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HOW TO GET A MORTGAGE. ULTIMATE GUIDE

By Thanh Phong Trieu | Buy

Mar 17
shop mortgage montreal
[Reading Time: 10 min]

My experience as a mortgage specialist taught me that most banks will consider giving you financing when your credit score is around 680 and above. The higher your score, the better the mortgage conditions you can get.

Understanding your credit score

The two main credit reporting agencies in Canada are Equifax and TransUnion. A credit score can range anywhere between 300 to 900 pts.

My experience as a mortgage specialist taught me that most banks will consider giving you financing when your credit score is around 680 and above. The higher your score, the better the mortgage conditions you can get.

If your credit score is lower than 680, your bank will often require a strong co-signer or simply reject your request. Keeping a good score is very important. To do so, you need to pay on time, keep your balance low, not exceed your limit and not apply for many credits in a short period of time.

There are two common misconceptions about credit score:

‘’Shopping around for the best interest rate will impact negatively on your credit score.’’

According to the Q&A page on Equifax and TransUnion website, this is not true. This common misconception has been widely spread by the mortgage industry to deter buyers from shopping around.

Answer from Equifax:

Q.  Does every inquiry impact credit scores? 

A. Simply put, an inquiry occurs when you or another company or individual requests access to your credit report. There are two types of inquiries: “hard” and “soft” inquiries. 

Hard inquiries may negatively impact credit scores. These result from a company or individual checking your credit reports in response to your application for credit. Examples of hard inquiries would be those resulting from your application for a credit card, a vehicle loan or a mortgage. 

One thing to know: If you’re shopping around for the best loan terms on a vehicle or mortgage loan, generally only one of those hard inquiries with a specified window of time will impact your credit scores. Depending on the credit scoring model used, the time period is typically 7 to 45 days. This exception doesn’t apply to credit cards, though – if you apply for multiple credit cards, each hard inquiry may impact credit scores.”

Answer from TransUnion:

Q. Will I be penalized for shopping around for the best interest rate?

A common misconception is that every inquiry decreases your credit score. This is not true. While an inquiry is recorded on your personal credit report every time you, one of your creditors or a potential creditor obtains your credit report, the presence of inquiries has only a small impact on your credit score. Many types of inquiries (such as employment, collection, insurance, rental, your inquiry into your own file and account review inquiries) have absolutely no impact. Most scoring models take appropriate steps to avoid lowering your score because of multiple inquiries that might occur as you shop for the best car or home loan terms.”

Lower credit score automatically means a higher mortgage interest rate for the buyers.

Again, this is false! Think of your credit score as a passing grade in school. At 60%, you score poorly, but you still pass. So as long as your credit score passes (around 680 on average), banks will still lend you money on certain terms and conditions. Most buyers with a ‘’weak’’ credit score are generally too scared to negotiate fearing to lose their mortgage and property. In this situation, your interest rate discount will depend even more on your skill to negotiate if you have a passing score!

With ‘’weak’’ credit score buyers, there are always some exceptions to the rule. The example above cannot be applied to all cases. It is always in your best interest to make sure to be well advised by a professional before taking any decisions.


Pre-approved mortgage

Not getting a pre-approved mortgage is the most lethal mistake a buyer can make. You need to get pre-approved by a bank before buying a property. My many years of experience as a mortgage specialist and as a realtor made it very clear to me that this is a must for all buyers. So why is this so important? Three reasons come right to mind:

Stay competitive

As we know it, most of the greater Montreal area is a seller’s market. Which means, being in a multiple offer situation happens quite often. So not having a pre-approved mortgage makes your offer less competitive vs other buyers that do have it. Some sellers even make it a condition to present any promise of purchase.

Wasting your time

Too often, have I seen buyers shopping for months, sometimes years, Finally putting an offer on their dream house, falling short, because the bank wouldn’t lend them enough money to finance their purchase.

Bitter love

For buyers who have put an offer rejected by banks. After finding the courage to shop in a lower price bracket, buyers will find it very challenging. Unconsciously, they will always compare a house at a lower bracket with their dream house they could not get because they did not have any approval. Removing that comparable from their minds is a big challenge. For others, this novice mistake is too much to bare and some buyers will get discouraged and give up on their dream of buying a first home.

Be aware: your pre-approved mortgage is not a sure thing. If something happens and alters your credit score before finding your dream home (financing a car, furniture, appliance or not paying on time), your loan may still fall through.


Shopping for the best mortgage rates

With the rising of selling prices and interest rates, getting the lowest interest rate becomes something essential. Sometimes, even contacting different mortgage specialists within the same lender can result in a different set of conditions. So to get the best conditions for your mortgage, you need to shop, shop and shop some more.

But first, here are some basic lingo and valuable tips that you need to know before going shopping.

Lenders vs. mortgage brokers

Lenders such as banks, trust companies, and credit unions offer their own mortgage products. To get the best deal out of them you have to be a skilled negotiator and deal with each of them individually.  

On the other hand, mortgage brokers sell mortgage products provided by partnership lenders. In other words, they are mortgage middlemen. Their job is to shop around on your behalf for the best conditions possible.

