Mortgage Insurance: What It Is and How It Works

Mortgage Insurance

Mortgage Insurance: What It Is and How It Works

For the vast majority of people, buying a home means getting a mortgage. Most of us don’t have pockets deep enough to pay cash for a home outright. That means working with a lender. By definition, lenders take risks in loaning money to consumers. There’s always the risk that you might make some payments late, or default on the loan completely. In order to offset that risk, lenders require mortgage insurance in many instances. What is mortgage insurance and how does it work?

Mortgage Insurance

What Is Mortgage Insurance?

Really, the name says it all. Mortgage insurance is protection against you defaulting on the loan. It limits the risk that the lender is taking in loaning you the money for your home. In addition to mitigating the lender’s risk, mortgage insurance in Edmonton can also help you by allowing you to qualify for loan amounts that you would otherwise not be considered for.

Who Requires Mortgage Insurance?

It’s important to note that mortgage insurance isn’t needed by everyone applying for a home loan. It’s generally only required for those who cannot make a down payment of at least 20% of the home’s value. So, if you want to avoid adding extra costs to your monthly mortgage payment, the best course of action is to come up with a larger down payment, even if this means putting off buying that home for a few months, or even a year. The more you can put down, the less risk to the lender, and the less need there is for supplemental insurance. However, there are some mortgage types where insurance is required no matter what, including USDA loans and FHA loans.

Does Mortgage Insurance Increase Your Costs?

In a word, yes, mortgage insurance in Edmonton will increase the costs of your home loan. This is because the monthly insurance payment will be bundled in with your home loan payment.

Insurers

Who Is the Insurer?

Your insurance payments will go to different places depending on where your home loan comes from. If you have a conventional home loan, then you’ll work with a private mortgage insurer, and your payments will go directly to them. However, if you obtain an FHA mortgage loan, then your insurance payments will go to the FHA. Note that FHA loans, while available with very low down payment requirements, carry a mandate that you have mortgage insurance, and you’ll have to pay both monthly costs and an upfront cost that’s added to your closing costs.

If you’re considering a VA loan, there is no mandatory mortgage insurance, but you will have an upfront cost associated with the VA’s guarantee of your loan. This can be factored into your monthly payments if you want, but it will increase your overall costs over time.

Does Mortgage Insurance Protect You?

To put it bluntly, no, mortgage insurance does not protect you. It does not benefit you, the consumer, in any way other than increasing your buying power. It is all about hedging the lender’s bet and reducing their risk. For you, the only outcome is qualifying for a home loan with less than 20% down, and an increase in your loan costs.

When Is Mortgage Insurance No Longer Needed?

The way mortgage insurance plays out over the life of a loan varies depending on the type of mortgage. FHA loans must maintain insurance for the duration of the loan. However, private mortgage insurance is cancelled once you pay your home loan down below 80% of the total loan value. So, you can count on your costs dropping at some point, as long as you stay in the home long enough.

As you can see, mortgage insurance in Edmonton is important to understand, and it will have a significant impact on your homeownership experience. Learn more from Dominion Lending in Edmonton at 780-466-9898.

Understanding How Your Credit Score Affects Your Mortgage Rate

Charts To Understand Credit Score

Credit and Homeownership: Understanding How Your Credit Score Affects Your Mortgage Rate

While your credit score might not determine your value as a contributing member of society, it does have a major impact on your life and how you are able to live it. If you’re contemplating making the leap into homeownership, for instance, your credit score will have a great deal to do with the interest rate you’re given on the home loan. In turn, that will affect the overall cost of your home loan. How does your credit score affect your mortgage rate, though?

Information for Credit Score

The Higher the Better

Your credit score is a numerical summation of the amount of risk you pose to a lender. The higher the number, the lower your risk level. The lower the number, the riskier you are. If you’re in the mid to low span of the credit score range, you’ll find that lenders really don’t want to take a chance on you.

If you’re in the upper-mid to high credit range, lenders are happier to see you walk through their doors. However, you’ll find that it’s not just about whether or not you can get a loan in the first place, but about how much you’re going to pay for the privilege of taking out that loan.

What Mortgage Rates Really Mean

Mortgage rate is another term for interest rate. It’s what you’re going to be charged for taking out the loan. You never repay just the amount the home costs – you always pay the lender for allowing you to borrow money. That’s the lender’s profit, and the greater the risk you pose, the more profit the lender wants to make to offset the chance that you’ll default before the loan is paid off and they’re left holding the bag.

Generally, the closer to 750, 800 or 850 (the max FICO score) you have, the better the mortgage rate you will be offered. However, understand that the individual lender is responsible for determining what score a borrower must have in order to be offered the best interest rate on their mortgage. Still, realize that a change of just a few points can make a significant difference in what you pay per month, and what you pay over the life of the loan. The difference between a mortgage rate of 5% and one at 8% is hundreds of dollars per month, and your credit score is the key to that rate.

