Looking to buy a home in Lethbridge in the near future? If so, now would be a great time to start looking into securing a mortgage to help you finance this large purchase. Unless you’re planning to buy the home in an all-cash deal, a mortgage will be a required part of the purchasing process.
Read on to find out everything you need to know about mortgages in Lethbridge.
Get a Mortgage Pre-Approval
Before you even start the search for a new home, it’s extremely helpful to start with a pre-approval first. A mortgage pre-approval letter is basically a promise from your lender that you can get approved for a certain mortgage amount based on your current financial and credit situation.
Your lender will require certain information from you in order to get the pre-approval process started and determine whether or not you can secure a home loan, and if so, for how much. Typical documents required may include:
- Letter of employment
- Banks statements
- Pay stubs
- List of assets and debts
Your lender will also check your credit score, which is a crucial component of the lending process and provides information about the type of borrower you would be.
Even though a pre-approval is not mandatory, there are a couple of important reasons why you may want to get pre-approved for a mortgage in Lethbridge.
Know how much you can afford. It would be extremely helpful to focus on homes that meet your budget rather than arbitrarily looking at properties that are far more expensive than you can afford. Not only is this a time-saver, but it can also help you avoid disappointment.
Be more competitive in a seller’s market. If you’re competing with other buyers looking at homes in Lethbridge, you want to be able to stand out to sellers and show them that you are a serious buyer who’s also financially qualified to close on a deal. Even if you’re not in direct competition with other buyers, a pre-approval letter will help sellers nudge in your favour and help sweeten the deal.
Keep in mind, however, that pre-approval letters are only good for a certain amount of time – usually from 90 to 120 days. After that, the pre-approval will expire and will no longer apply.
Interested in the cost of buying a house in the rest of Canada? Click here.
Saving For a Down Payment
While mortgages help you finance a home purchase, you still need to come up with a down payment to get the process started. Depending on the type of mortgage you decide to go with, you’ll have to come up with a minimum amount.
For instance, conventional mortgages require a minimum down payment of 20% of the purchase price of the home you intend to buy, and a high-ratio mortgage requires a down payment minimum of only 5% of the purchase price.
Can you borrow your down payment? Click here to find out.
Of course, depending on the price of the home, the down payment amount will fluctuate from one deal to the next.
That said, you can expect the down payment amount to be a hefty number, especially given the rising prices of homes these days. For instance, a 5% down payment on a $400,000 home purchase would equate to $20,000.
That’s a big number to have to come up with. As such, it’s important to start saving early enough in order to be able to come up with these funds when the time comes to buy a home.
Here are some tips to saving for a down payment:
- Open a dedicated savings account for your down payment
- Have your savings automatically deducted from your paycheck and deposited directly into your dedicated savings account
- Cut back on spending
- Pay down your high-interest debt (such as credit card debt) to free up that money to be used for a down payment
- Borrow from family and friends
- Borrow from your RRSPs in the form of a First-Time Home Buyer’s Plan
Mortgage Insurance Rules in Lethbridge
Certain rules apply in terms of mortgage insurance depending on how much of a down payment you put toward your home purchase. Conventional mortgages, which require a 20% down payment, do not require additional payments in the form of mortgage default insurance premiums.
On the other hand, high-ratio mortgages require additional mortgage default insurance premium payments. That’s because a lower down payment amount means a higher loan amount required. Any loans that are made for more than 80% of the purchase price of a home place lenders in a riskier position.
In order to compensate lenders in the event that mortgage default occurs – which is more likely with a higher loan amount – mortgage insurance can provide coverage. This unique type of insurance may cover lenders, but it is actually paid for by the borrower.
Types of Mortgages Lethbridge
When it comes time for you to apply for a mortgage in Lethbridge, you have a few options:
- Conventional mortgages – as already mentioned, conventional mortgages are those that require a 20% down payment. In exchange for such a high down payment amount, borrowers can avoid having to pay into mortgage default insurance.
- High-ratio mortgages – Also explained earlier, these types of mortgages require a minimum down payment of 5% of the purchase price of a home. Because down payment amounts are less than 20% of the purchase price of a home, mortgage default insurance payments are required.
- Fixed-rate mortgages – Mortgages come with interest rates. The loan amount taken out will have to be paid back in full at some point in the future, along with interest that the lender charges. These rates can vary depending on the lender, the market, and the borrower’s financial health. A fixed-rate mortgage simply means that the rate remains fixed throughout the mortgage term and won’t change during that time, despite what may happen in the outside market.
