Nowadays, everyone knows one thing: if you want to finish up the bidding on the house quickly and secure ownership of it, you need to pre-apply for a mortgage. However, the details of what sort of mortgage you should get and what you can do to maximize your chances of being approved for one are murky. So, let’s take a closer look at what you need to know before applying for a home loan!
Try to maintain a good credit score
Your credit score is one of the most important things you need to understand before applying for a home loan. You see, your credit will be played on a ‘score’ from three to nine hundred and, as such, will earn you a place in one of five categories. These categories are Excellent, Very Good, Good, Fair, and Poor in descending order. In general, your credit score is a direct reflection of your financial health. In other words, it is used as proof of whether or not you can pay off any loan you take in an attempt to make a foray into the house market. If your personal history with banks and prior loans is filled with missed payment dates, going into the red often, and other similar problems, you are unlikely to get approved for a loan.
A bigger down payment is better
Let it be immediately clear that before applying for a home loan, it is always best to save up as much money as you can for a down payment. Now, there are some basic rules in place to follow if you’re in doubt about how much you should spend. If a home costs under five hundred thousand dollars, you need to pay only five percent of its value as a down payment. If the price is over that amount, but less than a million dollars, then ten percent is required. Anything over that requires you to pay at least twenty percent of the home’s value upfront as a down payment. However, the more you pay upfront, the better the terms you’ll be able to get when taking out your loan. Note it’s smart to consider whether a home is overpriced if thinking about committing to a large down payment.
The different types of mortgage available in Canada
Fixed rate mortgage
A fixed-rate mortgage is one of the best deals you can get. In simplest terms, it is a mortgage whose interest rates remain constant. They won’t change from when you signed the loan contract. Any payment you make will go towards paying off a static debt.
Variable rate mortgage
A variable rate mortgage, on the other hand, is extremely risky. In theory, your mortgage rates could go down, which would effectively make your debt smaller and easier to pay off. However, just as, if not more likely is encountering a scenario where the interest rates spike up, exponentially increasing the amount of debt you need to pay off.
Conventional mortgage
Now, a conventional mortgage is, in a way, similar to a fixed-rate mortgage. In both cases, the debtor does not have to worry about sudden additions to the amount they owe. However, the difference lies in the ease of getting the mortgage and the requirements to qualify for it. You see, while the terms of a conventional mortgage are typically much more lenient, and you can get them faster, you need to be able to pay at least twenty percent of the home’s asking price as a down payment. This means you’ll need to have considerable cash on hand already.
High-ratio mortgage
As a counterpoint to the conventional mortgage, we have a high-ratio mortgage. Again, it is a solution that is similar to a fixed-rate mortgage. But this time, the difference is in the sense that it is often more easily approved for ‘risky’ clients. This is, after all, a mortgage that is used when you need your mortgage to cover more than eighty percent of a home’s value.
Open mortgage
An open mortgage is the only type of mortgage that gives you relative freedom when it comes to the manner in which you’d be paying it off. Meaning that you can freely make additional payments when your financial situation allows outside of the obligatory monthly ones. Doing so will also not incur any additional charges or shifts in your interest rates.
Closed mortgage
A closed mortgage, on the other hand, has the strictest repayment schedule out of every other mortgage type on our list. Not only that, but it is also impossible to renegotiate its terms or refinance it before its maturity. You may only follow the exact terms set when taking out the loan and pay strictly according to the schedule.
Look into some of the incentives too
If you are worried about applying for a home loan and how best to do it, chances are you are a first-time home buyer. In this case, you potentially qualify for several government incentives: The Home Buyer’s Plan, The First-Time Home Buyer Incentive, the Home Buyer’s Amount, and The New Housing Rebate. They will either qualify you for better mortgage terms or offer minor benefits, such as tax credit or being able to draw funds from your Retirement Savings Plan. While the benefits are not huge because you’ll need to worry about paying for movers and storage, the experts from Worldwide Moving Systems advise they are always worth pursuing.
Keeping an eye on your finances is a good idea
Despite being able to secure a mortgage, the final thing you need to know before applying for a home loan is that budgeting and a proper approach to your finances will be invaluable from the start. As we said before, saving money and eliminating debts will increase your chances of getting a mortgage. At the same time, having a proper budget set up will help prevent overspending. And even help you sort out how much money you’d have regularly available after the home purchase. This is invaluable for deciding whether you should buy a house or a flat too, so it’s best to get it all sorted before applying for a mortgage.
The importance of prep work
Now that you are aware of what you need to know before applying for a home loan, you should be able to maximize your chances for everything to go well. So long as you keep our advice in mind, we are sure that you’ll be living in your new house soon!