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Mortgage Glossary

Agreement of Purchase and Sales

This is the main legal contract a seller and purchaser get into. It is suggested that the agreement be prepared by knowledgeable and professional real estate agent in order to protect your interest by adding the relevant and suitable conditions and clauses that suites your needs. 

 

Amortization Period

Total  number of years it will take for the repayment of entire amount of the mortgage according  on a set of fixed payments.

 

Appraisal

The process of determining the market value of a property.

 

Assets

Assets are what you own or can call upon. This is usually  used in showing net worth or to  in secure financing.

 

Assumption Agreement

This is a  legal document tat is signed by a buyer which requires the buyer to assume responsibility for the obligations of the current mortgage. When others  assumes your mortgage,  you must ensure that you are released from the mortgage company  so you are not  responsible for the debt no longer.

 

Blended Payments

This form of payment consist of equal payments including both an principle and interest component. Generally the payments do not change however, the amount of principal portion increases and interest portions lowers. 

 

Canada Mortgage and Housing Corporation (CMHC)

CMHC is a federal Crown corporation which is administers the National Housing Act (NHA).  CMHC  insures mortgages for lenders which are greater  than 80% of the purchase price. The cost involved for the insurance are paid for by the home purchaser and is typically added to the mortgage amount. The mortgages that are greater than 80%  are  referred to as a’Hi-Ratio’ mortgage.

 

Closed Mortgage

Closed mortgages can not be prepaid and or negotiated for set period of time without having to pay penalties. 

 

Closing Date

The date on which the new owner takes possession of the property and the sale becomes final.

 

Collateral

This is described as an instrument in a form of asset like Canada savings bond, term deposit or a car that maybe offered as a form of security for loans. 

 

Conventional Mortgage

A mortgage up to 80% of the purchase price or the value of the property. A mortgage exceeding 80% is referred to as a ‘Hi-Ratio’ mortgage and the lender will require insurance for that mortgage.

 

Credit Scoring

This is a system that assess the credit worthiness of a borrower based based on point system .

 

Demand Loan

Demand loans are a type of loan that the balance must be paid when its requested. 

 

Deposit

The amount of  of funds that are deposited in trust by the home buyer when making an offer to buy a property. Upon accepting the offer the seller (vendor) , the amount deposited is held in trust by the real estate company and the broker and the lawyer until the sale is finalized and is closed where the fund is paid to the vendor. In case of inability of the purchaser to close the transaction the amount is paid to the vendor as compensation for breaking the offer and not executing the closing.

 

Equity

Equity is the difference between the market value of a home and total amount of outstanding mortgages that are  registered against the property. The difference belongs to the home  owner.

 

First Mortgage

This is type of debt that is registered against the home which has first call on the property and is also known as first in line. 

 

Fixed-Rate Mortgage

The interest rate in this type of mortgage is set for the entire term of the mortgage. 

 

Gross Debt Service Ratio (GDS)

A type of calculation that is used by lenders to determine if a borrower has the capacity for the repayment of the mortgage. The elements involved in the calculation are the mortgage payments, property tax, estimated  heating costs, and 50% of any maintenance fees involved , total amount then is divided by the gross income of applicants. The result of this ratios must be 32% or lower to be acceptable. 

 

Guarantor

When a person with established , provable income and credit guarantees the repayment of the loan if the borrower fails to repay.  

 

High-Ratio Mortgage

A mortgage is considered a high ratio when it exceeds 80% of the purchase price or appraised value of a home. This form of mortgage must be insured. In order to reduce  the cost of the insurance, a 1st mortgage up to 80% is approved  and a 2nd mortgage for the balance (up to 90% of the purchase price).

 

Home Equity Line of Credit

This line of credit which is a personal line of credit that  is secured against the borrower’s home. Normally it is, up to 75% of the purchase price or appraised value of the home is permitted to be borrowed with this instrument.

 

Interest Adjustment Date (IAD)

The mortgage term begins in this date, this date usually starts in the first day of the month following the closing. The interest cost for the days from the closing date to the first of the month are normally paid out in closing day. That is the reason it is advised to close your deal near the end of the month.  

