This episode is the first in a buyer series. I’ve created these to help anyone that’s purchasing their first home, but they’re really useful for anyone buying a home. I’ve created a guide to complement this episode with a lot of great checklists and tips, and you can download it from a link in the show notes.
Download the companion guide for this episode here.
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Interview Questions:
Kristin, so you’re a mortgage broker. I actually find that a lot of homebuyers don’t know what that means. How would you explain what you do to a first-time homebuyer?
As a mortgage broker my role is to find my clients the best mortgage rate and product from the 60+ lenders that I have available to me including most of the major banks and credit unions. Every mortgage lender is different not only with respect to the interest rate that can be offered but also within their terms and conditions, my job is to review these with you to confirm just which option will work best for you now and in the future depending on what your plans are for your new purchase.
What’s the main difference between working with you and the guy at the bank?
The main difference is licensing and whose interests they are working for. As a mortgage broker I am licensed with FSRA, the Financial Services Regulatory Authority of Ontario. I need to complete courses on a regular basis and comply with their rules and regulations in order to ensure that I am providing full disclosure to my clients so that they are 100% aware of what they are receiving. Since I do not work for any individual lender the choice is left up to the client once we review to determine what type of mortgage would work best.
Banks are protected under the Bank Act so there is no regulatory body ensuring that they are meeting the proper needs of the general public, they are only required to provide a service for their employer, which is the Bank.
Let’s play devil’s advocate for a moment. I’m a big fan of working with mortgage brokers, as you know, but let’s pretend that you are arguing for someone working with their bank for their mortgage. What would be the reasons?
The most often-cited reason is for a place to go. A lot of clients want to see the physical brick and mortar and know they can enter a location and speak to somebody about their mortgage.
Another would be to have all of your banking in one location (something that I do not recommend, diversification is your friend!).
Today’s episode is all about preparation for the home search. I actually advocate that someone planning to purchase a home come and talk to you before they come to me, since you really help frame their financial picture and give a new buyer an idea of what’s possible and what’s realistic. What should a potential homebuyer have prepared before they come to you?
A knowledge of their income, assets and liabilities to know what they can afford.
Knowing how you are paid if you are an employee is important too, as there is a difference between a full-time salaried employee someone who is on contract or not guaranteed their income/hours on a weekly basis.
Knowing what their credit is like is important as well so that we can discuss any possible changes that we may want to look at making to ensure a purchase can go as smoothly as possible.
How early in the process is it helpful to get in touch with you? When you’re starting to look at homes? A year before? When you have an offer on a home?
The sooner the better! I like to tell everyone that it is never too early to see what options are available to you, and sometimes we need that extra time to be able to make changes to credit or save up money for the purchase to qualify.
How do you get paid and is that different from the bank?
Brokers are compensated by the lender that your mortgage is arranged with, and we are paid based on the mortgage amount that a client obtains.
Bank employees can be paid a number of different ways. For the most part they are on salary with commission component and sales targets that they need to hit on a monthly basis, while others are 100% commission.
What’s a pre-approval?
A pre-approval allows us to go through the qualification of just what a client would qualify to purchase for based on income and monthly liabilities, but more importantly we determine the price point that would work best within the budget as well. Qualifying for a mortgage and ensuring that someone can comfortably afford the home as well as live the same lifestyle they are accustomed to is very important and something we would discuss together.
A mortgage pre-approval also allows us to secure a variety of interest rates if needed, all secured for 120 days. This then means that should there be a sudden increase in interest rates you are locked in, and if you decide to go ahead with a purchase during that time frame we know the rates that are available to you. Pre-approvals can be extended as many times as needed so it is not necessary to wait to start the pre-approval process once we are within the 4 month mark of when a purchase may be made, as it is never too early to begin the review to not only get an idea of the most comfortable price point but potentially make changes to credit or savings to reach the goal of home ownership.
What are the costs of buying a home these days?
First time home buyers still have incentives to assist in purchasing, both with the Land Transfer Tax Credit for up to $4k off of the land transfer tax, along with the ability to use RRSP’s for down payment via the Home Buyers Plan.
For a first time home buyer purchasing for $500k or less, the expectation is that you will need approximately 6.5% of the purchase price to have enough for the down payment and closing costs.
For a price over $500k that increases a bit to around 7% required.
