For just about every Canadian, a house is the most expensive and biggest investment they’ll make in their lifetime. And given the price of homes these days, being able to complete a real estate transaction without some sort of financial assistance would prove to be an impossible endeavor for most.
That’s why there are mortgages. These loan products are specifically designed to help homebuyers realize their dreams of homeownership, and they come in all sorts of varieties to accommodate the various financial profiles of buyers.
Let’s get into greater details about mortgages in Red Deer to help you determine which type of home loan is best suited for you and how to boost your odds of approval.
Everything you need to know about the mortgage stress test in 2019. Click here.
Types of Mortgages in Red Deer
When it comes to mortgages, there’s no one-size-fits-all. Instead, there are several different types of home loans that lenders make available to buyers, and each has its own set of perks and drawbacks for buyers to consider. Here are some of the main types of mortgages in Red Deer.
Conventional mortgages – In order to get approved for a conventional mortgage, you’ll need a hefty down payment and a very good credit score. Conventional mortgages require a minimum 20% down payment, which can make these types of mortgages more difficult to secure. But if you’re able to come up with this amount of money up front, you can avoid having to pay mortgage default insurance.
This insurance premium is designed to help reduce the risk for the lender, even though you’re the one tasked with paying the premium. A higher down payment amount means a lower loan amount, which effectively reduces the risk of default. As such, borrowers can avoid paying an additional insurance payment.
High-ratio mortgages – If you can’t come up with 20% of the purchase price of the home, you may be able to qualify for a high-ratio mortgage, which requires a minimum down payment of 5%. However, you will have to pay mortgage default insurance premiums on top of your mortgage payments in order to compensate for the lender’s added risk of loaning out more money to cover the cost of the home purchase.
Fixed-rate mortgages – As the name suggests, fixed-rate mortgages come with interest rates that do not change throughout the duration of the loan. Once you lock in at a specific rate, you will keep that rate until the end of the loan term. Many buyers like this option because the predictable payments work better for budgeting.
Adjustable-rate mortgages – Many buyers like adjustable-rate mortgages because they typically offer lower rates compared to fixed-rate mortgages. However, these rates are typically lower during an initial introductory period. Once that period expires, the rate will change, and it will usually increase.
Is the lowest rate mortgage always the best option? Click here to learn more.
At specific intervals, the rate associated with adjustable-rate mortgages will change. Buyers should do their due diligence to find out where rates are expected to go before choosing an adjustable-rate mortgage over a fixed-rate mortgage.
Second mortgages – Also known as “home equity loans,” second mortgages are available to homeowners who have at least 80% equity built up in their homes. Equity simply refers to the current value of the home minus the outstanding loan balance on the mortgage. The money obtained through a second loan can then be used for a home improvement project, car repairs, or any other pressing expense.
Bridge loans – A bridge loan is a short-term solution that helps homebuyers “bridge” the gap between their current mortgage and a new mortgage. By tapping into the equity in their current home to be used as a down payment, buyers can be alleviated of carrying two mortgages as they wait for their current home to sell.
Do you know how much it costs to buy a house in your city? Click here to find out.
Importance of Mortgage Pre-Approval
Before you start the house hunting process, you’ll want to visit a mortgage broker and get pre-approved for a mortgage first. Pre-approval is valuable because it gives the lender the chance to check your credit and verify your financial and employment documentation, after which a specific loan amount will be approved. Pre-approvals usually expire after 90 to 120 days.
Getting pre-approved for a mortgage is important for a number of reasons. For starters, it will help you determine how much you can afford to spend. Knowing how much you can get approved for will help you focus only on properties that are priced within your budget.
A mortgage pre-approval will also help you seem more serious to sellers and sharpen your competitive edge. This is especially important if the market is filled with interested buyers but inventory is a bit short. In these cases, you’ll want to be as competitive as possible to win your bid on a home.
Finally, being pre-approved for a mortgage can help to speed up final mortgage approval once you find a house you love and put in an offer that the seller accepts. Your lender will already have much of the documentation needed, so it’s just a matter of submitting your real estate contract and allowing the lender to finalize the details.
It should be noted, however, that a pre-approval doesn’t guarantee you final approval. Anything can happen from the time you get pre-approved to the time you need final approval. Plus, if your pre-approval letter expires, it will no longer be valid or applicable.
Mortgages Payment Options
A mortgage is a type of installment loan, which means the full loan amount is repaid over time in installments. The frequency of these payments can vary and typically include monthly, semi-monthly, bi-weekly, and weekly payments (click here for more information).
