A Glossary of Mortgage Terms and Their Definitions for New Home Buyers

A Glossary of Mortgage Terms and Their Definitions for New Home Buyers

 

Buying your new home is an exciting new adventure! As with every new adventure, there may be some new terminology that you may not be familiar with. This handy guide can inform you as you complete your mortgage documentation. Don’t forget – you can always contact the friendly folks at Ownest for any additional information or help relating to your mortgage application!

 

Adjustable-Rate Mortgage

Adjustable-rate mortgages, or ARMs, are also known as variable-rate mortgages. ARMs have flexible interest rates, meaning that the interest rate on the mortgage will vary based on an underlying index and the prime interest rate set by the lender. (Also see Variable Rate Mortgage)

Affordability

Your ability to carry the cost of ownership of a property in relation to your available income.

Amortization

A fancy way of saying the process of spreading out payments over time. You pay your mortgage over time by way of instalment payments which usually include principal and interest. At the start of your loan period, most of your payment goes towards interest, but over time you chip away at the principal. (See Principal and Interest.)

Amortization Period

The period of time required to repay your mortgage by equal instalments of set payments based on a particular interest rate. The payments are usually a combination of principal and interest in blended amounts.

Amortization Schedule

A table showing the amount of principal and interest in each of your payment instalments and the outstanding principal balance of the loan after each payment is made.

Annual Percentage Rate

Annual percentage rate (APR) is the interest rate that you will pay annually for your loan. It includes additional lender fees. It is usually expressed as a percentage. If you see two interest rates when you shop for a loan or mortgage, the higher rate is your APR.

Applicant (Mortgage)

Refers to all borrowers, co-borrowers and guarantors on a mortgage loan application.

Appraisal

An unbiased opinion by a professional of your home, based on your home’s physical and functional characteristics and the value of homes nearby. Mortgage lenders require an appraisal before they will grant you a mortgage on your home.

Balance

The amount of unpaid mortgage left after a payment has been made.

Blended Payments

Blended payments are a way of repaying a loan that sets equal monthly payments of principal and interest (blended) over an amortization period. By contrast, in a “principal and interest” loan, the borrower pays back the same amount of principal each month, plus a steadily decreasing interest payment.

Borrower

The one who obtains financing from a lender with the agreement that it will be repaid, with interest, within a defined timeframe. You are the borrower if you are getting a mortgage.

Canada Guaranty

A leading private mortgage insurer providing mortgage default insurance.

Canada Mortgage and Housing Corporation (CMHC)

The federal crown corporation that established mortgage default insurance for lenders and which promotes the construction of new homes, the repair and modernization of existing houses, and the improvement of housing and living conditions. (See also Canada Guaranty and Genworth)

Closed Mortgage

A closed mortgage is one that cannot be fully paid off, refinanced or renegotiated before the end of the term without incurring a penalty. Lender breakage costs, the opportunity cost to a lender of a borrower repaying a loan before scheduled maturity, will incur a payout penalty.

Credit Report

A record that details an applicant’s past borrowing and repayment history, and which is the reason for their credit score. Lenders often obtain borrower’s credit reports from Equifax and Trans Union.

Credit Score

Your credit score is a three-digit number that comes from the information in your credit report. It shows how well you manage credit and how risky it would be for a lender to lend you money. Your credit score is calculated using a formula based on your credit report.

Debt Ratio

Also called debt-to-income ratio or debt service ratio, it’s a comparison of your total monthly payments to your income. It is used to determine how much of a mortgage you can afford as a borrower. It’s the percentage of your income that goes toward paying your monthly debts, and it helps lenders decide how much you can borrow. (Also see Gross Debt Ratio and Total Debt Service)

Down Payment

The part of the purchase price of a home that the buyer pays in cash and does not finance with a mortgage. The minimum requirement in Canada is five per cent and can be from your own resources (cash, savings, investments) or be gifted or borrowed from a credit card or line of credit.

Fixed-Rate Mortgage

A fixed-rate mortgage is one in which the interest rate remains the same over the whole term of the mortgage.

Floating Rate

A floating (aka variable or adjustable) mortgage rate refers to a mortgage that does not have a fixed rate of interest over the life of the instrument but rather floats with the market.

Genworth

A leading private mortgage insurer providing mortgage default insurance.

