The first step towards purchasing a home is knowing what you can afford. This all starts with getting pre-approved for a mortgage. From there, you can narrow down your search and eliminate those blue-sky homes if they are out of reach.
When you meet with a mortgage broker they will assess what you can afford at the best possible rate for you, the buyer. A lender has - and should have - your best interest at heart. However it’s okay to challenge them to make sure you are getting the best service and mortgage rate on the market.
Here are 10 questions you can ask your mortgage lender as you get started on your home-buying journey:
1. How long have you been in the business?
This is an important question to ask for a couple of reasons. Firstly, you want to be working with an experienced lender. It can take up to five years for a mortgage broker to learn the market, understand credit and be able to apply it. A new broker may not know how to effectively weigh the risk vs. reward. With experience comes the expertise to make the less obvious decisions when it comes to getting you a rate that works for your goals and lifestyle.
2. What factors can affect my approval?
For the lender to fully approve and agree to lend you money there are a few more numbers beyond the list price that they need to crunch into the total equation before go time: the total cost of the home, which includes property taxes, condo fees, maintenance fees – the actual agreed upon price – it all can affect what you are approved for. Any changes in your credit score and employment status can also impact your approval status.
3. What type of mortgage should I consider?
The two most popular options are fixed and variable interest rate mortgages. A fixed rate mortgage is offers a specific rate that is locked in for the term, which is appealing as you know exactly what to expect. Whereas on the other hand, a variable rate changes with according to market interest rates. Hard to predict, ask your broker to help give some research into historical market data and to determine how equipped you are for risk to advise you in the best direction to go.
4. What is the Interest Rate & Annual Percentage Rate?
And is the rate you’re quoting me the lowest rate for that term? There’s a thing called “scaled pricing” which is where a lender offers two rates for the same mortgage: a lower, competitive rate with fair commission to the lender, and a higher, less competitive rate which brings more money into the lender’s pocket. Do your research; know what the competitive rates are out there in the market. If you ever have any doubt – ask for a second opinion.
5. How much do I need for a down payment?
In Canada you can purchase a home with as little as 5% down on a home less than $1M. Homes over $1M require a minimum 20% down payment. The down payment is calculated as the dollar value of the down payment divided by the home price. Your mortgage broker can help you decide how much of a down payment you’ll need in order to get the home you want and stay within budget.
6. When can I lock the interest rate, and will this come at a cost?
Interest rates might fluctuate from the time you apply for a mortgage to when the sale is closed. Talk to your lender about locking in a good rate, and what fees may apply if you were to do so.
7. What documents will I have to provide?
Make the most of your meeting with your lender by coming prepared with any required documents. These may include bank statements, tax returns and a recent pay stub. Ask ahead of time to see what they will need you to bring.
8. What is the drop rate policy in respect to pre-approvals?
A good lender will pre-approve you for a rate that is valid for 120 days. If rates drop during that 120 day timeframe and you are about to close on a house, you should still be able to qualify for a lower rate.
9. Do you guarantee on-time closings?
The purchase contract on the sale of the house contains a date to close escrow. If the lender is not able to close on time, you as the buyer could face extra costs, for example an increased interest rate and additional expenses to reschedule the move. Avoid any problems ahead of time by ensuring your lender’s guarantee to close on time.
10. Is this really the best product for me?
Have your lender explain the pros and cons, take into account your financial situation and budget to make sure you are getting the best product to suit your needs.