FINANCING - Michael Gallant

DOWN PAYMENTS

The Bank of Canada Act prohibits lenders from lending more than 80% of a property’s fair market value. When a home purchaser is able to make a down payment equal to at least 20% of a home’s fair market value, they qualify for what’s known as a conventional mortgage. Such a mortgage agreement is arranged strictly between the lending institution and the homebuyer, without any third party intervention.

Many people find it difficult to save such a large amount of cash. For some, it could take years to accumulate such a hefty down payment. Yet, we want the benefits that home ownership provides while we are young and raising our families. Enter, the Canadian Mortgage and Housing Corporation (CMHC). CMHC is a Crown corporation that insures high ratio mortgages for lenders. A high ratio mortgage is one where more than 75% of a property’s value is financed. Lenders are required by law to insure all high ratio mortgages. Mortgage insurance protects the lender in the event that the buyer defaults on the mortgage.

If you meet your lender’s credit approval criteria, you can purchase your next home with as little as 5% down and a CMHC insured mortgage for the balance.

When you apply for a high ratio mortgage, you’ll be charged a CMHC application fee of $235.00. In addition, you’ll also be charged an insurance premium that ranges from .5% to 3.75% of the mortgage amount. The amount varies based on the amount of the down payment, between 5% and 20%. While a purchaser may choose to pay the insurance premium in advance, it is not required. Alternatively, it can be added to the mortgage and paid off as you pay for the home.

When you finance a property using a CMHC insured mortgage you are required to demonstrate your ability to provide the agreed upon down payment plus an additional amount of cash to cover closing costs. CMHC will want to ensure that you have access to funds equaling 1.5% of the purchase price to cover legal fees and other costs to close.

CMHC requires homebuyers to take a minimum mortgage term of 3 years. They want you to have a fixed payment while you’re getting established in your new home. Keep this in mind when determining a range of value in which to shop. In most cases a three-year mortgage will have a higher interest rate than a shorter term, thereby increasing your carrying costs, and reducing the amount that you qualify to borrow.

FINANCE, QUALIFYING FOR A MORTGAGE

Lenders basically look at three things when considering your mortgage application. They include the applicant’s character, their ability to repay the loan, and the security pledged against the loan.

Regarding character, your lender will check with credit reporting agencies to ensure that you have handled obligations responsibly in the past. How have you serviced loans that have been granted you in the past? What about your credit cards? Do you make your payments on time, or are you habitually late? Do you have a history of bouncing cheques? Your past performance in these areas will provide your lender with their best guess on how you’ll handle your mortgage obligation. If you are turned down for a mortgage based on credit history, be sure to ask the lender to help you formulate a plan to recover a good credit rating so that you can buy later.

As far as security is concerned, in most cases the property that you are borrowing money to purchase will provide adequate security for the lender. If the lender feels that you are a high risk, they may ask you to pledge other assets that you have or purchase mortgage insurance to protect them against default, but this is rare.

When it comes to your ability to repay the loan, the lender will want to confirm that you have enough income to service the debt. For most people that means they’ll have full time employment. You’ll need to provide the lender with a verification of your income.

When a lender qualifies a mortgage applicant, they look at two key factors. The first is known as your Gross Debt Service Ratio (GDSR) and the second is called your Total Debt Service Ratio (TDSR).

Your GDSR is the percentage of your gross income required to pay your mortgage payment, including principal and interest, your property taxes, and your heating bill. Most lenders will not allow you to use more than 32% of your gross monthly income to meet these expenses. So a borrower with a monthly income of $4,000.00 could spend up to $1,280.00 per month to service the mortgage, heating costs and taxes. Beware! Many people are surprised at how much the bank will let you spend. Make sure you buy in a range that you can service comfortably.

Your TDSR is the percentage of your gross income that is required to service all of your debt. Most lenders will not allow you to exceed 40% in this area. In other words, your total monthly debt payments cannot consume more than 40% of your total gross income. You’ll need to factor in car loans, credit cards, student loans and any other payments that would be considered debt service. The same buyer that we looked at before, with a gross monthly income of $4,000.00 could spend up to $1,600.00 per month servicing all of his debt. If this buyer had a car payment of $350.00 per month, and a credit card with a minimum monthly payment of $100.00, he would only qualify to spend the remaining $1,150.00 per month to service his mortgage, taxes and heating bill.