The two main upsides are:

  • If you don’t like shopping around or to negotiate, a mortgage broker (such as Dominion Lending, Multi-Prêt, etc.) is an easy way to shop with multiple lenders all at once. It is like a one-stop-shop.
  • Each lender can have its own internal mortgage approval criteria. Mortgage approval could be easier to obtain with some lenders while being tougher with others. Mortgage brokers have access to multiple lenders. Good mortgage brokers are able to advise you on which lenders might be more suitable for your specific financial situation. My experience taught me that only a small percentage of mortgage brokers are experienced enough to do this efficiently. Shopping for the right professional is not that easy unless you have the knowledge to test them.

The two main downsides are:

  • They have signed a partnership with multiple lenders but not all. So if they don’t have a partnership with lenders giving the best conditions, then they cannot give it back to you.
  • They are a middleman, if you are a skilled negotiator, by going directly to the lenders, you can cut off the middleman and get a lower rate by signing with them.

if you don’t know where to start, I would suggest you shop with a mortgage broker. Don’t sign any contract with them that commits you at this point. Narrow down what’s suitable for you. Ask who the lenders are then go negotiate directly with them. I was always able to beat mortgage brokers’ conditions by negotiating directly with lenders.

Conventional vs. insured mortgage

Conventional mortgages refer to a loan where the buyer puts a minimum of 20% in down payment. If the buyer puts less than 20%, this loan would be referred to as an insured mortgage (aka high-ratio mortgage).

Furthermore, all high-ratio mortgages must be insured by either the Canada Mortgage and Housing Corporation (CMHC), Genworth Financial or Canada Guaranty. The cost of this insurance protection ranges from 2.5% (for a down payment of up to 20%) to 4.0% (for a down payment of 5% or less).

This insurance cost is financeable on top of your mortgage. But don’t forget the 9% insurance sales tax which needs to be paid at the notary.

Term vs. amortization

The term of a mortgage represents the length of time you are committed to the mortgage rate. It varies from 6 months to 10 years. The most popular mortgage term is a 5 years fixed rate.

On the other hand, amortization refers to the length of time you need to pay off the entire mortgage loan. For a conventional mortgage, in Canada, it could be as long as 35 years. An insured mortgage is for a maximum of 25 years. The longer the amortization, the smaller your mortgage payment will be. But, this will, in turn, increase your total interest paid at the end of your term.

Fixed vs. variable rate mortgage

The fixed-rate mortgage is a loan that has a fixed interest rate for the entire term of the loan. This is the most common type of mortgage. It appeals to people that want to pay the same predictable mortgage payment amount for the entire term.

A variable mortgage rate has an interest rate that is adjusted (as often as monthly) to reflect market conditions. This means, if the prime rate (rate given by the bank of Canada) goes up, your mortgage rate goes up and so does your payment, and vice versa.

People that choose this product are willing to take the risk that: interests may go up and down in exchange for a lower rate than a fixed-rate mortgage at the moment they choose this option.

Open vs. closed mortgage

An open mortgage gives homeowners the chance to prepay any lump-sum up to the full mortgage loan, at any time, with no penalty before the end of its term. Since this option has no penalty, open mortgage rates are always higher than closed ones.

A closed mortgage gives homeowners the chance to prepay only a limited lump-sum of the mortgage loan without any penalties before the end of its term. If that limit is reached, any prepayment above that limit will incur a penalty.

For homeowners thinking about selling in the near future, an open mortgage loan could be the solution to minimize their penalty.

There are many more lingo available and more in-depth elements to take into consideration when shopping for a mortgage loan. Make sure to talk to a specialist near you or don’t be shy to educate yourself.


Take advantage of government mortgage programs and more

There are many financial programs to help homeowners. It could be a good idea to use them to your benefit! These programs go from a refund of a land transfer tax to giving you a hand for paying your renovations. For most of them, the good thing about these programs is that you can be eligible to more than one at the time. Here are some of the most common examples:

Home Buyers’ Plan (HBP)

You can use up to 25,000$ from your registered retirement savings plan (RRSP) as a down payment to buy or build a qualifying home for yourself or for one of your relatives with a disability. As a couple, you can qualify up to 50,000$. To be eligible, you must be considered as a first-time homebuyer. Here is the checklist to see if you are qualified for a mortgage loan:

  • At the time of the withdrawal, you are a Canadian resident
  • You intend to live in the property as your primary residence within one year of the purchase.
  • Your RRSP funds must have been in your account for at least 90 days prior to the withdrawal. Normally, locked-in or a group RRSP cannot be withdrawn.
  • Your RRSP must be withdrawn within 30 days of signing a deed of sale at the latest.
  • You, your spouse or common-law partner haven’t owned a home within the last four years.
  • If you have used the HBP before, your outstanding balance must be at zero

For more details about this program, please visit the Canada Revenue Agency.

Home Buyers’ Credit

The city of Montreal offers three major financial programs to help first-time buyers (or homeowners that are buying a home) to help with their closing cost and renovation expenses:

Green Renovation Tax Credit

This program (aka Rénovert) encourages homeowners to invest in recognized eco-friendly home renovations that have a positive impact on the environment and improve their dwelling’s energy efficiency.

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About the Author

With my extensive background in finance, work experience and my love to share my knowhow, I have been able to make the most novice clients become a smarter and savvier buyer, seller or investor.

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