Saturday, January 9, 2010

Mortgage Myths

Applying for a mortgage can be intimidating. At times, it can appear downright scary. But that fear often comes from a lack of knowledge, and there are many misunderstandings when it comes to mortgages. To help you better understand the process, we explain a few common areas of confusion.

1) A pre-approval is the same as an approval.

Many people think that once a lender for a mortgage has pre-approved them, they are guaranteed an approval. But this is not always the case.
More than anything else, a preapproval represents an interest rate guarantee. There is still plenty of paperwork to be done as lenders examine more closely one’s source(s) of income and confirming documents. If they find something they don't like, or that you did not reveal in your initial application, your application could be declined.

Mortgage lenders determine what you can afford based on your salary alone. For example, if you reported that you earned $50,000 of income during the past year and a portion of that came from working overtime or receiving a bonus, both of which can vary from year to year, the lender will find out and may change the terms of the deal. Always be upfront with your lender.

In the case of high-ratio mortgages (mortgaging more than 80% of the purchase price of a house), the insurer, the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial, has final approval. However in most cases, if the lender has approved you and your income is not in question and you have good credit, the insurer will generally grant you an approval as well.

Nevertheless, there is always some risk associated with obtaining an approval. As such, it is prudent to add a financing condition to your offer to purchase. This way, if financing happens to fall through for whatever reason, you will not lose any deposit you may have put down.

2) Self-employed people cannot qualify for a mortgage

Lending institutions’ attitudes toward the self-employed have improved over the years.

There are many different products now available for self-employed individuals. Lenders tend to view self-employed persons on a case-by-case basis. As a rule, lenders are looking for a good credit score, a two to three year history of self-employed income and no outstanding taxes. If you fit this description, you should have no difficulty securing a mortgage.

3) You need a down payment of at least 25%

In fact, you can put down as little as 5%.

To do this, you must obtain a high-ratio mortgage, securing an insured mortgage through CMHC or Genworth. In this process you will incur added costs, including a one-time insurance premium that can either be added to the principal balance of your mortgage as part of the loan or in a lump sum. But as long as you have at least a 5% down payment, you should have no trouble securing a mortgage.

4) You can't borrow your down payment

There are restrictions, but lenders are far more flexible in this regard than they have been in the past. Monetary gifts are perfectly acceptable as long as they are from an immediate family member. Your lender wants to ensure that what you are getting is actually a gift and that you are not incurring additional debt that will need to be repaid.

Some “B” lenders are even more flexible than banks in this regard, but you will pay for that flexibility with higher fees and interest rates.

5) Those with poor credit cannot obtain a mortgage

Lenders are aware that people and circumstances change. A student who maxed out his first credit card in university and defaulted on payments will not pay for his mistakes forever.

Many lenders look for a year to 18 months of good credit. A good and easy way to rebuild a tarnished credit rating is by applying for a major credit card, making a few small purchases on it each month, and paying the balance on time for 12 months or so. Alternatively, you could apply for an RRSP loan as a way to rebuild your credit. Not only will this help you establish a history of installment payments, but you can also borrow from that RRSP to form a down payment for a house.

6) If you've ever declared bankruptcy, getting a mortgage is impossible

Bankruptcy does not have to put an end to one’s dream of becoming a homeowner.
If one has a 25% down payment, one can secure a mortgage directly after their bankruptcy is discharged.

Mortgages with smaller down payments are also an option. CMHC will consider a borrower whose bankruptcy has been discharged for two to three years and has since established a good credit rating.

7) Private lenders are like loan sharks

Private lenders are not loan sharks; they are simply offering something the major banks are unable to. Private lenders can be a sensible alternative for those working on establishing or re-establishing a good credit rating.

Private lenders do tend to charge higher interest rates than major banks or “A” lenders, but they are usually flexible and tend to play a short-term role until the borrower qualifies for lower interest financing from a conventional lender.

When you are shopping for a mortgage, avoid making assumptions. Ask questions if you do not understand something and ensure you know the terms of your mortgage. Knowledge is power and at the very least, becoming familiar with the mortgage process will make it seem less.

When you're looking for a mortgage, don't assume anything -- ask questions and ensure you know the meaning of the terms being bandied around. Knowledge is power, and at the very least, it will make the process appear less daunting.

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Constantine Isslamow
Real Estate Broker / Mortgage Broker
Century 21United Realty Inc. Brokerage / CENTUM Core Financial Inc.
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