Are you currently renting or living with your parents? Then this quiz is for you! Test your knowledge or learn some new information, the purpose of the quiz is to be a “fun” introduction to the world of mortgage financing. Buying a home is a large investment; don’t overlook the value of speaking to an experienced mortgage professional before you start house hunting as they can answer any additional questions you may have about the home financing process.
There are no right or wrong answers, just 8 easy yes or no’s. My hope is you’ll use it as a stepping-stone to lead you towards the information you need in order to make an educated decision about your financial future.
1. Do you have a down payment available?
The minimum downpayment required is 5% of the purchase price. There are many downpayment sources that are acceptable and they include savings, RRSP’s, investments, or a gift from an immediate family member. You may also qualify to borrow your down payment, however, that’s not my favorite solution as that’s another payment you’re responsible for in addition to the monthly costs of your new home.
2. Do you know what Mortgage Default Insurance is?
Mortgage Default Insurance protects the lender in the event the borrower defaults on their payments. If you purchase with less than a 20% downpayment, your mortgage will have an insurance premium. The more you put down, the less your premium will be. For example, if you put down 5%, the insurance premium will be 2.75% of your mortgage amount which can be added to your mortgage principal; whereas, a 10% down payment will result in a 2% insurance premium. There are some exceptions to this guideline which a mortgage broker could look into for you.
3. Do you have documentation to prove your income?
Whether you’re an employee, a contractor, or self-employed, you will likely be required to provide some sort of third party income confirmation in order to obtain mortgage financing. Acceptable documents include job letter, paystubs, Notice of Assessments, or income tax returns. If you cannot provide income confirmation documents, there may be a solution called a “stated income mortgage”. The requirements under that program are very different to that of an income-qualifying mortgage, so be sure to discuss the guidelines with your mortgage professional before you make an offer on a property.
4. Do you have good credit?
If you want to be sure you will qualify for the best rates, a good credit rating equates to at least 2 years positive repayment history on at least 2 separate debts each with credit limits of $2500. That means no derogatory credit reporting’s in the past 24 months which would include late payments, collections or judgments. If your credit report shows one or more issues, don’t worry too much as you still have many options available to you. Depending on your credit profile, your mortgage professional will be able to review all the alternatives available to you.
5. Is your debt level manageable?
Owning a property comes with more costs than a typical renter may face. Have you accounted for that in your budget? If you’re having trouble making more than the minimum payment on any of your outstanding debts, you may want to consider aggressively trying to reduce your debt level before buying a home.
6. Are you planning a life change soon?
Are you contemplating a change of jobs or thinking of going back to school? A material change in your financial profile could affect your affordability which should be taken into consideration when looking at the timing of purchasing a home. And in addition to that, a property purchased in today’s market is not expected to increase in value anytime soon so keep that in mind when financial planning.
7. Are you a frequent traveller?
If you see some long trips in your future or even a temporary move abroad, renting can provide additional flexibility and minimal commitment as owning property is a big responsibility. If you choose to take off for an indeterminate amount of time, you will still be responsible for all costs of owning your home and the repercussions for default are quite serious should you ever fall behind in payments. Alternatively, if you decide to rent your property out while away, be aware of the pros and cons of that decision as you would be an absentee landlord. If you are truly unsure of what to do going forward, start by deciding what kind of lifestyle you want to have and how home ownership fits into that picture.
8. Does commitment scare you?
When you get a mortgage, you will be asked what term you want. Will that be for 1 year, 5 years or even up to 10 years? If you break that term early for any reason, unless you took an open term, you will be charged a payout penalty which could be quite significant. For that very reason, financing a home can be much more of a commitment than renting. In addition to that, if you change your mind about the property you just recently bought, selling it quickly and for a profit could prove problematic in today’s economy.
Buying a home can be intimidating and this quick quiz should have provided you with some conversation starters to take to your favorite mortgage professional, if you haven’t already. In addition to having a financing consultation, I recommend meeting with an experienced real estate professional to discuss property expectations for your price range. And even if you’re not ready to buy yet, it’s never a bad idea to do a little preliminary research.