 

Interest-Only Mortgage

A mortgage on which only the monthly interest cost is paid each month. The full principal remains outstanding. The payment is lower than an amortized mortgage since once is not paying any principal

 

Mortgage

A mortgage is defined as  a loan which uses a piece of real estate as a security. When the loan is paid-off, the discharge of mortgage is provided by the to lender .

 

Mortgagee

The financial institution, bank  or person (lender) who is lending the funds as a mortgage.

 

Mortgagor

A person who borrows the funds using a mortgage.

 

Open Mortgage

Open Mortgage can be repaid at any time in duration of the mortgage term without having to pay penalties. Due to this fact open mortgages carry a higher interest rate of o.75%-1.00% higher than a closed mortgage rates. This is a great choice if you are looking to pay off your mortgage quickly or perhaps ell your property fast.  

 

P.I.T.

Principal, interest, and property tax due on a mortgage. In case your down payment is larger than 25% of the appraised value or purchase price, the mortgage lender will permit you to make your own property tax payments.

 

Portable Mortgage

This type of mortgage can be transferred from your current property to the property to the property you are purchasing. The reason for porting this mortgage can be to avoid extra penalties to break the mortgage contract or to save money due to having a lower interest rate.  

 

Prepayment Penalty

This is a fee that a borrower must pay the by the lender when the borrower prepays all or part of a mortgage when the amount exceeds  over and above the amount agreed in the contract. There are no set laws that indicates the amount that is allowed to be charged by the lenders bt the normal amount is the greater of interest rate differential or three months worth of interest. 

 

Prime

This is consider to be the lowest rate a financial institution or a bank  charges its best client.

 

Principal

It is defined as the original amount of a loan, considered before interest is added.

 

Rate Commitment

The number of days the lender will guarantee the mortgage rate when approving a mortgage. The length of ate commitment can be between 30-90 days.  

 

Refinance

When the current mortgage obligation is replaced with a new obligation that carries a different terms. Home mortgage is a the most common form refinancing .

When the debt replacement of debt happens under financial hardship, it is referred to as debt restructuring.

A loan may be refinanced for different reasons such as :

1.) to reduce monthly payment by lowering the interest rate 
2.) debt consolidation which allows to combine different debts under one loan that results in longer loan term.  
3.)  Reduce the  monthly repayment amount that results in longer loan term 
4.)  Reduce and or alter risk such as changing the current variable rate ti a fixed rate mortgage. 
5.)  Freeing  up cash which also causes longer loan term. 

Breaking your current mortgage contract and  renewing  at a new rate and a new term, has a penalty attached to it due to the lost interest by the lender which has affected their income. The amount is normally 3 months interest or interest rate differential which ever is greater. 

Knowing This amount will assist you to decide you if you  refinancing  the mortgage is a good idea. The shorter time the remaining from term better it is since the penalty would be  the smaller. The longer the term left on your mortgage,  the larger the penalties would be. 

Mortgages insured by the Canadian Mortgage and Housing Corporation, has a maximum penalty of three months interest after the third anniversary date of the interest adjustment period, or after the third anniversary date from your most recent renewal.

 

Renewal

When the mortgage term ended, your mortgage will be up for renewal. your mortgage will be open for prepayment at this moment in part or in full. The borrower can also decide to  renew with current lender or transfer to different lender. 

When renewing your mortgage, the banks often only offer the posted rates. You have to push a little harder for them to give you a break. They know that most homeowners don’t want to have to shop around, so, they offer you a higher rate and hope that you will take it.

 

Second Mortgage

A debt that is registered against a home which is secured by a second charge on the home.

 

Switch

When a mortgage is transferred form your current lender to a different lender or financial company 

 

Term

The length of time the financing agreement is agreed. The usual  terms available by lenders  are: 6 month, 1,2,3,4,5,6,7,10 year terms. The interest rates shall be fixed for whatever term once chooses.

