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

Understanding your credit score

The two main credit bureaus in Canada are Equifax and TransUnion. The credit score range can be anywhere from 300-900.

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

A score lower than 680, your bank will often require a strong cosigner 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 myth has been widely spread by the mortgage industry to scare buyers from shopping around.

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

Again, it is not true! Think of your credit score as a passing grade in school. At 60%, your grade is bad but you still pass. So as long that your credit score is a pass (around 680 on average), the banks will lend you the money conditional to some conditions. Most of the “bad” credit score buyers are too scared to negotiate fearing to lose their mortgage and property. Your interest rate discount will depend even more on your skill to negotiate if you have a passing score in this situation!

There are always some exceptions to the rule with bad credit score buyers. The example above cannot be applied to all cases. So make sure to be well advised by a professional before taking a decision.


Pre-approved mortgage

Not getting a pre-approved mortgage is the top mistake a buyer can do. My many years as a mortgage specialist and as a realtor made it very clear to me that this is a must to all buyers. So why is this so important? Three reasons come right to my mind:

Not competitive

As we know it, most of the greater Montreal is a seller market. Which means, being in a multiple offers situation happens quite often. So not having a pre-approved mortgage make your offer less competitive vs. those with it. Some sellers even make it a condition to present any promise to purchase.

Wasting your time

Too often, I have seen buyers shopping for months, sometimes years, to finally put an offer on their dream house to discover later the bank won’t lend them that much financing.

Bitter love

For buyers who have put an offer rejected by the banks. After finding the courage to shop at a lower price bracket, buyers will find it very challenging. Unconsciously, the buyer will always compare the house at a lower bracket with their dream house they lost when they didn’t have any approval. Removing that comparable from their mind is a big challenge. For others, this novice mistake is too much to bare and the buyer will get discouraged and give up on their search.

Be aware: your pre-approved mortgage is not a sure thing. If you do something to alter your credit score before finding your dream home like financing a car, furniture, appliance or not paying on time, your loan can still fall through.


Shopping for the best mortgage rates

With raising selling prices and interest rates, getting the lowest interest rate becomes something very sought out. 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 sell 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 their partnership lenders. In other words, they are mortgage middlemen. Their job is to shop around on your behalf within their partnerships for the best conditions possible.

The two main upsides are:

  • If you don’t like to shop or negotiate, a mortgage broker (such as Dominion Lending, Multi-Prêt, etc.) is an easy way to shop at multiple lenders all at once. It is almost like one stop shop.
  • Each lender can have its own internal mortgage approval criteria. A mortgage approval could be easier with some lenders while it could be tougher with others. By being able to have access to multiple lenders, great mortgage brokers would able to advise you on which lenders might be more suitable for your specific financial situation. My experience tells me that there is only a small percentage of mortgage brokers that are experienced enough to advise 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 the lender giving the best conditions, then they cannot offer the best offer to you.
  • They are a middleman, if you are a skilled negotiator, by going direct 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. With all my past experience, I was always able to beat the mortgage broker’s conditions by going directly to the 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 for this insurance protection ranges from 2.5% (up to 20% down payment) to 4.0% (for 5% down payment).

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 to a maximum of 25 years. The longer the amortization, the smaller your mortgage payment will be. This will, in turn, increase your total interest paid.

Fixed vs. variable rate mortgage

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

People that choose this product are willing to take a risk that the interest can go up and down in exchange for a rate lower 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 the closed mortgage rate.

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 the homeowners thinking about selling in the near future, an open mortgage 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. Make sure to talk to a specialist near you or educate yourself.


Take advantage of government mortgage programs and more

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

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 a related person 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 :

  • 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 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 at the latest within 30 days of the signing the deed of sale.
  • 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 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 green credit program (aka Rénovert) encourage homeowners to invest in recognized eco-friendly home renovations that have a positive impact on the environment and improves 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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