While the journey to first-time homeownership can be full of dizzying highs and lows, understanding the mortgage process can make the trip a lot smoother.
Once you’ve applied and been pre-approved for a mortgage you can start your home search with confidence, knowing what you can afford.
There are generally four things first-time home buyers should do before applying for a mortgage:
Establish your home buying team
Budget beyond the home purchase price.
Get pre-approved for a mortgage
Organize your financial statements
Let’s take a more in-depth look at what you need to know when prepping for a mortgage application.
First, what is a mortgage and how does it work?
In simple terms, a mortgage is a loan given by a bank or mortgage lender used to buy real estate. It typically involves multiple parties who all play an essential role in the application process, such as:
the lender (this could be a bank, credit union or private institution);
mortgage advisor; and
the borrower (or buyer).
The buyer uses funds from a mortgage loan to pay the lender for the property and the buyer repays any money borrowed, plus applicable interest and fees, over a set duration at regular intervals.
A portion of each payment is used to pay down the amount borrowed (also known as the principal) and a portion of the payment is applied to interest. The mortgage is registered on the property with the applicable provincial or territorial land registry office.
In many cases, the buyer can move into the new home as soon as the closing is complete (although the terms of the sale/purchase agreement can sometimes specify a later move-in date).
Below are some other important terms related to mortgages.
📅 Amortization period
This is the length of time it takes to pay off a mortgage in full.
📈 Interest rate
This is the cost you pay to borrow money. It can be fixed or variable. A fixed rate stays the same for the duration of your mortgage term, giving you predictable payments. A variable rate fluctuates with the lender’s prime rate, so your mortgage payment can fluctuate as the lender’s interest rate goes up and down.
💳 Payment frequency
The number of payments you make over a year is known as the payment frequency. Payments can be made monthly, bi-weekly, or weekly. Some lenders also allow for double-up payments which let you make additional payments on top of your regularly scheduled payment, helping you pay down your principal faster.
The way in which a mortgage is structured is unique to the financial situation of each borrower. A mortgage agreement can be impacted by many factors, including credit score, debt-to-income ratio, and salary. It’s important to speak with a mortgage advisor who can look at your full financial picture and build a mortgage that meets your life needs.
1. Establish your home buying team
Buying a home isn’t something you should do alone. Before you start browsing listings, make sure you have the right people in your corner.
🏦 Mortgage specialist
Connecting with a mortgage specialist is usually a good first step in the mortgage application process. The earlier you connect with them, the more time you have to strengthen your position before you apply. An RBC Mortgage Specialist can help you:
clarify the application process;
understand what you can realistically afford;
walk you through your mortgage options; and
get you set up for pre-approval.
Once you find the home you’d like to purchase, a mortgage specialist will work with you to design a mortgage—including the interest rate type, payment frequency and amortization period—that’s right for you.
🏡 REALTOR®
A REALTOR® brings local market knowledge, negotiation experience, and access to listings that can make a real difference in a competitive search. They can help you narrow down your options and guide you through the offer process with confidence.
🔎 Home inspector
Once you find a property you love and are serious about making an offer, a qualified home inspector can help make sure there are no costly surprises hiding behind the walls, in the attic, with the foundation, or with the structure of the home. If you have one in your corner early on, it can help speed up the offer process, too.
⚖️ Your real estate lawyer or notary
They handle the legal side of your transaction like reviewing contracts, managing title transfers, and making sure everything is in order on closing day. In Quebec, a notary is required by law; in other provinces, a real estate lawyer fills this role.
2. Budget beyond the home purchase price
Budgeting is another important element of preparing yourself to apply for a mortgage. Getting pre-approved can give you an idea of what you might be able to afford, which can give you a good starting point.
A budget isn’t just about the purchase price. First-time home buyers are often surprised by how many costs come alongside it like closing costs, home insurance, property taxes, and maintenance. When you map all of that out upfront, you make decisions with a lot more confidence and a lot less stress.
Just because a buyer is pre-qualified for a certain loan amount, doesn’t mean they’d be comfortable making those mortgage payments at the current interest rate. Make sure you use an online affordability calculator to give you a better sense on where you stand, financially. RBC has their Mortgage Affordability Calculator that can give buyers a sense of the total costs associated with purchasing a home, including heating costs and property tax. REALTOR.ca also has an affordability calculator, making it easy to figure out finances when one listing turns into 20 tabs and a completely new five-year plan.
3. Get pre-approved for a mortgage
A mortgage pre-approval is when a lender formally reviews a borrower’s income, debts, and assets. Pre-approvals are typically valid for three to four months. This is an exciting step in the mortgage application process because buyers can use this information to make serious offers on properties. Some sellers prefer when buyers are pre-approved, as it’s less likely the deal will fall through due to financial issues.
Here’s more information on a pre-approval, including what you need to get started.
Pre-approval is also a great time for buyers to consider the pros and cons of the different mortgage types available to them.
When a buyer comes in pre-approved, the whole process moves faster and with fewer surprises. We’ve already reviewed your income, your debts, your assets. So when you find the right home, there’s no scrambling. The financing piece is handled, and everyone at the table knows it. Just as importantly, a pre-approval also gives you the confidence to house hunt and submit an offer knowing what you can actually afford.
4. Organize your financial statements
First-time home buyers should organize all the necessary financial documents early on in the mortgage application process. Lenders will need this information to process the loan.
The financial documents required typically include:
✓employment and income verification (i.e. copy of recent pay stubs);
✓confirmation of your down payment (i.e. savings or investment statements);
✓a pre-approval certificate; and
✓bank account statements.
Once an offer is accepted, the mortgage application process tends to move swiftly. Having the right documents in place ensures first-time home buyers can finalize their purchase as quickly as possible. It’s also important to secure these documents in advance if a home purchase takes place during a holiday when banks and major financial institutions are closed.
When offering home buying advice to clients, Atwal recommends narrowing the search to homes that align with both lifestyle needs and pre-approved budget.
“It’s about what type of home you would love, as well as what works for your whole financial picture. The clearer you are on that going in, the more confident every decision feels.”
Here’s where the realistic budget comes in handy. A lender may refuse to finance a home if the offer price is higher than what the buyer can afford. Sticking to a budget can help first-time buyers avoid rejection.
While shopping around, buyers should also consider what kind of home they want to live in. Fixer-uppers or unfinished homes have very different financing implications than move-in-ready properties.
Getting the right mortgage can be as important as finding the perfect property. If you’re looking to purchase your first home or property, Eileen or Jesse can help with everything from house hunting to selecting a mortgage specialist.
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