 

Total Debt Service (TDS) Ratio

This is math calculation that is used by lenders in order to determine the borrower’s capacity for the repayment of the mortgage. The elements involved are : mortgage payments, estimated heating cost, property tax and 50% of maintenance fees as well as any other monthly obligations ssuch as personal loans, lines of credits , car payments, credit card balances and other mortgages. The total of these numbers are then divided by the gross income of the applicants. The acceptable ratio is 40%  and under. 

 

Variable Rate Mortgage

In this type of mortgage the interest rate fluctuates when the prime changes.

 

Vendor Take Back (VTB) Mortgage

A type of mortgage that is  provided to the borrower by the vendor (seller).

 

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FREQUENTLY ASKED QUESTIONS

How can a home inspection help me & how do i order one?

A visual examination of a home to decide the overall condition of the property allows the buyer to protect their investment by knowing the possible flaws that could possibly exist in the property.  The main elements that are checked are components such as roof, floors , crawl spaces, ceilings, attics and walls  as well as heating , cooling, land drainage, and exterior weather proofing as examples. When the inspection is completed the outcome is reported to the buyer in a form of written report in detail within 24 hours of inspection completion.

Inspecting a property prior to purchasing it may ad extra level of protection and a piece pf mind prior to purchasing a property which will make the purchasing decision much easier. Through having a detail inspection a home buyer may indicate a property may need major structural repairs which can affect the purchase decision all together.A home inspection can add extra levels of security and comfort when purchasing a home. The home inspection can be ordered by any professional company that are recognized by the lenders standards within Ontario.

What is the minimum down payment required to purchase a property?

The minimum down payment required  to purchase a property is 5%, however this only applies for properties that are valued lower the 500,000. For properties valued between $500,000-$1,000,000 a purchaser would require to pay 5% for the first 500,000 and 10% on the remaining difference up to 1,000,000. Additionally, the purchaser needs to provide proof that can can show applicable closing costs such as land transfer tax, legal fees, appraisal fees, etc.

Regardless of how much down payment a borrower has in hand minimum 5% of it must be provided through their own funds resources or as a form of gift from a family member and it can not be borrowed.

As a general guideline lenders accept a down payments in a gift form from a close family memberby providing a gift letter indicating that the amount is a true gift and has not been borrowed and must be signed by the gift donor. The gift letter and the funds must be in your possession before the application is received by CMHC (Canadian Mortgage and Housing Corporation ) for approval which is the main body for mortgage loan insurance in Canada..

Mortgages that have less than 20% down payment must be insured by CMHC or GE (Genworth)

In case of purchasing a property utilizing a private mortgage, there is a requirement of Minimum of  25%-30% down payment depending on the location and condition of the property. Private mortgages have more flexibility in terms credit and income requirements which make them ideal for realestate developers and investors. 

 

 Mortgage loan insurance explained

Mortgage loan insurance in Canada is provided by two main Organization such as CMHC ( Canada Mortgage and Housing Corporation)  which is a crown Corporation as well as GE Capital Mortgage insurance company (Genworth) which is a an approved private corporation. Mortgage loan insurance is legallyby law in order to insure the lenders against default on mortgages that carry a loan to value higher than 80%. The insurance premiums range from 0.2%- 6.4% are required to be paid by the home purchaser and borrower and could be added into the total mortgage amount.

Conventional mortgage explained

A conventional mortgage is defined as a mortgage that carries a down payment of 20% or more of the purchase price. There mortgages that have Loan to value (LTV) lower than  80% do not require mortgage insurance.

How can bankruptcy affect me to qualify for a mortgage?

There are certain lenders that do consider to approve you for your mortgage depending on your case and nature of your bankruptcy. In case of private mortgage in Ontario, there are many lenders that will lend private 1st & 2nd mortgages regardless of your credit and or income.

does  child support affect me to qualify for a mortgage?

When you pay child support to another person, essentially he amount paid out will be subtracted from your overall  income before calculating how much mortgage you will qualify for.

