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Mortgage Planner, Advisor and Broker


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FIRST-TIME HOMEBUYING

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How Do Mortgages Work?

A mortgage is ‘the pledging of property to a creditor as security for the payment of a debt.’ It is a legal contract under the terms of which, if you don't pay the loan back (including interest), the lender can acquire your house, and dispose of it to obtain the loan amount, including legal and administration fees. This is called foreclosure.

Your down payment is the lump sum you pay up front that reduces the amount of money you have to finance. You can put as much money down as you want, or you can sometimes pay as little as 5 percent. The more money you put down, the less you have to finance, and the lower your monthly payment will be.

Your mortgage payment is made up of:

Principal: The total amount of money you are borrowing.

Interest: The money the lender charges you for the loan. It is a percentage of the total amount you borrow.

Property Tax: Property tax is levied by your municipality. You have the option of paying this annually, by installments, or adding it to your mortgage payments. If you choose the latter, the lender will pay your taxes by the due date each year. Default on your property taxes has the same ultimate consequences as failure to pay your mortgage.

Insurance: A variety of insurance coverage comes into play with a mortgage. All are optional depending on the circumstances, generally with the exception of mortgage insurance for high ratio mortgages.

Mortgages are typically paid off in incremental payments that gradually chip away at the principal of the loan. This is called amortization. The portion of your payment that goes to pay the interest is much higher than the portion that goes to the principal in the early years.

These payments are precisely calculated and scheduled to pay off your loan in a specified period of time.

To help you feel prepared and informed, here are some of the steps involved in buying a home. If there's anything you're unsure about, please don't hesitate to talk to me. I’m prepared to do everything I can to make things proceed smoothly, quickly and effortlessly.

Affordability and Financing

Thoroughly review your current income and expenses. How much will your new mortgage add to your monthly expenses? Before you embark on your housing search, get a pre-approved mortgage. A pre-approved mortgage lets you know how much money you qualify for, so you can shop in comfort.

Lenders determine affordability by looking at your Gross Debt Service ratio (GDS) and your Total Debt Service ratio (TDS). The GDS ratio is based on what you can afford to pay each month; it includes mortgage payments, taxes and heating. Maximum GDS ratio is 32%. The TDS ratio includes everything covered under GDS plus all your other financing obligations. Maximum TDS ratio is 37% (40% if it's CMHC).

I can help you do a complete analysis based on net income and projected budgets to determine what you can afford.

This pre-qualifying stage is also the time to find out about the differences between conventional mortgages and high-ratio insured mortgages. Ask about assistance for first-time homebuyers such as the 5% down payment allowed under the "First Home Loan Insurance Program" sponsored by CMHC, and the federal government's "RRSP Homebuyer's Plan", which lets you use funds from your RRSP to purchase a home.

I will also go over closing costs with you, like land transfer taxes, legal fees and other disbursements. A good rule of thumb is to budget about 3% of the purchase price for closing costs. And don't forget: if you buy a new home from a builder, you'll pay 5% GST on the total purchase price.

Before you're pre-qualified, I can run a credit bureau report for you.

Once you're pre-qualified, the interest rate is guaranteed for 60 to 90 days (possibly 120 days) from the time of your application. If rates drop, you'll get the lower rate; if they rise, you're covered. And just because you pre-qualified with a certain financial institution, you're by no means committed to that lender. I’ll shop the market to get you the best possible deal!

Before You Sign the Offer

Once your offer is accepted, your lawyer will order a series of searches from various municipal offices to ensure that the vendors haven't been sued, that they've paid all of their property taxes and water, electric and gas bills, and that there'll be no outstanding mortgages or liens on the property once you become the owner.

Your lawyer will notify the property tax offices as well as the utility offices that you will be the new owner as of the closing day.

A few days before closing, you'll visit your lawyer's office to sign the closing documents. Bring a certified cheque for the balance of the closing funds, because the lawyer pays the relevant parties on your behalf (land transfer to the government, balance owing to the vendor, etc.). Part of that amount covers the lawyer's fee and disbursement costs. The lawyer obtains the mortgage funds directly from the institution that's funding your mortgage.

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Since our successful purchase last year, we feel confident in recommending Dara’s professional service to our friends."
Laura Wallis, Kitsilano, B.C.

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