Buying Your First Home: Three Steps to Successful Mortgage Shopping

Summary of the three steps to successful mortgage shopping

Step 1: Know what you need and want in a mortgage

Before you start shopping around for a home or a mortgage, understand the following:

• the minimum down payment required to buy a home
• the down payment amount that you will need to avoid having to pay for mortgage default insurance
• how the Home Buyers' Plan (HBP) can help you make the down payment on your home
• the difference between term and amortization period
• how accelerated payment options can help you save money in interest and shorten the time it will take you to pay off your mortgage
• the difference between fixed and variable interest rate mortgages
• the difference between open and closed mortgages
• the prepayment options you might like to have on a mortgage
• optional insurances available on mortgages, such as:
  • life insurance
  • disability insurance.

Step 2: Shop around and get pre-approved

Before shopping around:

• Evaluate your financial situation to determine how much you can afford as a down payment and as regular mortgage payments.
• Request a copy of your credit report to make sure it does not contain any errors. Lenders can check this information.

Key tips while you are mortgage shopping:

• Shop around at a few different lenders and brokers to obtain pre-approvals for a mortgage before you start looking for a home. Keep in mind that the pre-approved amounts can overestimate what you can actually afford to pay.
• Bring all the information that you may need during the pre-approval interview with a lender.
• Consider only homes that you know you can afford based on pre-approvals you received from different lenders.
• Know how much you can afford to borrow by calculating the maximum home costs based on your income and current debts. Use the GDS and TDS formulas. Remember to add to your budget any additional costs you expect in the near future, such as starting a family or purchasing a car.
• Don't accept the first offer made to you. Make sure you have explored other offers to find one that best meets your needs.
• Be sure that the pre-approval contains the terms that you want — for example, the prepayment options that you want to be able to use.
• Don't underestimate a small difference in interest rates between offers. A small difference may have a major impact on the interest you pay in the long run.

Step 3: Make the right decision for your needs

Before signing a mortgage agreement:

• Budget realistically for the extra costs that you must pay when you buy a home, including closing costs, moving costs and other costs related to owning and maintaining a home.
• Read the terms and conditions of your mortgage agreement carefully. Ask questions about anything you don't understand.
• Don't forget that federally regulated financial institutions (such as banks) cannot use coercive tied selling to force you to get another product.