Gross Debt Ratio

A ratio that is the percentage of your income needed to pay all of your monthly housing costs, including principal, interest, taxes, and heat (PITH). It also includes 50% of your condo fees, if applicable. The percentage can vary by lender.

Interest Rate

The amount charged by a lender to a borrower for the use of borrowed funds, calculated as a percentage of the principal.

Lender

The bank or other institution responsible for underwriting, funding, and administering your mortgage loan and to whom your real estate is pledged as security for the loan. (Also see Mortgagee)

Maturity

The end of a term, or period, for a mortgage loan at which time the borrower may have the option to pay off the mortgage, renew it with the existing lender or transfer it to another lender. The maturity date of a mortgage is when the mortgage term ends. It is often referred to as the renewal date because it’s when you as the borrower may have the option to renew, refinance, or pay your mortgage off completely, with no penalty. (Also see Mortgage Renewal)

Mortgage

A mortgage is a type of loan used to buy a home or other property. It allows the lender to take possession of the property if you don’t repay the loan on time. The property is the security for the loan. The payments cover the interest on the loan plus the principal (the amount of the loan).

Mortgage Insurance

A credit risk management tool protecting the lender from losses due to default on the mortgage by the borrower. It is typically required when the loan to value ratio for the property is 80% or greater.

Mortgage Pre-Qualification

A pre-qualification gives you an estimate of ow much house you can afford, based on your credit information, gross household income and overall finances. It does not require supporting paperwork.

Mortgage Pre-Approval      

The tentative approval for a mortgage, made in advance of a home purchase. It is valid for a specified time period and is subject to the borrower submitting their supporting documentation to the lender, and subject to their financial position not changing. Once a property has been purchased, the property must also meet the lender’s underwriting requirements.

Mortgage Renewal

The process by which a borrower agrees to another mortgage term with the current lender to replace the term that has matured. At the end of the prior mortgage term, and with a balance of funds still owing, the borrower may choose to continue with the same lender for another term. However, the details of the mortgage document may change at the time of the mortgage renewal to reflect the current mortgage market. The new term leaves the existing registered mortgage in place and is therefore not considered a new mortgage. The old mortgage document secures the renewed term, and its provisions are amended to fit the new term.

Mortgage Statement

A statement received from the lender that includes details of the mortgage such as property address, outstanding principal balance, monthly payment, interest rate and mortgage term.

Mortgage Term

The period for which the lender loans funds to the borrower, as specified in the mortgage agreement. At the end of the mortgage term, the principal and unpaid interest are due and payable by the borrower to the lender. At that time, the borrower may renew or refinance the mortgage. (Also see Mortgage Refinance and Mortgage Renewal)

Mortgagee

An individual or organization that lends money secured by real property for which they may receive specified payments according to the mortgage agreement. (Also see Lender)

Mortgagor

The borrower in a mortgage, typically the home buyer. The mortgagor makes specified payments according to the mortgage agreement. (Also see Borrower)

Open Mortgage

A mortgage that can be paid off early without any penalties or fees attached.

Principal (Mortgage)

The amount of funds originally borrowed from the lender or the portion of a mortgage still owing upon which interest is calculated.

Qualifying

The process of determining a prospective borrower’s eligibility for mortgage financing related to a potential real estate purchase. (Also see Mortgage Pre-Approval)

Term

The period for which the lender loans funds to the borrower, as specified in the mortgage agreement. (Also see Mortgage Term)

Total Debt Service (TDS)

The percentage of the borrower’s income that is needed to cover housing costs (GDS) plus any other monthly obligations that an individual has, such as credit card payments and car payments. The percentage can vary by lender. (Also see Debt Ratio)

Title

A document that records the information about the land, such as the legal land description, municipal jurisdiction, ownership, and registered interests. The Land Titles Office no longer issues a paper Certificate of Title, but a paper copy may be available from any Registry Agent in Alberta. An electronic copy is available on the Spatial Information System (SPIN) operated by Alberta Registries, Service Alberta.

Variable Rate Mortgage

A mortgage where the interest rate is periodically adjusted based on the prime lending rate typically set by the lender. Rather than being a Fixed Rate Mortgage, which has the same interest rate over the term, when an interest rate change occurs, payments may be increased or decreased. (Also see Floating Rate)

 

Do you have mortgage-related questions? Feel free to contact us and one of our friendly in-house experts will be happy to help!