In case of receiving a child support by you by another person, the amount received can be added to total annual income  when determining how ,much mortgage you qualify for based on showing proof of consistent receipts based on the lender requirements.

Can gift funds be used as a form of down payment?

Close family can gift funds as a form of down payment which is acceptable by most lenders. It is important to mention when the donor is signing the gift letter , they are confirming that the funds are a true gift and not a loan. In cases the mortgage loan insurance is  needed , CMHC (Canada Mortgage and Housing Corporation) requires the gift letter and its funds to be in possession of the home buyer prior to the package being sent to them. for approval. In case GE Capital there are no specific requirements regarding this.  

 pre-approved mortgage explained

When You are pre-approved for a mortgage you are guaranteed a specific interest rate b a lender for a period of normally 560- 120 days. Tis pre approval is normally carry conditions such as the borrower providing their proof of employment , income as well as proof of down payment brfore the mortgage is fully finalized. Many successful realtors will require the home buyer to obtain pre approvals from their lenders in order to go through the showings of of home buyer desired properties. This is to ensure they are showing the home buyers are shown properties they can afford.

Obtaining a mortgage Pre-approval  is the first initial  step  a home purchaser needs to take before starting  the buying process. In case of Private mortgages in Toronto and Ontario, your Pre approval takes only few minutes unlike traditional banks that take days . Here at Fast Private Lending we ensure you receive your pre approvals quickly with the least amount of documentation and regardless o your credit and income as long as you meet our lenders guidelines.

down payment explained

Home buyers normally do not have the entire funds to purchase a property upfront, and that is the reason financial institutions lend the home buyers the funds in a form of mortgage . In order for the financial institutions and banks to lend you the mortgage the home buyer needs to come up with the initial money in a form of nonpayment .

The down payment is consider as a stake a home owner have in the purchase and is determined by a percentage of the purchase price which will be part of home equity when the property is purchased. .

A  home buyer can reduce the cost of the property in a long term by putting more down payment when purchasing a property which results in smaller mortgage payments and lower interest and that can save lots of money over long term. In case of residential private mortgage in Toronto , Ontario the private lenders require the borrower to provide 25%-30% as a form of down payment and on the commercial mortgages between 30%-40% .

 

How can i purchase a property with  5% down payment?

Lenders in Ontario offer mortgages that are insured with as low as 5% down payment for either new or resale  homes. Since the carrying cost of low down payment purchases are higher due to the added default insurance premiums the home buyer has more cost and responsibilities than of conventional mortgages. 

When borrowing low down payment mortgages your responsibilities are : 

  • legal fees and appraisal cost appraisal 
  • insurance application fee 
  • Mortgage default insurance premium payments are considered even though tit is added to the total mortgage amount owed 

 

How your mortgage can be paid off faster

There are several methods which your mortgage can be paid off faster and you can save :

  • choosing  a  accelerated payment or non monthly payments
  • Increasing the number of payments that are scheduled
  • Making  payments toward the principal amount
  • Doubling -Up the mortgage Payments
  • choosing a shorter renewal and or amortization

How can you use your RRSP to help you buy your first home?

Federal government has introduced a program which allows first time home buyers to utilize their RRSP  savings to assist them toward financing and down payment of their home purchase. Upward of 50% of new home buyer are taking advantage of this program which allows the home buyer to use up to 25 k in RRSP savings for individuals and couples up to 50 k put together to help them pay toward their down payments . The home buyer has up to 15 yeas to repay back the amount utilized from their RRSP.

In order to to be qualified to utilize the RRSP funds, the home buyer must  have the fund deposited in their account for at least 90 days  as well as having to sign an agreement to purchase the subject property.

Utilizing this program allows you to save on taxes since you may use it as tax deductions. How does it work ?

It  does make great financial sense to utilize the savings through your home buyers plan if you have savings , this way you may transfer the amount to your RRSP account 90 days prior to closing date then withdraw the amount from the your home buyers plan. Your $25,000 contribution can be received as refund which will allow you to pay back the RRSP or any other possible expenses that are related to purchase a property.