- Variable-rate mortgages – Unlike fixed-rate mortgages, a variable-rate mortgage comes with an interest rate that may fluctuate at different intervals. They usually come with an “introductory period” in which the rate is typically lower than that of a fixed-rate mortgage. Once that period ends, the rate can change in either direction.
- Open mortgages – These mortgages allow borrowers to increase their outstanding principal amount sometime in the future. Borrowers can then borrow more money from their lender, though there is usually a cap on any additional loan amounts borrowed.
- Closed mortgages – These mortgages feature a prepayment limit, which means borrowers are only permitted to pay up to 15% of the mortgage original principal amount every calendar year.
- Second mortgages – Homeowners who have built up at least 20% equity in their homes (which is the market value of their home minus any principal balance outstanding) may be eligible to secure a second mortgage, or a home equity loan. These types of loans use the equity in a home to be used as cash to cover any type of large expense.
Did you make any of these common mortgage application mistakes?
Credit Score Needed to Secure a Mortgage in Lethbridge
One of the most important factors involved in assessing a borrower’s ability to get approved for a mortgage in Lethbridge is their credit score. This number – which is valued from anywhere between 300 to 900 – measures a borrower’s credit health and paints the picture of a borrower’s past financial activity.
Generally speaking, a financial past that includes making bill payments on time and not spending too much in credit card expenditures will translate into a higher score. On the other hand, a history of missed payments and spending up to the limit on credit cards will have a negative effect on a credit score.
Generally speaking, a credit score of at least 680 is required to get approved for a traditional mortgage, though this may depend on other factors, including the lender, the borrower’s income, assets, debt load, and down payment amount.
For more information about minimum credit score requirements, click here.
What if You Have Bad Credit?
If your credit score is less than 680, you may have other options available to you:
Work with an alternative lender – Rather than applying for a mortgage with a conventional lender, consider working with a private alternative lender who has experience dealing with bad credit borrowers. These lenders will focus less on your credit score and more on your income, assets, down payment amount, and most recent payment activity.
Get a cosigner – If you know anyone close to you who has good credit and is willing to back you up, consider asking them to cosign on the loan with you. If they do, they will be responsible for taking over your mortgage payments in the event that you default on your mortgage.
Make an effort to fix your credit score – If your credit score is lagging, consider holding off on buying a home for now and take some time to improve your score. You can do this by taking any one of the following steps:
- Make timely bill payments
- Don’t spend any more than 20% to 30% of your credit card limit to keep your credit utilization ratio low
- Make more than just your minimum credit card payment amounts
- Avoid applying for new loans or credit
- Keep your old credit accounts open (especially those with a remaining balance)
Check out this infographic for more information about credit scores in Canada.
Hidden Costs of Buying a Home in Lethbridge
The purchase price of a home itself is already a huge expense. But there are other expenses related to buying a home that you should be aware of:
- Mortgage interest
- Appraisal fees
- Lender fees
- Underwriting fees
- Attorney fees
- Title fees
- Home inspections
- Property taxes
- Home insurance
To learn more about the hidden cost of buying a house, check this out.
Comparing Different Mortgage Products
Just like you would probably shop around to compare prices for different consumer goods, you should also comparison shop for different products with different lenders to find the best (and cheapest) mortgage product available. Some of the things to look at among different mortgages include:
- Interest rate
- Amortization period
- Penalty fees
- Prepayment options
Mortgage Payment Options
A mortgage in Lethbridge is a type of installment loan, which means the entire loan amount is gradually paid off in full by making installment payments. But the frequency with which you make your payments will depend on your needs and what your lender is able and willing to offer. Payment frequency options include:
- Accelerated bi-weekly (payments every two years)
- Semi-monthly (two payments per month)
Mortgage Amortization Periods
Eventually, the full loan amount will need to be repaid. When you take out a mortgage, the maturity date will be specified in your contract. This is the date that the entire loan amount will need to be paid off in full, which is also known as the amortization period.
There are different amortization period lengths, which range from short-term to long-term. Short-term amortizations require the loan amount to be repaid in a shorter amount of time, which means bigger payments will need to be made. But lots of interest can be saved since the loan amount will be paid off a lot sooner.
Long-term amortization periods are popular because the payment amounts are much smaller, making them more affordable for many borrowers. But they take longer to pay off and require more to be paid in interest overall.
Looking to Apply For a Mortgage in Lethbridge?
If you’re considering buying a home in Lethbridge in the near future and are in need of a mortgage, call Loans Canada. We can connect you with a reputable lender in the mortgage sphere who can offer you the ideal mortgage product for you. Call Loans Canada today!