A mortgage is not a subject we learn about in high school, although I wish it was. Credit, interest rates and qualifying for a mortgage will affect your lifestyle going forward, however, where is one supposed to learn about this? Some hear about them through friends or family, or maybe online, though the mortgage market is a changing and evolving model so it can be a challenge to ensure you’re getting accurate information. I’ve been working in the mortgage industry for over 30 years and even I still don’t know everything there is to know! Keep reading to see how you can easily separate fact from fiction;
- You can’t get a mortgage if you have a low credit score
You shouldn’t judge a book by its cover and neither should your lender as your credit score is only a small piece of the mortgage approval process. In addition to income, downpayment, assets and property details, a potential lender also considers the contents of your credit report, which includes debt levels and repayment history. While there are some lenders who have strict minimum credit score requirements you must meet in order to qualify with them, there are other lenders out there who don’t care about credit as much, and they want your business. Be aware if you do have some credit issues, you may be charged a higher rate or could be asked to make a larger downpayment to mitigate the risk to the lender. Another option is to ask for family support in having a relative cosign with you until such time as your credit improves enough for you to qualify on your own.
- If you went bankrupt, you have to wait 2 years until you can apply for a mortgage
Now that we know a low credit score won’t stop you, how about a bankruptcy? It is a common belief that if you have a prior bankruptcy or consumer proposal on your credit report, you have to wait for many years before you can qualify for a mortgage. We all know bad things happen to good people and as long as you do all of the right things after your discharge date there may be the option of qualifying at a reasonable rate after only 2 years. Having said that, you may be required to put down more than the minimum of 5% and you would have to demonstrate a minimum of 24 months of satisfactory rebuilt credit, good job stability and some pretty good savings habits. If you are fully prepared to put down an even larger downpayment and pay a slightly higher interest rate, you may even apply for a mortgage a day after you’re discharged without the 24 months of re-established credit.
- The maximum amortization available is 25 years
The amortization is the time it could take to pay off your mortgage in full. The term you choose will determine the interest rate you will be charged and what your minimum required payment will be. A shorter amortization means a higher payment amount. Some lenders still offer a 30 year or even a 35 year amortization as long as you have enough of a downpayment to avoid the requirement of high ratio mortgage insurance. The longer amortizations will lower your mortgage payment slightly and allow you to qualify for a higher mortgage amount, however, depending on the lender, those benefits could be offset by a higher rate so be sure to crunch the numbers before committing to the longer amortization.
- My bank will give me the best mortgage rate because I have been with them for so many years
Maybe they will as it would be nice if they rewarded your loyalty to them, though maybe they won’t and you should have a look elsewhere. If a low rate is your number one and only priority, compare the rate offerings of a few different sources before you start negotiations with your bank. Do be aware rate is not always the most important benefit of a mortgage as there are many other features and benefits that should be considered.
- I have to pay to use a mortgage broker/independent mortgage consultant
The great news is you can benefit from our experience free of charge as we are paid a commission by the lender who facilitates your financing. For myself specifically, the only exception to that rule is when the services of a private lender are required due to some issue with your ability to qualify. This is because the private lenders do not pay a ‘finders fee’ to the mortgage broker involved.
- You will be foreclosed on if you miss a mortgage payment
Foreclosing is a costly measure and most lenders will work with you to resolve mortgage repayment issues rather than foreclose. The important action is to do everything you possibly can to address the issue before it becomes a problem. Contact your mortgage lender as soon as possible if you think you may have trouble making your mortgage payment to see if some acceptable arrangements can be made for you.
- I’m locked into my mortgage for the whole length of my term
Some mortgages include “unique” payout restrictions in exchange for a deeply discounted interest rate that you should be aware of before you choose that term. The majority of mortgage products available these days do allow you to break your term early in exchange for paying a payout penalty. The penalty is based on the time left when you break your term and the remaining balance owing on your mortgage or simply a 90-day interest penalty. Talk to your existing lender to obtain a payout penalty figure.
- It’s not worth it to refinance my mortgage if I have a payout penalty
Refinancing your mortgage allows you to access equity in your home, lower your mortgage payments or reduce debt. Whatever your reason for a refinance, don’t let a payout penalty keep you from looking further into it. Your mortgage professional should be able to create a few amortization scenarios to determine if it is financially beneficial to include your payout penalty in your new mortgage amount and still come out ahead.
So there you have it, the truth about mortgages, but that’s just the tip of the iceberg. There is so much more to know about credit, interest rates, and mortgages. The best way to ensure you’re receiving accurate and applicable information is to speak with an experienced mortgage professional about your financing needs.