Christian finance and consumer credit counseling & debt management
Your Responsibilities
Know Yourself - How Much Can You Afford?
Before you start shopping for a house, and for a mortgage, it is important for you to determine how much you can afford.
Pre-approval
The easiest way to find out is to ask for a "pre-approval" from a financial institution. To do this, you submit your financial information to a potential lender, which approves you for a predetermined mortgage amount. The pre-approval agreement, which normally does not involve any obligation on your part (you are not signing a mortgage contract), may also guarantee the interest rate for a mortgage taken out during the 60- to 120-day pre-approval period.
Look at your financial situation
Although you may find the financial institution's pre-approval convenient, remember that the pre-approved loan represents the maximum amount you could pay for a house, according to the lender's criteria and the information you have provided. However, it may overestimate what you can actually afford, since it does not take into account the extra costs associated with purchasing a house (for example, the unexpected expenses you may incur from time to time, changes in interest rates that might substantially increase your housing costs, and any other future financial obligations such as the replacement of a car). It is therefore important that you fully understand what your financial situation is and your financial plan to handle future payments.
Before you start shopping for a house, keep track of your monthly income and expenses to determine how long your need to save to accumulate the required down payment to purchase the house that you have chosen, and whether you can afford the monthly mortgage payments.
As a rule of thumb, your maximum monthly housing costs should not exceed 32 per cent of your gross monthly income, and your monthly debt payments should not exceed 40 per cent of your gross monthly income.
In fact, your ratios should be lower than the maximum outlined above, to give you flexibility in case of unexpected expenses, or changes in your mortgage conditions (e.g., a sharp increase in the interest rate when you renew your mortgage).
Extra costs
Remember that there is more to buying a home than paying the down payment and mortgage. You'll need to budget another 1.5 to 4 per cent of the price of your home to cover extra costs such as legal fees, land transfer tax and tax adjustments.
Shop Around
Your mortgage is likely the most important debt that you will take on in your lifetime. It is therefore important that you look for a mortgage with the most beneficial conditions, which will save you money.
Lenders
Mortgages are available from several types of lenders such as banks, mortgage companies, insurance companies, trust and loan companies, credit unions and caisses populaires. Different lenders may have different prices and conditions for similar products, so you should talk to several lenders to make sure you're getting the best product for your needs.
Mortgage brokers
You can also obtain a mortgage through a mortgage broker. Rather than lending money directly to you, brokers arrange transactions by finding a lender for you. Since brokers have access to a number of lenders, this may give you a wider range of loan products and terms to choose from. However, since mortgage brokers do not all have access to the same financial institutions, they may not be able to offer you the same kind of product. Consequently, you should consider contacting more than one broker, just as you should with banks and other financial institutions.
Some lending institutions may pay brokers' fees. If a broker cannot find you a product that is better than the one at your institution, you are free to shop elsewhere.
Ask the right questions
When you shop around at various financial institutions and mortgage brokers, you should obtain the information you need to compare products and avoid any surprises, before committing yourself to a contract.
The following section, "Your Rights", outlines the information you have the right to receive when you apply for a mortgage at a bank or another financial institution regulated by the federal government. This information will enable you to compare the various lenders and help you make a decision. You can use the information presented in the next section as a checklist that you can take with you when you speak to lenders or brokers. Be sure to write down the information they give you. Don't be afraid to let lenders know that you are shopping around for the mortgage that best suits your needs.
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