In both cases I add an extra 0.5% to cover costs that are often overlooked, such as utility hookups, general moving expenses, etc.
If 7-7.5% is budgeted for there will be no surprises.
Is there any incentive to you for a client to work with one Realtor as opposed to another?
Finding a house is one thing, but communication is key to ensure all goes smoothly from the initial visit to receiving the keys on closing.
I like to be updated on all aspects of the purchase and having a Realtor who knows what changes could impact financing is important.
There are many changes that can be made to the Purchase Agreement that will modify the mortgage, anything from a price change, closing date change, request for work to be completed prior to closing, etc.
Being able to pick up the phone and ensure we are both working in the best interests of our client to make this as stress-free of a process as possible is my goal.
So working with like-minded individuals throughout is always welcome, and while there is no monetary incentive involved, the knowledge of knowing that my client is in good hands throughout the process is priceless.
What does a buyer’s first meeting with you look like?
We will go through their current financial details, expected/anticipated financial details to help plan in order to review the different types of mortgage products that can be a good fit for them.
With the review we look at features within a mortgage that can be good or bad for their particular situation, whether it is the penalties involved if breaking the mortgage early, restrictions on prepayments or portability, the registration type (ie standard or collateral), etc.
There is never any knowledge of their ‘maximum’ purchase price as they find out quite quickly how irrelevant that number is! The price is determined by the monthly costs to be paid, not the other way around.
What kinds of mistakes do you see homebuyers making these days, especially new homebuyers?
The biggest mistake is underestimating the total monthly cost associated with owning a home.
Online calculators which generate monthly mortgage payments are great, but there is so much more to consider on a monthly basis than just that cost that we need to account for. Costs such as property taxes, condo fees (if applicable), utilities and home insurance are all mandatory costs and need to be factored into the equation the same way that the mortgage payments do.
Another would be not preparing for the unexpected. We don’t want to plan for the worst, but we want to plan with goals in mind knowing that
Let’s suppose that a homebuyer is interviewing three mortgage professionals. What are some smart questions that they should be asking so that they know they’ve got the right person?
The first thing is to ask what type of mortgage would be recommended for them.
If the conversation shifts towards interest rate instead of the features within the mortgage you will want to look closer into that or be wary - an interest rate saving of 0.05% over 5 years is minimal if the difference in penalties are $10k+ or more!
It’s also good to have the discussion about making changes or modifying your mortgage prior to closing - you are typically only committed once you sign the documents with your lawyer, but until then you want to be kept up to date on changes within the market or new products that are announced to ensure you are receiving the best offer available.
Also, make sure your mortgage broker works with multiple lenders and banks! Some only choose to deal with 2-3 different lenders which cannot serve all clients needs. While we all have our favourites (quicker turnaround time, efficient customer service, better business hours, etc) our role is to work for the client and obtain the best mortgage anywhere we can, even if it may not be our first choice.
What costs do clients often forget about?
Just that little fees can add up quite quickly when you need to account for a lot of them. The general purchase fees we can predict, but going forward needing to buy a full garage worth of items to take care of a house/backyard can equate to a large cost if you plan on purchasing everything all at once! And maintenance items are more important than furnishings in a house to start
Are there any questions that you get a lot from clients?
What’s your best rate?
- There is no way to answer this, and there is no such thing as a ‘best’ rate. The lowest interest rate on paper may not end up saving you the most money in the long run, so the rate becomes irrelevant once we discuss just what is involved within a mortgage
Why do you need so much information and documentation?
- Lenders ask for a lot of details in order to meet the requirements set out by the Government as well as their investors. It is all for fraud prevention to ensure proper qualification to keep Canada’s housing market strong - if we can provide this information to prove that you will be able to pay your mortgage going forward it helps everyone to keep costs low and ensure mortgage defaults remain as low as they can be
When do I provide my down payment and who do I give it to?
- The lawyer receives the remainder of the funds after you have provided your deposit with your offer, and you provide those funds to the lawyer right before closing, typically 1-4 business days in advance
Why didn’t I do this earlier?!?
- It can be a scary thought to have a full review of your financial situation, especially if you have never done that before. I believe most go into this process cautiously optimistic about how it will end up, but when they see how easy it can be when someone is working for them and is on their side. I like to describe the home buying process as complicated instead of difficult - there are a lot of steps involved but we will go through them one by one to ensure each is taken care of before moving on with the next.
