Mortgage FAQ

Key Mortgage Terms

1What is a Mortgage?
A mortgage is actually a document which is registered in Land Titles Office and provides evidence that you have given your home as collateral to a lender to secure a loan. In practice, the loan itself is usually referred to as a mortgage.
2What is a Down Payment?
Down payment is the amount of money you pay up front to obtain a mortgage.
3Loan to Value Ratio
The amount of the mortgage expressed as a percentage of the value of the home. For example, if you wish to borrow $190,000 on a home you are buying for $200,000, the Loan to Value Ratio is 95%.
4What is the minimum down payment needed for a home?
Subject to certain maximum price restrictions, in Canada, According to the guidelines of the Canadian Mortgage and Housing Corporation (CMHC), a minimum down payment of 5% of the total cost of the prospective property is required to purchase a home and must be from your own funds or a gift from a family member and cannot be borrowed.
5What is “High-Ratio” Mortgage?
A mortgage when the down payment is less than 20% of the appraised value or purchase price of the property. A high-ratio mortgage is subject to mortgage insurance (CMHC fees)..
6What is “Conventional Mortgage”?
A mortgage when the down payment is more than 20% of the appraised value or purchase price of the property. A conventional mortgage is not subject to mortgage insurance (CMHC fees).
7When do i need mortgage loan insurance?
When the down payment is less than 20%, the borrower is required by law to have mortgage insurance, to insure the lender against a mortgage default. Mortgage loan insurance provided by CMHC (Canada Mortgage and Housing Corporation) or Genworth.
8What can i use as a down payment?
Most lenders will accept gifts from family as an acceptable down payment (when the fund is not a loan). First-time homebuyers can use your RRSP savings to help finance a down payment. With the federal government’s Home Buyers’ Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.
9How much mortgage can I afford?
In order to determine the amount of a mortgage you can qualify, lenders’ have guidelines for the qualification ratios: Gross Debt Service ratio and Total Debt Service ratio, or “GDS” and “TDS”.

Gross Debt Service Ratio (GDS) – The percentage of your gross income which you will be using to pay for the mortgage payment including property taxes. Generally, lenders will have an acceptable Gross Debt Service ratio ranging from 28-32%. In other words, 28-32% of the monthly household income can be set aside for the mortgage payment. The mortgage payment, property taxes, half of the monthly condominium maintenance fees and heating costs should be up to 32% of your taxable income.

Total Debt Service Ratio (TDS) – The percentage of your gross income which you will be using to pay for the mortgage payment including property taxes and all other debt payment such as credit cards and bank loans. Generally, most lenders will have an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40% of the monthly household income can be set aside for the total debt obligations, including their future mortgage payment. All of your monthly debt payments, including car loans, credit cards, lines of credit payments should be up to 40% of your taxable income.
10What are Closing Costs?
Closing costs are fees paid at the closing of a real estate transaction and associated with the costs when the title to the property is conveyed to the buyer. (about 1.5% of the basic purchase price)

Some of the closing costs ares to consider:
Down payment
Home inspected by a professional building inspector
Prepaid property tax
Premiums Survey Charges
Land Transfer Taxes- a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.
Property insurance – The borrower will be required to have in place by the closing date.
Legal and attorney Fees and Disbursements
Garbage Disposal Fees
Title Insurance
Fire Insurance
11What is A Home Inspection?
A home inspection is an examination of the structure and systems: heating and air conditioning, plumbing and electrical, roof, attic, insulation, walls, floors, ceilings, windows, doors, foundation, and basement. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the property is structurally sound.
12What is an Appraiser?
A real estate appraiser is an independent third party who provides an objective report on the estimate of value of real estate. The appraisal is supported by the collection and analysis of data.
13Pre-Qualification
The borrower supplies the mortgage professional with information about the financial situation including income, assets and debt. It is a tool to help potential borrowers figure out their price range to determine what the borrower can afford. Pre-qualification does not mean that you have been approved for a loan.
14What Is A Pre-Approved Mortgage?
A pre-approved mortgage is a tentative commitment from a lender that it will loan a specified period of time (usually 60 to 90 days) and for a set amount of money for the purchase of real estate, with a certain term and at a certain interest rate. The pre-approval is subject to certain conditions (like income confirmation and down payment verification) being met before the mortgage is finalized.
15Mortgage Commitment
Mortgage Commitment – A commitment that is issued by the lender that states that the lender will fund the mortgage, saying it will advance mortgage funds in a specified amount to enable a buyer to purchase a house. This letter may include details of your interest rate and the maximum amount of loan they will offer. The commitment requires the borrower and the property to be approved. This means the property will need to be appraised at the sale price or higher and must meet the lender’s guidelines.
16How can you pay off your mortgage sooner?
There are ways to reduce the number of years to pay down your mortgage. You’ll enjoy significant savings by:
Electing a non-monthly or accelerated payment schedule
Increasing your payment frequency schedule
Making principal prepayments
Making Double-Up Payments
Selecting a shorter amortization at renewal
17Home Equity
The difference between the price for which a home could be sold (market value) and the total debts registered against it.
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