into your mortgage payments, be prepared to pay a hefty fine!
On the other hand, open mortgages offer flexible repayment options by increasing your regular payments or accepting lump sums. Your mortgage financing is cheaper in the long run, albeit with higher mortgage rates. However, we should note that there still might be minor penalties for lump sums, depending on the lender.
How To Get A Mortgage?
It’s time to discuss what it takes to get a mortgage. We briefly mentioned that the lender reviews the borrower’s information to determine whether the standards are met. But which standards are those?
As with all loans, mortgages require a certain amount of annual income. These prerequisites are crucial because a lender must ensure the borrower has enough money to keep up with payments. Additionally, lenders may require buyers to set up an escrow account to pay property taxes, potential mortgage insurances, and homeowners insurance.
Sufficient credit score
Unsurprisingly, your credit score also has a say in whether you qualify for a mortgage. As of 2020, the Canada Mortgage and Housing Corporation (CMHC) increased the minimum credit score requirement to 680. Therefore, with this score and above, you’ll qualify for the best mortgage rates in Canada.
A down payment
When closing the deal, borrowers need to pay a portion of the purchase price upfront. The amount you pay impacts the fees and interest over the loan’s lifetime. Namely, a larger down payment gets you fewer fees and interest, as well as a larger amount of home equity.
What Is The Mortgage Approval Process?
The mortgage process is an organized procedure that helps you get approved for a mortgage. The process can take anywhere from three days to several weeks, depending on how busy the lender is and whether your documents are complete. Generally, we divide the process into three steps, each with different activities.
The discovery call is the first encounter you have with your lender. Here, you talk about your property objectives and the amount of money you can borrow. If you’re unsure of how to proceed further, this is the stage where you ask your questions and develop a plan.
Next, the preapproval stage is when the lender reviews your application to ensure you qualify for mortgage approval. Then, they will complete your documents by pulling your credit report and checking your debt profile. It’s essential to avoid any significant changes in your employment status or financial situation, as this might lessen your chance of approval.
After the lender has preapproved your application, the underwriting process commences. Here, lenders determine whether the risk of lending you money is acceptable by reviewing your income, credit, down payment, and mortgage property. When all this is finished, you will need to meet with your lawyer to sign the papers and confirm insurance.
Finally, your lawyer and lender register your name as the buyer, and the loan is closed.
Now you’re well on your way to becoming an expert on mortgage loans! With this knowledge, you can come to an informed decision before purchasing a mortgage. What’s more, you won’t be caught off guard by turning points in the mortgage process.
A mortgage is essentially a loan where the lender agrees to lend money to the borrower, while the latter has to pay it back regularly or risk losing their property.
To qualify for a mortgage, you need to have a stable income that can carry the burden of mortgage payments, a suitable credit score of 680 and above, and a down payment on your chosen property.
A remortgage is a process of paying off a mortgaged property with the money from a new mortgage on the same property.
A mortgage is a contract between you and a lender in which the lender has the right to take your property if you don’t repay your borrowed money along with interest. Mortgage loans are used to purchase a house or borrow money against an existing home’s value.