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Key Mortgage Terms

What is a pre-approved mortgage?

A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (typically from 60 to 120 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like 'written employment and income confirmation' and 'down payment from your own resources', for example.

Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range.

In summary, a pre-approved mortgage is one of the first steps a homebuyer should take before beginning the buying process.

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What are closing costs?

Closing costs are extra costs that need to be taken into consideration in addition to the down payment, property taxes and homeowner's insurance premiums. The following services associated with purchasing a property need to be taken in to consideration as potential closing costs:

• Survey (Real Property Report) Charges
• Appraisal Fees
• Land Transfer Taxes
• Attorney Fees and Disbursements
• Garbage Disposal Fees
• Title Insurance

Your real estate transaction may be subject to GST and/or HST. Be sure to check with your real estate agent if GST/HST applies.

What is the difference between Pre-approval, Pre-qualification, and Mortgage Commitment?

If you are just getting started in the hunt for a new home, it is important to know the difference between pre-qualifying, pre-approval and a loan commitment. It is not enough to simply begin looking for the home of your dreams. It is critical that you determine the price range that you can afford, get qualified for a loan, and understand all of the steps to assist you in securing that perfect property when you find it.

Pre-Qualification

Pre-qualification does not mean that you have been approved for a loan, but it is an important component of the home buying process. You have to know what you can afford before you look. Pre-qualification will save you time and ultimately money.

A mortgage professional can help you determine your pre-qualifications. You should candidly discuss your financial situation with him or her and not withhold any information. Most likely, your mortgage consultant will want to know your yearly household income as well as your assets and liabilities.

If you can discuss your finances candidly and determine what you can reasonably qualify for a loan, then no one's time will be wasted. Otherwise, your real estate agent may end up being a tour guide, showing you beautiful houses that you will never be able to get a mortgage for, rather than helping you find an appropriately priced property that you can afford to mortgage.

A pre-qualification really may not mean that much to sellers because a credit check is not completed nor is any written documentation provided. A pre-qualification is more of a tool to help potential buyers obtain an estimate of their purchase price range based on the purchaser's verbal information provided to a mortgage professional.

Pre-Approval

A pre-approval is a more accurate qualifying process based on written documentation provided to a mortgage associate who will also conduct a thorough credit inquiry. It is particularly important that you disclose all financial information that is requested in order for the mortgage professional to accurately pre-approve you.

Getting a pre-approval completed before viewing homes may give you more bargaining power when it comes to negotiating the price of a home. If the seller is presented with a written pre-approval from a mortgage professional, you may have more leverage. In fact, it is a good idea to plan to get pre-approved as most real estate agents will not spend their time showing homes to potential buyers who do not have a pre-approval in place, especially in a hot market.

Pre-approvals however, still do not necessarily guarantee that you will ultimately get the loan. The final approval depends on the lender verification's of the documentation provided by you as well as approving of the home after you have placed a purchase agreement on making it a 'live deal'.

Mortgage Commitment

A loan commitment is a letter that is issued by the lender that states that they will fund your mortgage. This letter may include details of your interest rate and the maximum amount of loan they will offer. This sort of commitment requires that both you and the house be approved. This means that the home will need to be appraised at the sale price or higher and must meet the lender's guidelines.

Regardless of what stage of home buying you are in, it is very important that you keep a few things in mind. Remember that just because you are approved for a large loan, does not necessarily mean that you should borrow at the upper limit of your loan approval. Homeownership involves more expenses than renting and some properties require more work than others. Make sure you leave a financial cushion for repairs and upgrades to your new home.

Once you are approved and have a mortgage commitment in place, do not make any big changes to your finances anytime prior to your possession date. Changing jobs, obtaining other loans can lower your credit rating or change your debt-to-income ratio and ultimately may change your approval status to no longer getting the loan. Now is not the time to buy that new car, big screen television or to take an expensive vacation before your possession date. The mortgage company may make one last credit check even if you have a loan commitment if the possession date is longer than ninety days. The more educated and prepared you are, the home buying process is easy and stress free.

What is title insurance?

Protecting purchasers against loss is accomplished by the issuance of a title insurance policy obtained through the solicitor, that states if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy.

Title insurance differs significantly from other forms of insurance. While the functions of most other forms of insurance is to guard against future events (such as death or accidents or in the case of property, fire or flood), the primary purpose of title insurance is to eliminate risks and prevent losses caused by events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject of real estate. Either those claims are eliminated prior to the issuance of a title policy or their existence is exempted from coverage.

What is a home inspection?

A home inspection is an examination of the structure and systems: heating and air conditioning, plumbing and electrical, roof, attic, insulation, walls, floors, ceilings, windows, doors, foundation, and basement and is not typically a requirement in qualifying for mortgage financing.

