Owning a house is a significant milestone, but the path to homeownership can be hindered by simple mistakes made during the mortgage process.
To ensure a smooth and stress-free journey to home ownership, it’s crucial to be aware of the common pitfalls and how to avoid them.
We have compiled a comprehensive list of 15 mortgage mistakes that can impede your path to home ownership in Canada.
By avoiding these mistakes, you can increase your chances of obtaining a mortgage approval quickly and efficiently.
Avoiding these mortgage mistakes will bring you several steps closer to realizing your dream of home ownership.
Let’s get started!
The 15 Mortgage Mistakes to Avoid
- The Reality of “No Down Payment Mortgages” in Canada
- Not Planning for the Mortgage
- Go House Shopping Before Securing a Mortgage
- Applying for Other Credits During a Mortgage Application
- Not Considering Long-Term Home Ownership Goals
- Don’t Know How Fixed and Variable Rates Work
- Not Considering the Impact of the Amortization Period
- Not Understanding the Legal Nature of a Mortgage
- Know Income Sources are Different
- Changing Jobs During the Mortgage Application Process
- Not Considering Mortgage Brokers
- Thinking Credit Scores Are All the Same
- Income Misrepresenting in Mortgage Application
- Not Considering Cost of House Ownership
- Not Considering Closing Costs
The Reality of “No Down Payment Mortgages” in Canada
Contrary to popular belief, there is no such thing as a “no down payment” mortgage in Canada.
While buying a house with a low down payment of 5% of the purchase price is possible, a completely zero down payment is not an option in Canada.
The down payment must not only come from you. It can be a gift from immediate family members, grants, or other loans.
Depending on your credit score and how you plan to use the property, the minimum down payment for a mortgage to buy a house ranges from 5% to 10% of the house price.
The minimum down payment for borrowers with bad credit scores is 20% of the house price.
Learn More: 13 Ways The Fed Is Making Housing Affordable For Canadians
Learn More: 15 Mortgage Down Payment Sources For Easier Home Buying
Not Planning for the Mortgage
Obtaining a mortgage can be daunting, even for seasoned homeowners, if not properly planned.
This may result in losing control over the mortgage process and cause significant stress.
To have a successful and hassle-free mortgage experience, planning is crucial.
This involves evaluating your financial resources, establishing a budget, outlining your family and lifestyle needs, and creating a clear plan for managing your finances.
Go House Shopping Before Securing a Mortgage
Many buyers make the mistake of starting house-hunting before securing a mortgage.
This can lead to disappointment and frustration.
The proper sequence is to start with securing a mortgage.
It involves qualification and pre-approval. These should help you determine the maximum house price you can afford.
This step is crucial because it gives you a clear understanding of your financial limitations to help you avoid falling in love with a home outside your budget.
For example, you want to avoid situations shopping for $600,000 where you can only qualify for a $400,000 house max.
You can set realistic expectations and make informed decisions about the homes you view.
Additionally, considering purchasing a home is possible if you secure your mortgage before starting house shopping.
Learn More: How to Get Pre-approved for Mortgage Online with approvU
Applying for Other Credits During a Mortgage Application
When applying for a mortgage or any other type of credit, the lender or provider will need your permission to check your credit report.
Your credit report contains critical information about your financial status and debt repayment capacity.
Mortgage lenders typically examine the proportion of your monthly income that goes toward paying off your monthly debt obligations, such as credit cards, car loans, or student loans.
This proportion is called your debt-service ratio.
The lower your debt-to-income ratio, the better your chances of approval.
A high debt-to-income ratio indicates that you are more likely to struggle financially, which could negatively impact your chances of mortgage approval.
Even after you’ve been approved for a mortgage, the lender may still check your credit record.
This is done to ensure that your financial situation hasn’t changed negatively, which could jeopardize your ability to repay the loan.
Not Considering Long-Term Home Ownership Goals
Although many opt for 5-year mortgages, statistics reveal that less than 20% hold the mortgage for the entire term.
This implies that over 80% of Canadians signed up for a 5-year term mortgage end up paying a prepayment penalty for ending the contract early.
Although 5-year term mortgages have the lowest rates, assessing your long-term objectives is essential.
