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If you’re planning to buy a home in Hamilton, odds are you’ll need the help of a mortgage to finance such a large purchase. Mortgages make it possible for Canadians to realize their dreams of homeownership.
But mortgages themselves can be expensive. Depending on the price of the home you plan to buy, among other things, a mortgage is a hefty bill that will be adding to your other monthly obligations.
Before you take out a mortgage, be sure to find out all the ins and outs of these types of loans to make an informed decision. In this article, we’ll discuss applying for a mortgage in Hamilton, to help you determine what type of mortgage is right for you.
Get Pre-Approved For Your Mortgage in Hamilton
You may want to consider getting pre-approved for your mortgage before you start your search for a new home in Hamilton. A pre-approval is a promise from your lender that you can get approved for a specific loan amount to finance a home purchase.
There are a couple of reasons why you may want to take this extra step before you start looking for a new home.
Should you spend your entire preapproval amount? Find out here.
Find out how much you can afford. Rather than looking at all sorts of homes in different price ranges, you should be focusing on properties that match your budget. But you won’t truly know how much you can afford and how much you can get approved for without getting pre-approved first.
A pre-approval will tell you what loan amount you can get approved for and will help you narrow your focus, save time, and avoid disappointment.
Show sellers you’re serious. Sellers want to know that the buyers they strike deals with can actually afford to pay for the home and get final approval for a mortgage.
And going into a deal with a pre-approval letter in hand will show sellers that you’re serious and will make you more competitive, especially in a seller’s market.
Just keep in mind that pre-approvals expire after 120 days. Once they expire, you will have to get pre-approved again.
Interested in buying a house in another Canadian city? Check out this infographic.
How to Save For a Down Payment in Hamilton
A down payment is a necessary part of securing a mortgage. In Canada, the lowest down payment amount accepted by traditional lenders is 5% of the purchase price of a home. That means a home that costs $500,000 would require a minimum down payment of $25,000 to secure a mortgage.
Considering how large down payments need to be, it can be difficult for many potential homebuyers in Hamilton to come up with that amount of money. As such, saving up for a down payment requires some diligence, sacrifice, effort, and time.
But saving up for a larger down payment is beneficial for a few reasons.
For instance, a larger down payment amount will reduce the loan amount you need to take out, making your mortgage smaller and easier to pay down. Further, if you’re able to come up with at least 20% of your purchase price, you can eliminate additional payments for mortgage default insurance, which we’ll get into later.
Here are some tips to help you save for your down payment:
- Open an account dedicated solely for down payment savings
- Have a certain amount automatically deducted from each paycheck and deposited into your down payment savings account
- Cut down on your spending
- Pay down your high-interest debt to free up more money for your down payment savings
- Borrow from friends and family
- Borrow from your RRSPs (Home Buyers Plan)
For more information about the Canadian Home Buyers Plan, click here.
Mortgage Insurance Rules in Hamilton
Certain types of mortgages require default insurance. More specifically, your down payment amount will dictate whether or not mortgage default insurance is required.
For example, any down payments that are less than 20% of the purchase price of the home will require an additional insurance premium to be paid on top of the regular mortgage payments. These are considered to be “high-ratio” mortgages.”
If borrowers in Hamilton are able to come up with at least 20% of the purchase price in the form of a down payment, mortgage default insurance is not required. These are considered “conventional mortgages.”
The purpose of mortgage default insurance is to protect the lender in case a borrower stops making payments and defaults on their home loan.
Types of Mortgages Available in Hamilton
There are several types of mortgages available in Hamilton, including the following:
Open mortgages. An open mortgage allows borrowers to increase the principal amount outstanding at some point in the future. These mortgages then let borrowers go back and borrow more money from the lender. There’s typically a cap on any additional amount that can be borrowed.
Closed mortgages. A closed mortgage comes with a prepayment limit, meaning you’re only allowed to pay up to 15% of the original principal balance of the mortgage each calendar year.
Fixed-rate mortgages. A fixed-rate mortgage has an interest rate that remains the same throughout the mortgage term. As such, mortgage payments stay the same, making them easier to budget for.
Variable-rate mortgages. A variable-rate mortgage comes with an interest rate that fluctuates at certain points throughout the term. The “introductory period” typically comes with a rate that’s lower than a fixed-rate mortgage, though when that period ends, the rate can go up (or down).
Conventional mortgages. A conventional mortgage requires a down payment of at least 20% of the purchase price of the home. As such, no mortgage default insurance is required.
High-ratio mortgages. A high-ratio mortgage is one in which a down payment of less than 20% is made. As such, mortgage default insurance premiums are required.