 

A Tale of Two Salespeople

A Tale of Two Salespeople

 

To illustrate how Pront-O supercharges the sales process, let’s look at the work journeys of two different salespeople – Jen and Mike. Jen and Mike are both excellent sales associates, working for different home builders. Their employers have a broad inventory of multi and single-family residential homes. Both have similar jobs but only one of them has the benefit of Pront-O, the Ultimate Lead Qualifier.

Mike – Sells the Traditional Way

It’s a busy weekend and Mike is hard at work in the show suite. There are numerous potential customers in the show home, but Mike can’t know for sure who is serious and more importantly, who can afford what product. Mike looks around the busy showroom and wishes there were a way he could know upfront who are the most interested and eligible prospects, so he could zero in on the top ones. Is it the older couple looking at condos? The family with four kids?

Ron and Sharon are young, first time home buyers. They like the high-end finishes on a mid-priced home. Mike recommends they get pre-approved for a mortgage.

“How do we know who has the best rates?” asks Ron.
“I can recommend a couple of options, or you can do your own research,” says Mike.
“How long does it usually take to get pre-qualified?” asks Sharon.
“It usually takes a week or two, between doing the paperwork and getting the lender approval.” says Mike.

The young couple leaves and Mike is no further ahead in knowing if they are a potential sale or not. He makes a note in his own system to follow up with them later.

Jen – Uses Pront-O to Qualify Her Leads

Jen accesses her Ownest dashboard from any device, where she instantly sees the system has intelligently screened all potential buyers in her funnel, ranking them for her using the easy-to-read green/yellow/red ranking system based on the Five Cs of Credit. Today she is in the show suite when an older couple comes in.

They are intrigued by the fact they can pre-qualify right on the show suite Ipad (which has been sterilized by Jen) and get right to answering the 8 simple pre-qualification questions. Jen has barely returned to her desk computer when their pre-qualification comes up on her dashboard – green! Jen knows that the couple have looked at a mid-priced condo across the city.

 

 

Based on their verified income and green ranking, they can certainly afford a more luxurious place. Jen offers to show them options closer to where they live now. The couple are thrilled at the higher-end finishes and the location. They’re grateful to Jen because they didn’t even know the development existed.

By noon, Jen has closed the deal –  leaving it to Maestr-O to guide the couple through the online mortgage application.

Now she can turn her attention to the “yellow lead” clients, whom she has never met. They are Nick and Karen, first time homebuyers who have pre-qualified on the builder’s website from home (due to COVID concerns), eight simple questions and a soft credit check. Thanks to the Ownest widget, the link is seamlessly integrated into the builder’s website.  

Jen contacts Nick and Karen and they are impressed at her quick follow-up and the builder’s fast “one stop shop” kind of service, searching thousands of mortgages to match them with the most suitable lender.

Jen knows that Ownest will work with these clients to identify solutions to their complex credit situation. She also knows that she may be in a position to help them find the home that is a better fit for them. Although the young couple loves the layout and finishes of a higher end home, Jen is able to identify a different model with a similar layout in a less expensive community, one more appropriate for their financial situation.

The couple are grateful. She now has their loyalty because they feel like “Jen is looking out for us.” Jen lands the sale because Pront-O gave her insight into their creditworthiness, allowing her to sell them on a property that fit their situation.Two weeks later, Mike follows up with Ron and Sharon. Unfortunately for him, in the interim they have identified a similar home through a realtor friend who has a mortgage broker connection. Mike lost that sale and the potential for several others, because he doesn’t have the credit information required to focus on the strongest leads, or the ability to respond in real time with appropriate options.

With Pront-O intelligently screening your potential customers’ credit, you’ll have all the information you need to manage leads, customer and the sales process – including valuable insights for up-selling and cross-selling.  Isn’t it time Pront-O joined your sales team?

 

The Five Cs of Credit and Why It Matters

The Five Cs of Credit

and Why it Matters

 

What Are the Five Cs of Credit?

The five Cs of credit is a set of criteria used by lenders to gauge the creditworthiness of potential borrowers. This type of approach weighs five different characteristics of potential borrowers and conditions of the loan, to help predict the chance of potential default and overall risk or loss for the lender.  The Five Cs are: Collateral, Credit, Capacity, Capital and Character.