This will help you determine if it’s the most cost-effective choice, given that prepayment penalties can run into tens of thousands.
It’s essential to consider your long-term financial and family requirements when selecting a mortgage.
Five years is a significant period, and life changes such as major renovations, job relocation, or the need to save for college tuition can affect your mortgage and homeowner aspirations.
Before committing to a specific mortgage term, it’s helpful to ask yourself questions such as:
- Do you plan to renovate any major home in the next two years?
- Are you considering a job change that may require relocation?
- Will you need to raise funds for education in the future?
Answering these questions can help you determine the best mortgage term to meet your needs.
For example, if you plan to access the equity in your home for renovation, health, vacation, or education within the next three years, a 3-year mortgage term may be a better fit.
Don’t Know How Fixed and Variable Rates Work
Understanding the differences between fixed and variable rates when choosing a mortgage is essential.
Make your preferred choice based on your comfort level with changes to your interest rate and mortgage payment over the term of the mortgage.
Variable rates are less predictable and subject to market fluctuations, specifically changes to the Bank of Canada’s prime rate.
This can result in changes to your mortgage payment, upward and downward, as the market rate changes.
On the other hand, fixed rates provide more stability and predictability.
If you prefer a consistent mortgage payment and are uncomfortable with the possibility of changes to your interest rate, a fixed-rate mortgage may be a better fit.
With a fixed-rate mortgage, your interest rate and mortgage payment will remain the same for the entire mortgage term.
Not Considering the Impact of the Amortization Period
The typical amortization periods for mortgages in Canada are 25 years and 30 years.
Extending the amortization period of your mortgage to 30 years can reduce your monthly payments and make it simpler to be eligible for a mortgage.
However, doing so comes at the expense of higher interest rates and more extended payment periods, which means you will pay more in interest over the life of the loan.
Choosing a more extended amortization period means paying more interest over time.
This added interest expense can significantly impact the overall cost of your mortgage.
To minimize the interest you pay and become mortgage-free faster, it’s essential to consider a shorter amortization period.
By paying off your mortgage loan more quickly, you can reduce your overall interest expenses and save money in the long run.
It’s essential to weigh the pros and cons of a longer vs shorter amortization period and determine which option aligns with your financial goals and long-term plan for homeownership.
Not Understanding the Legal Nature of a Mortgage
It’s easy to get caught up in the advertisements for low mortgage rates.
However, it’s important to remember that a mortgage is a legally binding agreement between you and the lender.
Like any contract, it has specific terms and conditions that both parties must adhere to.
Here are some key terms and clauses to be aware of when entering into a mortgage contract:
- Prepayment Penalties: Most mortgage contracts allow for prepayments of up to 15-20% of the principal loan, but reviewing the prepayment penalty clause carefully is essential.
- Assumability: Assumable mortgage clause allows you to transfer your existing mortgage to the new property owner if they qualify, helping you avoid the prepayment penalty if you sell the house before the mortgage term is up.
- Transferability: This clause enables you to change the title ownership of the property without selling the house, for example, if you originally bought the home with co-buyers and now wish to transfer full ownership to yourself.
- Convertibility: The convertibility clause allows you to switch between different types of mortgages, such as from a variable to a fixed rate, without incurring a penalty or breaking your existing mortgage contract.
Understanding the terms and conditions of your mortgage contract before signing on the dotted line is essential.
This will help you make informed decisions and avoid any potential pitfalls.
Know Income Sources are Different
Having a reliable and consistent source of income is crucial when applying for a mortgage loan, as it greatly impacts your eligibility.
To validate the income declared in your application, your lender will require your employment and income documents.
Validating your income and its consistency helps ensure you can pay the loan as needed and the money comes from a legitimate source.
Also, how you generate your income affects the type of mortgage you can qualify for and the type of lender that will consider your application.
Fortunately, approvU simplifies this process by instantly matching you with the right lender and mortgage options based on how you generate your income.
Changing Jobs During the Mortgage Application Process
It’s crucial to consider the timing of any job transitions while going through the mortgage application process.
Changing jobs could end your approval, particularly if the new job has a probationary period.
Mortgage lenders prefer that you have completed the probationary period with your new employer.