Second mortgages. Homeowners with at least 20% equity in their homes (the value of their home, less any outstanding principal balance remaining on the mortgage) may be eligible for a second mortgage, which allows them to borrow against the equity in their home to be used to cover large expenses.
Credit Score Required For a Mortgage in Hamilton
Before a lender in Hamilton approves a mortgage application, they’ll want to assess the borrower’s credit score. Generally speaking, lenders want to see a credit score of at least 680 before they agree to extend a home loan to a homebuyer.
Your credit score dictates what type of borrower you would be. A high credit score generally means that you’ve been diligent with your loan payments over the past, while a low score probably means you’ve missed a payment here and there.
If you want to get approved for a mortgage without any trouble, make sure your credit score is at least 680 or higher.
For even more information about credit scores, take a look at this.
Alternative Mortgage Options For Hamilton Borrowers With Bad Credit
What if your credit score is less than 680? Will you be out of luck when it comes to securing a mortgage?
If you’re applying with a conventional lender, you might find trouble getting approved for a mortgage Hamilton. But, there may be other options for you if you have a bad credit score.
Work with an alternative lender. Instead of seeking a mortgage with a conventional lender, consider applying for a home loan with an alternative lender in Hamilton (click here for more information). These lenders place less emphasis on a borrower’s credit score and more emphasis on their income, assets, down payment amount, and most recent payment history.
Just keep in mind that if you are approved with this type of lender, you’ll be paying a higher interest rate compared to a conventional loan.
Take out a bridge loan. You may be able to make your dreams of homeownership come true by taking out a customized short-term solution such as a bridge loan. These types of loans can help you take advantage of the borrowing potential of your current home to help cover an expense if you have trouble getting similar financing from a traditional lender.
A bridge loan is similar to a regular mortgage loan but is used to get access to
loans at a lower rate in the future while helping to improve your credit score.
Get a cosigner. If you know someone who you trust and has a good credit score, ask them if they would be willing to cosign your home loan with you. If they assume this position, they would be responsible for taking over the mortgage payments if you are no longer able to make them yourself.
Take time to improve your credit score. Perhaps the best thing to do would be to give yourself some time to improve your credit score to increase the chances of getting approved in the future.
The following steps can help your credit score increase:
- Pay all bills on time
- Use less than 20% to 30% of your limit on your credit card every month
- Make more than your minimum credit card payments
- Don’t apply for new credit card or loans
- Keep old credit accounts open
- Don’t close any accounts that still have a balance remaining
Do you know how the mortgage stress test is going to affect your approval? Learn more here.
Hidden Costs of Buying a House in Hamilton
Buying a house in Hamilton is obviously a huge purchase and a big expense to add to the books. But in addition to the mortgage payments that must be made to pay down the loan, there are several other expenses that many buyers – especially first-timers – may not be aware of.
It’s important to get familiar with all expenses related to buying and paying for a home before getting into this large financial commitment:
- Closing costs, such as appraisals, lender fees, underwriting fees, lawyer fees title fees
- Mortgage interest
- Home inspections
- Property taxes
- Property insurance
For more information about closing costs in Ontario, click here.
Comparing Different Mortgages in Hamilton
You’d be well-advised to shop around for a mortgage before settling on one. To do this effectively, you’ll want to make sure that you compare key components of each mortgage product to choose the one that’s best for you. Here are the components that you’ll want to compare between mortgages:
- Interest rate
- Amortization period
- Prepayment options
- Penalty fees
- Variable- versus fixed-rate
Mortgage Payment Options
Mortgages are types of installment loans, which means the entire loan amount is repaid in installments over time. The frequency in which the payments are made to pay back the loan can vary based on what your lender offers and what you’re most comfortable with.
The most common payment frequency is monthly, which means payments are made once a month. But other payment options are also available, including:
- Semi-monthly – two payments a month
- Accelerated bi-weekly- payment every two years
- Weekly – one payment per week
Did you know that you could be charged a penalty for prepayment? Check out this article.
The amortization period of your mortgage refers to the entire length of time that you have to repay the loan amount in full. You have a few options, including short or long-term amortizations.
Short-term amortizations are attractive because they allow mortgages to be repaid sooner than long-term amortizations. And as such, much less is paid toward interest, making them more affordable overall. But because you have less time to pay off the mortgage, the monthly payments will be much higher.
Long-term amortizations tend to be more popular among borrowers because the monthly payments are much smaller as a result of having much more time to fully repay the loan. That said, it will cost the borrower much more in interest as a result of the long time period to repay the loan.
Which amortization length is best for you? Check out this article to find out.
Need a Mortgage in Hamilton?
If buying a home in Hamilton is on the agenda for you sometime soon, then it may be time to start looking into applying for a mortgage, and Loans Canada can help connect you with a third-party mortgage professional in your area.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.