The mortgage industry is made up of mortgage brokers and direct lenders who will help you obtain financing to purchase your new home, investment property, or refinance your current home. Keep in mind that everyone’s financial situation, risk tolerance, strategy, and goals are all different. You should choose to work with a professional who you feel comfortable with and who understands your objectives.
Before working with a real estate agent, it’s a good idea to meet with a mortgage broker or a direct lender to discuss your homeownership goals, financial situation, and the loan application process. It would be best if you shopped around to see who can provide better rates and terms. Together, you will work with your mortgage broker to begin the mortgage application process and obtain a mortgage loan.
Mortgage financing is about connecting with the right professionals who understand your strategy and can discuss the best financing options available for you. If you’re a real estate investor, it could be beneficial to meet with a mortgage broker who has a connection to investor-friendly lenders. Often for real estate investors, banks will have strict lending guidelines or require you to put down a larger down payment if you already have a few properties.
It’s important that you find the best mortgage product for you, whether that’s thru the best rate, best deal, or flexible loan with low pre-payment penalties. Outlined below are some of the differences between working with a mortgage broker vs a direct lender.
Also, keep reading for helpful tips for first-time home buyers, how to improve your credit report, and actionable tips for buyers looking to purchase within the next year!
A mortgage broker is a licensed and regulated financial professional who can help you find the best mortgage product through hundreds of loan programs, different lenders, and mortgage rates. A mortgage broker works as an intermediary between you, the consumer, and a lender to find the best lender for you.
Their goal is to find you the best mortgage loan based on your needs, wants, and criteria. They have access to hundreds of different lenders and have more options than a direct lender because they are not just offering one product. A mortgage broker only earns commission once a successful completion has occurred.
There is no additional cost to the home buyer to use a mortgage broker. The lender will pay the mortgage broker once the mortgage file completes. There are a couple of instances where mortgage brokers may charge a fee to the consumer, and that happens when they need to facilitate private lending or construction financing.
Mortgage brokers will assist you throughout the application process, from your pre-approval to a home appraisal. However, a financial institution will still provide your mortgage loan.
In comparison, a direct lender such as a bank can only offer you their own mortgage product. Each bank has one set of rules or criteria and one mortgage product that they can offer you. They are unable to provide a wide variety of mortgage products for you to choose from.
Direct lenders work for a financial institution. For instance, traditional banks, credit unions, or private lenders directly provide the mortgage loan.
Working with a direct lender may be a more straightforward and time-efficient application process if you already have an existing relationship with them. Also, many consumers enjoy the convenience of walking into their local bank and easily setting up an appointment to meet with a mortgage broker from that specific bank.
Mortgage brokers and direct lenders will be able to go over the entire process with you based on your personal circumstances and financial information to find the right lender for you and your goals!
If you’re a property investor, in particular, it can be extremely beneficial to build a relationship with a good mortgage broker. The key difference is that mortgage brokers have access to hundreds of lenders, all with different rules and criteria, to find the best mortgage rates for you. They may even be able to get you a lower interest rate.
Each person’s situation will be different. If you have a low credit score or you are recently self-employed then a mortgage broker might be able to provide more financing solutions. However, if you have a good credit score and you have been at the same full-time job for a few years then a bank could be a better option for you.
A mortgage broker may be able to facilitate slightly better rates than going to your bank. It’s important to do your research and meet with both mortgage brokers and direct lenders before making your final financing decision.
Helpful questions to ask include:
Below is an interview I did with Niko Mavrikos who is a mortgage broker at Tribeca Mortgages in Victoria, BC.
The most common problems that harm someone’s credit score are late visa payments, late phone bill payments, going over credit card limits, and not paying off high balances.
Another mistake I see people make is when they have active credit cards with small balances that they have forgotten about. As a result, they have missed consecutive payments. Even something as small as a $10 balance when left unpaid over consecutive months can harm your credit score. If you can, it’s a great idea to automate your credit card and utility payments so that you don’t miss a monthly payment.
A helpful tip is that instead of having a small credit card limit and using your maximum credit limit every month, it would be better to increase your credit card limit but keep your spending the same. As a result, your credit score will improve.
Apparently, the sweet spot is to spend about 20% of your credit card limit or line of credit limit. For example, say your current credit card limit is $10,000, you should try to spend only $2,000 each month. And if you can, try your best to pay it off right away. It will likely take a few months to improve your credit score after you implement the changes. It does take willpower and discipline, so make sure this is the right strategy for you!
Most lenders, especially the big banks, have a minimum credit score requirement for their applicants. To get the best interest rates available, it’s important to have a high credit score. If you fall below a certain score (depending on the lender’s criteria), you may have to use B lenders (instead of A lenders), who will require you to pay higher mortgage interest rates.
This is a complicated question to answer since each client is different, but the basic criteria include a client’s income, gross debts, and total debts. Gross debts are all liabilities, including credit card payments, car loans, student debt, lines of credit, and existing mortgage payments. Total debts include all previously mentioned liabilities above plus any existing property taxes, utilities and/or strata fees from any properties you currently own.
Keep in mind that any properties that you currently own have to be declared on your mortgage application. It’s best to work with a mortgage broker early on in your search process to go over your specific needs and goals!
1. As a first step, it’s important for buyers to get pre-qualified. Once you’re pre-approved, you should contact a real estate agent to get an understanding of different neighbourhoods and the properties that you’re interested in within your price range and that are tailored to your wants and needs.
2. You should be certain that you have good job security or confidence that your job will remain constant for the next few years. That way, you can afford to make the mortgage payments and additional homeownership costs once you move into your home. For instance, home insurance, property tax, utilities, strata fees and/or landscaping are additional fees that require money out of pocket.
3. Save, save, save for a down payment! The more money you can put down, the lower your monthly mortgage payment will be. Don’t forget to build a safety fund for all the additional payments that come with homeownership.
4. Don’t necessarily go to your highest pre-approved amount. It would be best if you found a home that meets your needs but does not stretch you financially on a month-to-month basis. You’ll want to be able to enjoy life as well! And have money set aside for emergencies.
5. Do not take a big car loan out before you buy your home, as that significantly reduces your qualifying power. For example, on average, a $400/month car loan reduces your qualifying buying power by $100,000 in mortgage debt. For every $100 increase in your car loan payments, it is approximately $25,000 in mortgage borrowing power that you won’t be able to receive.
6. If you have any student loans, you should try to get your university or college to lower your payments. Additionally, it would help if you were diligent about chipping away at statements that have higher rates. Your student loan amount will reduce your borrowing power and negatively impact your credit score if you miss payments.
The Bank of Canada’s 5-year benchmark rate is at 5.04%, so, unfortunately, the low-interest-rate environment hasn’t affected the qualifying rate. Until the Bank of Canada eases their qualifying restrictions, the existing low variable and fixed rates offered don’t help new home buyers with difficulty qualifying.
It’s important to get all your necessary documents such as job letters, income taxes, pay stubs, purchase paperwork, and down payment history to your mortgage broker as soon as you have an accepted offer. Then, your mortgage broker can submit your mortgage application for approval right away. Strong communication between you, your mortgage broker, and your realtor can be very beneficial in an active market!
*Disclaimer: The topics of discussion, content and resources on this website are general information that may not be the right solution or advice for you specifically. Not intended to solicit buyers or sellers currently under contract with a brokerage.
*Stock images from Social Squares