Utilizing your RRSP to purchase a  home not only allows you to purchase a property sooner but also provides you with significant tax sheltered growth. You may discuss this further with your financial adviser to come up with a personalized  plan.

 

What costs are invoked in purchasing a property?

Firstly you must ensure you have sufficient amount of down payment saved to purchase a property.

In order to qualify for a conventional mortgage you must utilize a down payment of 20% or more, if you are a first time home buyer and the value of your property is lower than 500k you may be qualify for a low down payment of 5% .

Another cost involved is  the closing cost which normally costs the home buyer around 2.5% of the purchase price.

Inspecting the property you are buying is highly suggested since it can reveal any structural or minor flaws withing the property that can affect the outcome of your decision to purchase the property. he inspection needs to be done by a professional company to ensure there are no structural issues with the property. The home inspectors will always provide you with a full report so you are fully informed. The cost of inspection is normally between $300-$500.

Choosing a good lawyer for closing your transaction is very important, it is advised to look for the right lawyer at the right price since the cost can be varying in a big way.

There are also the following cost involved:

1)closing and adjustment costs

2)interest adjustment costs between buyer and seller

3) Land transfer tax ( it is  based on a percentage of the purchase price of the home)

Property insurance also needs to be paid by the time closing the property as well as all the costs involved with moving

 

What is the right length of my mortgage term for me?

As a rule of thumb it is important to know that lower the length of mortgage term lower the interest rate and the length may vary between 6 months to 30 years long.

Home buyers normally choose a 4-5 year term but as long as you have a higher risk tolerance, you may choose a shorter mortgage term in order to pay a lower interest rate.

Some points to consider before choosing a mortgage term:

1. Short mortgage term may be more suitable if you are looking to sell your home in  short terms 

2. In case based on your understanding the interest rates are bottomed out and may not be doping more then long term mortgage terms may be more suitable. Also if you believe the interest rates are high at the moment you should maybe looking at medium length mortgage term so the rates can drop lower by the end of your term. 

3.In case the security is of your concern if you are 1st time home owner, then longer mortgage term may be more suitable for you since it can control your monthly payments to fluctuate.

4. If you are interested in following the interest rates market has to offer by studying it closely then a short term mortgage term may be for you  

Monthly costs of owning a property

Owning a property is a big responsibility and carries a big financial responsibility.

elements such as taxes are not billed in a month to month basis so you may need to calculate them monthly to make sure your expenses are balancing your ome. . Below are examples of some the monthly expenses you are responsible for.

The Mortgage Payment

The monthly mortgage payment is considered to be the largest monthly expense for most people. the payment amount  depends on variables like the term of the mortgage and or its amortization.

Property Taxes

The Property taxes may be paid directly to municipality in which it is proof of payment is  required by your financial institution from time to time or it can be paid included in your monthly mortgage payments.

School Taxes

School taxes are included into the property tax in some municipalities and they may be collected separately and must be paid by the end of school year in a lump sum.

Some other payment responsibilities are  utility bills which includes cable, water, heating, gas and  electricity, telephne and water.

Maintenance 

Costs like painting, repairing the roof plumbing and electrical You will also have to cover the cost of painting, roof repairs, electrical and plumbing, lawn care, drive way and snow removals are also to be mentioned. These also help with the value of the properties within the neighborhood and have an affect on increasing the value of the homes in the area.

Fixed rate mortgage explained

The interest rates involved in fixed rate mortgages are pre determined and are normally between six months to 30 years . This allows the howme owner to manage finances and have a solid idea of how much they need to pay every month.

Variable rate mortgages explained

There are essentially 2 different  kinds of variable rate mortgages.  one of the most common variable mortgages is the one that its payments is determined according to the bank’s prime lending interest rate. When the prime interest rate goes up as the result does the interest rate of the mortgage payment. In the 2nd type of variable rate mortgage, the the payments are fixed for 1-2 years period even though the interest rate can fluctuate monthly. If the interest goes down , bigger portion of the payment goes toward paying off the principal amount and in case rates go up bigger portion will go toward paying off the interest .

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