Anecdotes and Advice from a First Time Home Buyer Part 1 – First Steps and Pre-Approved Mortgages

by Mike Holman

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.

And so the search begins…..

It goes without saying that home ownership is an enormous financial responsibility, and like many other individuals, I agonized over how my husband and I would be able to afford it. What eased our anxiety was coming up with a manageable monthly amount that we would be able to pay towards a mortgage. We created a realistic budget listing all our expenses to evaluate how much we could afford to spend on our first house without stressing out about the big number. The rough amount that we arrived at is one with which we are comfortable based on our lifestyle. I would suggest that this budget take into account unexpected emergencies or financial difficulties. Lenders advise that the ratio of your debt (including housing payments, car payments, credit cards and utilities) to your income should not exceed 40 per cent of your monthly income.

Online mortgage calculators are a useful tool found on the web pages of CHMC, major banks and lending institutions. What was frustrating though was that they work on the premise that you have a house in mind and know what the mortgage, property taxes and heating will cost. To plug in the numbers, I looked at the feature sheets of recently available homes in my desired neighbourhoods that I was able to obtain from the MLS, on the websites of local real estate agents and of course from open house visits. While the results of your qualifying mortgage will not be precise, at least they will be a reasonable estimate of what you can afford.

My next step in arriving at our financial big picture was to get a pre-approved mortgage (PAM) by talking to a couple of banks and mortgage brokers to determine how large a mortgage we could carry and what lending rate we could obtain. A PAM is a financial lender’s guarantee of a particular lending rate for a specified period of time, usually 90 days, based on your income, down payment and existing debts. A note of caution though with pre-approvals. We learned from a realtor that multiple credit checks can be detrimental to your credit rating. If several banks or brokers will be conducting a credit bureau check, do advise each organization about the multiple reference checks. Some lending institutions can also evaluate your mortgage circumstances based on the information you provide without doing a hard credit check.

The standard mortgage discount seems to be 0.9% below prime to 5.35% on a variable mortgage and a 1.5% discount to 5.74% on a fixed rate mortgage. Do shop around though as your assets and liabilities may impact your ability to negotiate a better deal. Incidentally, ING offers the same rates I found upfront without any haggling; they seem to have a very competitive mortgage product.

Rather than approach banks individually, you may consider using a mortgage broker. These are companies which have the ability to negotiate with a large number of different lenders and are often able to offer a lower rate at a bank than the average person. There is no cost for the services of a mortgage broker as it is the lender whose deal you accept which pays the broker. The Financial Services Commission of Ontario has a list of registered mortgage brokers on their website.

My husband and I have decided not to go the mortgage broker route yet as we have a PAM with a reasonable rate. We will be checking with other banks as we also want to determine what rates we can negotiate as we are also thinking of moving over our line of credit and bank accounts. The other thing that we learned is that you may be obliged to use a mortgage broker that does a full PAM and rate comparison for you even if you do eventually find a better rate elsewhere. Not sure about the veracity of this information; however it is something to verify upfront with a mortgage broker. As it could be months before we find a house, we are taking our time about finding a better rate since our PAM is reasonable and will help us be competitive in the case of a bidding war.

Read the next post in this series “Down Payments and Financing“.

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{ 10 comments… read them below or add one }

1 Mr. Cheap

How do the mortgage brokers force you to do business with them? I’ve gotten a PAM, but didn’t sign any sort of agreement with the broker (if they claimed I was legally obligated to borrow through them I’d laugh in their face)…

Hopefully they wouldn’t sue me after I finished laughing ;-)

2 telly

We had an interesting thing happen to us when we purchased our house…

Our realtor referred us to a mortgage specialist at RBC (they basically refer one another). His rates were substantially better than posted rates, including ING. The day before our house closed, the receptionist at our realtor’s office called us up and faxed us an offer she had received that day from another mortgage specialist at another bank. I spoke to our guy at RBC and he agreed to match the offer (dropped our rate by 0.11%).

Just something to keep in mind, generally realtors won’t go out of their way to help you secure a good mortgage rate but if you have a good relationship with them, it doesn’t hurt to ask them who they’d recommend and what they know current competitive rates to be.

3 FourPillars

Sounds like you got a good deal Telly.

ThickenMyWallet.com has a similar post up today.

Mike

4 Sods

We had a brutal experience with a mortgage broker. I assume it was isolated, but i will never use one again as it almost cost us our house and thousands of dollars.

Basically what happened was, since Brokers get commission from the lenders, they “sell” the lenders that pay them better. Our broker found a lender i had never heard about “ResMor” who made us jump through hoops to get approved, us being naive, did what the broker reccomended. We were approved finally (took 2 months and mounds of paperwork), and then they refused to fund us 24 hours before because they thought our condo corp was “underfunded”. So we had to scramble for a mortgage, push back closing, pay lawyer fees etc. We ended up going to my parents credit union who got us approved and funded within 48 hours.

5 FourPillars

Sods – that’s unfortunate. I wouldn’t let that experience turn you off mortgage brokers however. I used two of them this year and I found that worked well. Maybe the lesson is that if they try to get you to sign with some “bank” you never heard of then run away?

Mike

6 telly

Mike,

Did you buy two properties this year?

7 FourPillars

Telly – no, the mortgage on my house came up for renewal. I called two mortgage brokers to make sure I wasn’t getting screwed on the rate.

One of them was really slow which is why I ended up going with the one I used.

Mike

8 the Wealthy Canadian

Why not go with one (or more) mortgage broker(s) and do your own shopping around as well? I don’t recall having to sign anything with a broker in the shopping around phase.

9 NeverStopBuying.com

Regarding the post, sometimes you have 120-day rate guarantee, and I have read that multiple credit checks within a week doesn’t hurt your credit rating, as lenders can see that you are shopping around for mortgage

I have used Mortgage Intelligence broker last year, got the best rate (from Desjardins)

This year I just got a HELOC with TD, as I bank with TD, and they matched CIBC’s HELOC offers (P-1% for 3 months)

Big 5 has the power to match any rate essentially, but would you visit 5 banks to pin one against another, or let the broker do the work for you?

10 FourPillars

NSB – I used Mortgage Intelligence as well – quite good.

Mike

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