To avoid jeopardizing your chances of mortgage approval, it’s advisable to maintain employment stability until after your mortgage has been approved.
If your probationary period is set to end after your mortgage closes, it may be wise to wait until after your mortgage has been finalized before changing jobs.
Not Considering Mortgage Brokers
While mortgage brokers are often associated with challenging income and credit situations, their services go far beyond that.
Mortgage brokers offer a more comprehensive and convenient mortgage experience than banks.
They are licensed professionals who can help you search, qualify, select, and secure the right mortgage for your needs.
More so, mortgage brokers are knowledgeable and experienced in the industry and can offer insights and guidance that may not be available through a traditional bank.
Over $132 billion worth of loans is processed by mortgage brokers each year, which is a testament to their expertise and reliability in the industry.
If you’re in the market for a mortgage, consider working with a mortgage broker for a stress-free and efficient experience.
Thinking Credit Scores Are All the Same
Have you ever wondered why your mortgage or loan application gets declined due to a low credit score, even when you’ve confirmed that you have the required score for the loan?
It’s not uncommon!
Different types of credit scores exist for various purposes.
The credit score a lender uses for a car loan application might differ from the one they use for a credit card application.
This is because the credit scores are calculated using different scoring models.
Furthermore, your credit score from TransUnion might differ from that of Equifax.
Most mortgage lenders use the Equifax credit score.
Although they may use the TransUnion credit score for other credit purposes, the Equifax credit score is the most preferred for mortgages.
The credit score varies between these providers because of the elements and weighting used in their credit analysis.
These models can vary depending on the type of credit used, such as a mortgage, auto loan, or credit card.
As a result, your credit score can vary among different credit score providers and for different types of credit.
Overall, credit scores evaluate your creditworthiness and ability to take on additional debt.
Even though the difference in credit scores might be small, it can still play a significant role in determining whether or not you’ll be approved for a mortgage.
Income Misrepresenting in Mortgage Application
It’s tempting to inflate your income to qualify for a larger loan.
You should resist that temptation and be honest about your income.
Lenders thoroughly review income documents, and any inaccuracies or misrepresentations will eventually come to light.
More so, inflating your income on a mortgage application is considered fraud and can have serious consequences, including criminal charges, fines, and a tarnished credit score.
That can also harm your chances of securing a mortgage in the future. It’s best to be truthful and accurate about your income to avoid negative consequences.
Not Considering Cost of House Ownership
To ensure a smooth transition into homeownership, it is critical to consider all the expenses associated with owning a home, such as utility and maintenance costs.
Owning a home is a significant milestone with many responsibilities and expenses that may not have been present during rental or living with family.
These expenses are frequently ignored, but they can significantly impact your budget.
You are probably not responsible for utilities and maintenance expenses while renting or living with your family.
However, as a homeowner, these costs become your responsibility.
Thus, it is crucial to consider these costs when planning to transition to homeownership.
These expenses can accumulate quickly and significantly impact your monthly budget if left unaccounted for.
Not Considering Closing Costs
Buying a house requires more than just a down payment.
There are fees, such as legal, appraisal, home inspection, and land transfer taxes, that must be covered in addition to the down payment.
These fees are collectively referred to as closing costs.
It’s important to remember that closing costs can be higher if you opt for an alternative mortgage solution.
Alternative mortgage lenders, B mortgage lenders, or subprime lenders often charge lender fees equal to 1% of the mortgage amount, and you may also have to pay a brokerage fee.
Closing cost is typically 1.5% of the property value. For example, if you’re buying a $500,000 home, you’ll need to have at least $7,500 set aside for closing costs.
Preparing for closing costs is crucial to ensure a smooth home buying experience, so consider these expenses when budgeting for your home purchase.
Obtaining a mortgage loan is a complex and multi-faceted process that requires preparation, planning, and a keen eye for detail.
By avoiding the 15 mortgage mistakes outlined in this article, you can increase your chances of obtaining a mortgage loan quickly and without complications.
Whether you’re a first-time homebuyer or an experienced homeowner, it’s essential to understand the mortgage process and the common mistakes to avoid.
Doing so can ensure a smooth and successful homebuying experience, fulfilling your dream of homeownership.