Ownest's software verifies credit using the Five Cs of credit

 

Why is it Important to Use the Five Cs of Credit?

Evaluating a borrower’s creditworthiness based on the Five Cs of Credit is important because it gives the lender a better overall picture of the borrower and their ability to pay off the loan. It also takes into consideration the more “personal” side of financing by considering the borrower’s character, as opposed to simply looking at past credit history and collateral. For example, if the credit check reports a default payment, it could have been due to unique or rare circumstances, such as an illness or divorce. These types of questions will help lenders understand the borrower’s credit – looking back to the credit history and looking forward to the client’s future capacity.

Save Time: Ownest’s Software Automatically Calculates the Five Cs

One of the biggest challenge when it comes to financing is knowing the actual creditworthiness of a potential purchaser or borrower. For example, if someone is interested in purchasing a home, the sales associate spends a lot of time with the customer during the sales journey. Waiting for a mortgage approval can take 7 – 10 days, and in the meantime, your sales team is spending valuable time building a relationship with a client who may not be approved for financing.  Wouldn’t it be nice to know this information at the beginning of the sales journey?

Ownest’s Pront-O app instantly pre-qualifies and intelligently screens
applicants based on their actual borrowing ability.

 

 

The software performs a soft credit check using the Five Cs of Credit, then sorts and ranks the leads by  summarizing the information in an easy-to-read stoplight snapshot (green, yellow, red rating system). This data  empowers our affiliate and lender partners with key insight and visibility of the borrower’s overall credit profile – faster and more accurately than any other software on the market – so you know where you’ll get the best return for your sales efforts.

 

How Much Time and Money Will You Save?

 

Whether you’re a lender or a company that offers financing for your products, Ownest software can provide valuable insight and streamline your sales process. Pronto’s pre-qualification capabilities are just one of the many features of our revolutionary software. Contact us to schedule a demo today!

Request a demo of Ownest Software

 

New CMHC Lending Criteria

Ownest has in-house mortgage experts

 

 

On June 4, 2020, CMHC announced changes to their underwriting criteria, which will impact sales in some parts of the new home sector. How does this affect home builders, realtors, mortgage brokers – and home buyers?

What are the changes?

  • Credit score requirement increasing from 600 to 680 Beacon;
  • Flex down mortgages are no longer available (no more zero down mortgages);
  • Stricter Debt Servicing Requirements.

When do these changes take effect?

  • July 1st, 2020

Why are they Changing the Criteria?

  • The COVID-19 pandemic, related job losses, business closures and a drop in immigration are adversely impacting Canada’s housing market.
  • CMHC states that these actions will protect home buyers and reduce government and taxpayer risk while stabilizing the housing market.

What do these Changes Mean on a Practical Level?

  • If you have deals in the pipeline, get them to apply for a mortgage NOW. Clients will need to be approved by the lender and insurer (CMHC) prior to July 1st in order to qualify under old rules. After July 2020, there will be more restrictive requirements for credit and debt servicing.
  • For example: For a purchase of a $350,000 house with 5% down the requirement for income is $73,571.13, after the changes the requirement will change to $81,979.26. This will have a significant impact on income requirement.

What can you do to assist your buyers using CMHC?

  • Any clients with lower credit scores, unsure of their direction should firm up purchasing now.
  • Any clients with a little extra debt with the requirement of more flexible guidelines should firm up agreements now.
  • Try to secure new home upgrades as soon as possible to avoid big material changes that require re-approval closer to possession as it may cause an issue.

It is important to note that this is not a directive from the Ministry of Finance, so Canada’s private mortgage insurers such as Genworth and Canada Guaranty are not adopting the new mortgage rules.

Ownest is Here to Help

Ownest’s team of in-house mortgage experts are second-to-none and work with a large network of preferred lenders.

  • We will put in the extra hours necessary to ensure your clients’ needs are met.
  • Any offers submitted where approvals from lenders are obtained, we will ensure CMHC or other insurer approval is obtained;
  • Wherever possible, we will work with lenders that don’t require CMHC or other insurer approval after financing had already been approved, to help ensure your client has approval upon possession (some banks require resubmission closer to possession).

If you need advice or would like us to help you navigate the changing landscape of mortgages, we invite you to contact us and we’ll be happy to help.

Contact Ownest for Mortgage Advice