Is Higher Always Better?

A higher credit score is always better. Well, at least until you get to a certain point. Up to about 700, your mortgage rate will decrease as the numbers increase. Even a modest jump of just 25 points can move you from a higher mortgage rate to a much lower one. However, once you pass the 700-point mark, you need to start considering other things to change your mortgage rate. These can include things like the type of loan you obtain, or your annual income amount.

How Do You Change Your Credit Score?

While your credit score will dictate what mortgage rates you’re offered, there’s good news for those with less than stellar financial histories. You can improve your score. It will take time and effort, though. Start by disputing any items on your credit history that aren’t yours, and then work on paying off outstanding debt and high credit card limits. With time and perseverance, you can boost your score.

However, remember that there’s little point in shooting for the highest score possible. Generally, a score of 700 – 750 is considered excellent, and even those with scores slightly under 700 can receive good mortgage rates.

What Information Do You Need for a Loan Application?

Information for Loan Application

What Information Do You Need for a Loan Application?

Buying a new house or property in Edmonton is an exciting adventure, but one part of the process that can be stressful is applying for the loan. Not being sure that you can afford the property will put a damper on things until your loan application is processed. In order to have the best chance of getting your loan approved, it’s best to be very thorough in your loan application. Knowing what documents and information to bring with you to complete a loan application is a great way to get the ball rolling and find out fast if you’ve got the loan.

Information for Loan Application

In general, the loan approval process doesn’t take that long once the lender has everything they need from you. They’ll have to verify the information, determine whether your financial status is on par with their requirements for a loan, and determine whether your financial situation is likely to change based on a few key factors. Here’s what you’ll need to bring for a loan application.

Personal Information

First, you need to bring all your personal information. This includes government-issued identification, your Social Security number, and all your contact information such as your phone number and address. These basic facts start the process by letting the lender verify your identity and get in touch with you. This information is also used to check your credit score so that the lender can get an idea of how creditworthy you are.

Financial Information

The next information you’ll need is anything relating to your finances. These pieces of information let the lender see that you can afford the loan. This includes proof of employment, recent pay stubs, recent tax returns, copies of recent bank account and credit account summaries, and proof of any assets you may have, such as a 401(k). This information is probably the most important for determining if you can afford the loan amount you are asking for.

Requested Documents

Depending on the circumstances and what type of loan you are applying for, the lender may ask for specific documents as well. For example, they may ask for information on the property you intend to buy, or information about your business history if you’re buying a property for commercial purposes. Be sure to bring along anything that the mortgage company asks for, and ask them if they need any additional materials if they don’t volunteer that information when you pick up the application.

Completed Application

Finally, you’ll need to bring the completed mortgage application with all these documents. You can often download or complete applications online, and then email, mail, or bring in the extra documents afterwards. In many cases, the lender will help you fill out the application form at your initial meeting, so you may not need to fill this out yourself. In any case, be sure that the application is on file with the rest of your documents to get the process moving.

Do You Need Anything Else?

If you’ve gathered up all the documents listed above, then you should have everything you need to apply for a mortgage. Be sure to ask your lender if they require any additional special documents, and bring any paperwork that you have exchanged with anyone involved in the sale of the property, such as the homeowners, the realtor, or the lender.

If you want to learn more about how you can save with the right mortgage lender, contact us at Dominion Lending by calling our Edmonton office at 780-466-9898, or chat with us online to get instant answers to all your questions.

How to Get Pre-Approved

How To Get A Mortgage Pre-Approval

How to Get Pre-Approved for a Mortgage in Edmonton

There are many paths to homeownership, and for most homeowners in Edmonton, luck and circumstance play a big part in finally landing that dream home. But did you know that there are ways that you can make it more likely that you’ll seal the deal when the time comes? One of the best ways to ensure that you are shopping for a home that you’ll be able to buy is to get pre-approved for a mortgage.

How To Get A Mortgage Pre-Approval

What Does Pre-Approved Mean?

When you shop for a home in Edmonton, there are two main paths that people take for financing: they find a home they love, and they approach the bank or lender to find out if they’ll be able to get a loan for the asking price of the home. Or, they start by asking a lender how much they’ll be qualified to borrow based on their finances, and then they shop for a home within that budget.

The second scenario is called getting pre-approved, and it’s a great way to ensure that you don’t fall in love with a house that you won’t be able to afford. It also gives you a good idea of what price range you should be shopping for if you don’t know where to start. Here’s how to get pre-approved for a mortgage.

First Step: Know Your Credit Score

The best first step for getting pre-approved for a mortgage is to know your credit score. Find out if there is anything on your credit report that may stop you from getting pre-approved – you may find that it is smarter for you to take care of some things on your report first before the lender checks your score.