If the inspector finds problems, it does not mean you cannot sell your house, but you can be certain a buyer inspection will find them too. Finding problems before you list your property can avoid accusations of misrepresentation, low offers, and even lawsuits. A home inspection can also ensure sellers comply with new, tougher disclosure laws enforced in many provinces.

You may or may not want to make the repairs and you can always adjust the selling price or contract terms if the problems disclosed in the home inspection are major items. This information will also help you determine what type of financing will or will not be available for your home. You can find home inspectors under Professional Services section.

What is an appraiser and what does an appraisal do?

A real estate appraiser is a provincially licensed, impartial, independent third party who provides an appraisal -- an objective report on the fair market value of real estate. The appraisal is supported by the recent collection and analysis of data of comparable properties that have sold in the past ninety days or less.

Some lenders that offer conventional financing (20% or greater down payment) may require a full appraisal at your expense be completed as part of your financing approval. Most licensed appraisers will provide an advance estimate of the cost to perform the appraisal, and many will commit to a fixed fee for the appraisal. It is always wise to obtain a written contract for services that includes a description.

What is mortgage loan insurance?

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC) a crown corporation, Genworth Financial and AIG United Guaranty that are approved private corporations. This insurance is required by law in Canada to insure all lenders against default on mortgages with a loan-to-value (LTV) ratio greater than 80%. The insurance premiums, ranging from .50% and up depending upon your down payment and amortization length, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

What is a conventional mortgage?

A conventional mortgage is usually one where the down payment is equal to 20% or more of the purchase price, a loan to value of or less than 80%, and does not normally require mortgage loan insurance.

What is the difference between Term and Amortization?

The "term" of the mortgage should not be confused with the "amortization". The amortization of the mortgage refers to the entire length of time that it will take for the mortgage to be paid and the house to be "free and clear". The term is the period for which your current payment obligations are valid. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years your mortgage is up for renewal and is open to renegotiate the term. Fixed rate mortgages can be "closed" or "open".

Open Mortgages

Allow one to pre-pay some, or all of, their outstanding mortgage obligation at any time, without penalty. Generally, open mortgages have a six-month, and a one-year term option with higher interest rates than closed mortgages of the same term length.

Closed Mortgages

Closed mortgages are offered in terms ranging from six months to ten years. Generally, closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of one's mortgage and should be properly discussed with the mortgage associate to clarify what the lenders pre-payment options are.

What is equity?

The interest of the owner in a property over and above all claims against the property. It is usually the difference between the market value of the property and any outstanding encumbrances.

What is interest adjustment date?

The date that the lender will start collecting interest. Your regular payments will commence one payment period after this date. For example, if you have chosen to make bi-weekly payments, your first payment will come due two weeks after the Interest Adjustment Date. When you sign your mortgage papers the bank will collect from you an "Interest Adjustment" which is a calculation of interest from the Completion Date to the Adjustment Date.

What is interim financing?

Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.

What is loan to value ratio (LTV)?

The amount of the mortgage expressed as a percentage of the value of the home. For example, if you wish to borrow $190,000 on a home you are buying for $200,000, the Loan to Value Ratio is 95%.

What is maturity date?

The last day of the term of your mortgage agreement. On the maturity date the mortgage must be paid in full, renewed with the same lender or transferred to a new lender.

What is a mortgage?

A mortgage is actually a document which is registered in Land Titles Office and provides evidence that you have given your home as collateral to a lender to secure a loan. In practice, the loan itself is usually referred to as a mortgage.

Who is the mortgagee?

The lender who provides a loan secured by a mortgage.

Who is the mortgagor?

A person who takes out a loan which is secured by a mortgage.

What is porting?

This allows you to move to another property without having to lose your existing interest rate. You can keep your existing mortgage balance, term and interest rate plus save money by avoiding early discharge penalties.

What are prepayment privileges?

When you negotiate a closed mortgage, you are entering into an agreement with the lender that you will not pay off the mortgage during the term. In return, the lender agrees to maintain the same interest rate throughout the term. However, most mortgages allow certain prepayment privileges such as an annual prepayment of a certain percentage of the mortgage amount or an annual increase in the mortgage amount. An open mortgage will usually cost more but allows you to repay the mortgage in full or in part at any time without penalty.

What is refinancing?

Renegotiating your existing mortgage agreement. May include increasing the principal or paying out the mortgage in full.

What is renewal?

At the end of a mortgage term, the mortgage may "roll over" on new terms and conditions acceptable to both the lender and the borrower. This is known as renewing a mortgage. Otherwise, the lender is entitled to be repaid in full. In this case, the borrower may seek alternative financing. Before you renew your mortgage please consult one of our mortgage associates.

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