If you’re thinking about buying a home, you’re likely wondering how you’ll pay for it. So, what is a mortgage, anyway?
A mortgage is a loan given by a bank of a lender for the purchase of a home. The loan agreement will outline things such as the interest rate to be paid to the lender, the amortization period for the mortgage, the repayment terms, and the length of the term at which point a renewal will be required, either with the same or a different lender.
For the vast majority of homebuyers, a mortgage is an essential part of the purchasing process, and your choices now will impact your finances for years to come. To help make the most of your real estate investment, read on to gain a deeper understanding, so you can make an informed decision when the time comes.
Check Your Credit Rating
Before you apply for a mortgage, be proactive and get a copy of your credit report. Once you have it, thoroughly check for errors and other items which may need to be addressed. Since your ability to get a lower mortgage rate largely depends on the information contained in your credit report, it’s important to ensure that all the information is correct.
Get Organized
Prepare the necessary documents in advance. This will save you time and ensure a smooth application process. Depending on the type of mortgage you’re applying for and your employment situation, various documents may be necessary.
Get the Stamp of Pre-Approval
Getting pre-approved helps you understand how much you can borrow before going through the mortgage application process. This is an important step as it will influence your decision on the upper price limit of your purchase, and will provide some realistic boundaries before diving head-first into the process.
Consider the Future
Your plans may change, but the end goal should always be to reduce financial risks. Think about how long you’re planning on staying in the house, whether or not you should consider saving for a larger down payment, and how much of a risk you are willing to take.
Different Types of Mortgages
Understanding the options and procedures involved with buying real estate will be hugely beneficial to your plans and finances.
- Conventional: If you have 20% or more as a down payment on the property, your bank lender will offer you a conventional mortgage.
- High-Ratio: This allows you to borrow more than 80% of the property’s purchase price. Keep in mind that with this option, you will also have to pay mortgage loan default insurance.
- Vendor Take-Back Mortgage: This is a type of financing arrangement whereby the seller of a property lends money to the buyer to help them buy it.
- Assumable Mortgage: The buyer is allowed to take over the same monthly payments at the same interest rate that the seller was paying, until the seller’s original agreed-upon term is completed. At that point, the buyer will need to qualify for a new mortgage.
- Blanket Mortgage: This is restricted to housing co-ops in most cases, and occasionally condos. The unit owners will pay their own portion of the mortgage either by qualifying for a portion of the blanket mortgage, or by obtaining their own mortgage.
- Portable: The borrowed is allowed to transfer the loan from one property to another without penalty
