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1. How much can I afford to pay for a home?

To determine 'affordability' you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence you are purchasing, calculate 32% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.

Second, calculate 40% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders' usual guidelines.

In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don't leave yourself house poor. Structure your payments so that you can still afford simple luxuries.

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2. What is a home inspection and should I have one done?

A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.

A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.

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3. What is the minimum down payment needed to buy a home?

A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions. For instance, in the Greater Vancouver area the maximum purchase price with 5% down is $250,000. Any purchase price in excess of $250,000 requires a minimum of 10% as a down payment. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, where applicable). Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. It cannot be borrowed.
Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Where the mortgage loan insurance is provided by Canada Mortgage and Housing Corporation (CMHC), the gift money must be in the your possession before the application is sent in to CMHC for approval. Where the mortgage loan insurance is provided by GE Capital (GE), the gift money is not required to be in your possession until the closing date.

Mortgages with less than 25% down must have mortgage loan insurance provided by either CMHC or GE.

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4. What is mortgage loan insurance?

Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 75%. The insurance premiums, ranging from .50% to 3.75%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.

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5. What is a high-ratio mortgage?
A high-ratio mortgage is one where the amount to be borrowed by way of a mortgage is greater than 75% of the purchase price, or the appraised value, which ever is less. High-ratio mortgages generally require mortgage loan insurance provided by either Canada Mortgage and Housing Corporation (CMHC)or GE Capital (GE), a private insurer. The mortgage loan insurance premium is paid to CMHC or GE and protects the lender in the event the mortgage is not repaid and the bank has to take back the property. The benefit to the borrower is that it allows them to purchase a home with less than 25% down payment. The insurance premium is paid by the borrower and can be added directly onto the mortgage. Mortgage loan insurance premiums range from .50% to 3.75% of the mortgage amount and are calculated based on the overall loan to value. For instance, borrowers with a 5% down payment, a loan to value of 95%, would pay a premium of 3.75% while those with a 20% down payment, a loan to value of 80%, would pay an insurance premium of 1.25%. Mortgage loan insurance is not the same as mortgage life insurance.

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6. What is a conventional mortgage?

A conventional mortgage is usually one where the down payment is equal to 25% or more of the purchase price, a loan to value of or less than 75%, and does not normally require mortgage loan insurance.

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7. Does paying my mortgage bi-weekly really cut years off my mortgage?

Payment frequency is not the major factor in reducing the amortization period of your mortgage. Principal reduction is! But what about all the talk of bi-weekly payments taking five years off your amortization period. Although you will save some interest making your payment bi-weekly, ultimately it is the fact that your total payments each year are higher that results in the significant reduction in amortization. For instance, when a client chooses a bi-weekly payment of $500 over a monthly payment of $1000, in fact they are choosing to pay an extra $1000 annually. In most cases a bi-weekly payment is simply a monthly payment divided by two. That means that instead of paying $12,000 in monthly payments, you are now paying $13,000 in bi-weekly payments. That extra $1000 is what ultimately cuts the years off your mortgage. But you can do close to the same thing by increasing your monthly payment, if a monthly payment frequency would be more convenient for you, or by taking an accelerated semi-monthly payment.

See the numbers below: Most people find that a payment frequency tied to how often they earn their income makes the most sense. And where possible, increase your regular payment amount or make periodic lump sum payments as both will help reduce the length of time it will take to repay your mortgage fully.

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8. How does bankruptcy affect my ability to qualify for a mortgage?

Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing.

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9. How will child support and alimony affect my mortgage qualification?

Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for. Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.

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10. Can I get a mortgage to purchase a home and make improvements?

Subject to qualification, yes. In fact, even purchasers with 5% down may qualify to buy a home and make improvements to it. For high-ratio financing, both Canada Mortgage and Housing Corporation and GE Capital, insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements that the purchaser may wish to make to the property. This option eliminates the need to finance the renovations or improvements separately. Some conditions apply. Where the improvements are cosmetic, the mortgage loan insurance premium is unchanged from the standard schedule. Where the improvements are deemed to be structural, the mortgage loan insurance premium is increased by .50% over the standard schedule. For information on mortgage loan insurance premiums see high-ratio home mortgage financing.

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11. Can I use gift funds as a down payment?

Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. where the mortgage requires mortgage loan insurance, Canada mortgage and housing corporation requires the gift money to be in the purchaser's possession before the application is sent in to them for approval. where mortgage loan insurance is provided by GE Capital this is not a requirement. See 'what is mortgage loan insurance?' for further information.

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12. What is a pre-approved mortgage?

A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 90 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like 'written employment and income confirmation' and 'down payment from your own resources', for example. Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.

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13. Should I wait for my mortgage to mature?

Lenders will often guarantee an interest rate to you as much as 90 days before your mortgage matures. And, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well.

Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with the lender or another lender. If you don't you may end up paying a much higher interest rate on your renewing mortgage than you need to.

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