FINANCE, INITIAL PURCHASING COSTS

Purchasing real estate can be a costly endeavor indeed. For many, a home purchase becomes very stressful financially. That usually happens because the buyer is unaware of some of the expenses they’ll need to incur, and therefore, unprepared. Here’s an overview of practically everything that could come up during a home purchase in Saskatchewan. Please note that all costs are approximate.

Down Payment - You should be aware that your lender will insist that you put a little money into your home purchase from the start. You’ll need somewhere between 5% and 25% of the purchase price, depending on your personal circumstances. Read our article on down payments for more information.

Appraisal Fee - Your lender will want to order an appraisal on the property you purchase to ensure that you’ve agreed to pay a fair price for the property and that they are not lending too much money on the home. Approximate cost $175.00-$225.00.

Mortgage Application Fee - In the past, many lenders have charged a mortgage application fee to process your request for financing. Most major lenders have stopped doing so. It shouldn’t take much shopping around to find a lender that will not charge. This fee was typically between $75.00 and $150.00.

CMHC Application Fee - If you are planning on taking a high ratio mortgage (down payment of less than 25%) you’ll have to pay a CMHC application fee of $235.00. However, this fee does include your appraisal, if one is deemed necessary. Additionally, you will be charged an insurance premium that ranges from .5% to 3.75% of the mortgage amount. However, this fee is usually added to the total mortgage amount as opposed to being paid up front.

Home Inspection Fee - Don’t you dare close that deal without the help of a qualified professional building inspector. Please read our article on the importance of home inspections and budget $275.00-$400.00.

Home Insurance - Your lender, and your common sense, will require you to purchase insurance to protect yourself against a loss due to fire or other types of tragedies. You will also likely want to protect the home’s contents. A home insurance policy can cost as little as $300.00 and will increase in relation to the value of the home you’re purchasing and the value of your personal effects. An insurance broker can give you a good idea of how much you should budget. Just let them know how much you plan to spend on a home and the approximate value of your personal belongings.

Land Transfer Tax - At the present time there is no land transfer tax in effect in Saskatchewan.

Utility Connections - Budget approximately $200.00 for various utility connections.

Adjustment Costs - There may be certain adjustment costs that apply to your purchase that you should be aware of in advance. The seller may have already paid the local property taxes beyond the date of possession. In such cases, the buyer will reimburse the seller on a pro-rated basis, from the date of possession to the end of the tax period. You may also be required to pay the seller an interest adjustment on any portion of the purchase price not received by the seller at possession. Because the Saskatchewan Land Titles system is still manual, it commonly takes two weeks to a month for titles to transfer. The seller will not receive the purchase funds until after the title transfers and is usually compensated with an interest adjustment.

Registration of Title - You must register your title with Saskatchewan Land Titles. This cost varies depending on the home’s value. It costs $2.00 per thousand of the purchase price, plus $20.00. Typically performed by a lawyer and billed to you as a disbursement.

Mortgage Registration - If you are taking a mortgage to finance a portion of your home purchase, the lender will require that the mortgage be registered against the property. This cost varies depending on the amount of the mortgage. It costs $2.00 per thousand plus $20.00. Typically performed by a lawyer and billed to you as a disbursement.

Other Disbursements - The lawyer that handles your purchase will want to search the property’s title and perform a tax search to ensure that you receive clear title to the home. They will charge back any expense that is incurred on your behalf to close the transaction including photocopies, courier expenses, etc. These “other disbursements” are typically in the area of $90.00 to $150.00.

Legal Fees - The lawyer’s fee obviously varies with the amount of work a given file requires. They will usually charge a fee of $250.00 to $500.00 (depending on the home’s value) to register the property’s title. If there is a mortgage, the lawyer will charge a similar fee to prepare and register the mortgage against the title of the property.

Surveyor’s Certificate or Real Property Report - Lender’s usually require one of these reports to verify that the buildings situated on the property are all located within the boundaries of the property. In many cases the seller will have a property survey in their possession. Always request that the seller provide one in your offer to purchase. If the seller is unable or unwilling to provide one they can cost $350.00 to $450.00.

Moving Costs - If you decide to hire a professional mover there will obviously be additional costs involved that will vary significantly depending on the distance of the move and the amount of property to be moved. Call a few movers for a quote.

DOWN PAYMENTS

FINANCE, QUALIFYING FOR A MORTGAGE

FINANCE, INITIAL PURCHASING COSTS

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