Next: Gather What You Need

In order to get pre-approved for a mortgage, you’ll need to go through the standard application process. That means you’ll need to bring all the following with you:

  • Personal Identification Information: You’ll need a government-issued ID, a Social Security number, and your address and contact information. This allows the lender to verify your identity and check your credit.
  • Your Income and Employment Information: You’ll need to bring paystubs or other proof of employment, tax paperwork from previous years, and any information about secondary income, such as information on retirement benefits, rent you receive from a second property, child support, or a side business, for example.
  • Information on Assets: If you own any assets that may make the lender more likely to lend to you, such as other properties, saving accounts, stocks, and so on, be sure to bring that information with you as well.

Finally, be sure to ask the lender if there is anything special they require. For most pre-approval processes, the information listed above is all you need, along with your completed mortgage application forms.

How Long Does It Take?

The pre-approval process can take as little as an hour, and as long as a few weeks. It depends largely on how complex your financial life is. If you have a straightforward stream of income and a good credit score, it’s likely that you’ll be pre-approved very quickly. If your income is very diverse or your credit score isn’t perfect, it may take longer for the lender to make a decision. However, for the most part, you’ll find out soon whether or not you’ve been pre-approved, and for how much.

With this information, you can start shopping for a home that will suit how much you know you’ll be able to afford. That makes it much easier to find the right home for your family. Learn more from Dominion Lending in Edmonton at 780-466-9898.

New Mortgage Rule Changes Explained

As many of you have seen on the media, OSFI has implemented new mortgage rule changes starting January 1, 2018. Now, non-insured mortgage consumers (buyers with a 20% or greater down payment) must qualify at the “a stress test rate” which is the higher of the Bank of Canada Rate (currently 5.14%) OR the rate from the lender plus 2%.

What effect will this have on the average consumer?

The biggest impact will be on the amount in which the homebuyer will be able to qualify for. Previously, the homebuyer qualified at the rate offered by the lender with no stress test for non-insured buyers. This new change applies to all terms, fixed and variable rates. The stress test for non-insured mortgages applies to both fix rate and variable rate mortgages.

We saw a similar rule change in October of 2016 for those consumers putting down less than 20% for their home purchase.  These “insured” consumers must qualify for a mortgage at the Bank of Canada rate (currently 5.14%).

What about the news of interest rates rising?

 

Although the above mentioned rule changes don’t quite have a direct effect on interest rates, the strength of the Canadian economy does.

 

The Bank of Canada (BoC) has 8 meetings every year where they discuss how well the economy is doing. If the Canadian economy is doing better than expected, there will be an increase to the “overnight lending rate”, which is essentially the rate of interest at which banks lend money to one another. When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money, and they raise their respective prime rates to cover the added costs. Conversely when the BoC lowers the overnight rate, banks usually lower their prime rates by the same amount. Each bank sets its own prime rate, but most of the banks follow the BoC prime rate. The increase/decrease in the “overnight lending rate” is done to combat rapid inflation and vice versa.

The scheduled for the meetings is below;

Wednesday, January 17
Wednesday, March 7
Wednesday, April 18
Wednesday, May 30
Wednesday, July 11
Wednesday, September 5
Wednesday, October 24
Wednesday, December 5

The results of the January 17th meeting were that the BoC decided to raise the “overnight lending rate” to 1.25% from 1%. This triggered the BoC prime to go up from 3.2% to 3.45 Because of all these changes the Qualifying rate, or the “stress test” rate also increase from 4.99% to 5.14%.

Now more than ever, it’s a great time to contact a licensed mortgage professional to discuss your options. We will help you navigate through all of the rules changes, and help you get into the home of your dreams.

-Sunny Vig

Jan 25, 2018

Getting A Mortgage With Bad Credit

Credit Challenges

 

In today’s economic climate of tighter credit requirements and increased unemployment rates taking their toll on some Canadians, there’s no doubt that many people may not fit into the traditional banks’ financing boxes as easily as they may have just a couple years ago.

Your best solution is to consult one of our Mortgage Specialists to determine whether your situation can be quickly repaired or if you face a longer road to credit recovery. Either way, there are solutions to every problem. Just because you have bruised credit, doesn’t mean you can’t unlock your home ownership potential.

Mortgage professionals who are experts in credit repair can help credit challenged clients improve their situations via a number of routes. If the situation is beyond the expertise of a mortgage professional, we can help you get in touch with other professionals, including credit counselors and bankruptcy trustees.

If you have some equity built up in your home and still have a manageable credit score, for instance, you can often refinance your mortgage and use that money to pay off high-interest credit card debt. By clearing up this debt, you are freeing up more cash flow each month.

We can can also offer you some top tips towards a quick credit score recovery – The Mortgage Force Team is here to help!