The payment option you get will depend on what the lender is able to offer you and what you’re most comfortable with. That said, monthly mortgage payments are the most common among borrowers.
Mortgage Amortization Periods
It’s important to understand the difference between a mortgage “term” and “amortization period.” The term of a mortgage basically refers to the timeframe that you are committed to the terms of your mortgage, including the interest rate. The term is the time within which the mortgage has legal effect. When the term expires, you will have to renew your mortgage, usually at new terms and interest rate.
The term differs from the amortization period, the latter of which is the entire life of the mortgage and the timeframe within which the entire loan amount – plus interest – must be fully repaid to the lender.
How long should you amortize your mortgage for? Read this to find out.
You have options when it comes to your amortization periods. Some buyers like shorter amortization periods because it allows them to get rid of their mortgage sooner rather than later. Shorter amortization periods also allow borrowers to pay much less in interest.
However, since the loan amount must be repaid sooner, the monthly payment amounts are higher, which can make this arrangement financially difficult for some.
Other borrowers prefer longer amortization periods for the simple fact that the monthly mortgage payments are smaller, making these payments fit better into budgets. That said, longer amortization periods obviously take longer to pay off, and the amount of interest paid over the long haul is much higher compared to shorter periods.
Credit Score Requirements in Red Deer
One of the qualifying factors for a mortgage in Red Deer is your credit score. In Canada, credit scores range from 300 to 900, and to get approved for a traditional mortgage, at least a 650 to 680 credit score is required. A higher credit score means that your financial history is healthy, meaning you likely made timely payments on loans and credit accounts in the past.
Check out this infographic to learn even more about your credit score.
Qualifying For a Mortgage With Bad Credit
What if your credit score falls under the 650 mark? Does that mean your ability to secure a mortgage is quashed?
While conventional lenders might frown on borrowers with low credit scores, there are other options available for those with bad credit. Alternative lenders are available to those with less-than-perfect credit scores.
These lenders will place more weight on other factors aside from your credit score, including your income, assets, and most recent financial activity. Just note that bad credit mortgages typically come with much higher interest rates compared to traditional home loans from conventional lenders.
Improve Your Credit Score to Boost Your Odds of Mortgage Approval
While there are alternative lenders available to help you get a mortgage in Red Deer despite your bad credit, you may want to take steps to give your credit score a boost. This way, you can increase your chances of getting approved for a conventional mortgage, as well as any other type of loan or credit product available.
Take the following steps to give your credit score a boost:
- Be diligent about paying your bills on time every month
- Pay more than your minimum payment amounts on your credit cards
- Keep your credit card expenses to under 30% of your credit limit
- Reduce your debt load
- Avoid applying for additional loans or credit lines
- Don’t close old accounts, even if they’ve been paid off
- Don’t try to close credit accounts that still have a balance
Learn how to negotiate the best mortgage contract for your lifestyle and need.
Comparing Mortgages in Red Deer to Find the Best
If you were to shop around for a new car, you would likely take the time to compare different models, dealers, prices, and features. Well, the same goes for mortgages. Considering the different mortgage products and lenders out there, it makes sense to do a little comparison shopping to make sure you’re getting the best, most affordable mortgage possible.
When comparing lenders and mortgages, pay specific attention to the following:
- Interest rate
- Amortization period
- Payment schedules
- Early repayment penalties
This can take some legwork, so you might want to leave the comparison shopping to a mortgage broker who will do all this work on your behalf. And since they’re typically paid by lenders, there is usually no fee associated for their services.
What is the true cost of borrowing? Take a look at this infographic to find out.
How to Save For a Down Payment
A major obstacle that buyers often face when trying to get a mortgage is coming up with a down payment. Saving up tens of thousands of dollars to buy a home can be a huge undertaking, which is why you should allow yourself enough time to come up with this massive amount of money.
Here are some tips to help you accumulate the funds needed for a decent down payment:
- Set up a savings account dedicated to your down payment
- Be diligent about putting a certain amount or percentage of your paycheck towards your down payment savings
- Set up automated savings so money is automatically and directly deposited into your account
- Pay off high-interest debt to free up cash for your down payment
- Consider debt consolidation
- Apply for the First Time Home Buyers Plan (HBP) by borrowing from your RRSPs
Looking to Apply For a Mortgage in Red Deer?
If you’re on the prowl for a new home and need a mortgage to help you finance this big purchase, let Loans Canada help. We have an expansive network of professionals that we deal with and can put you in touch with the right team to help you land a mortgage to finance a home purchase. Call Loans Canada today!