Conditional Offer

A conditional offer is an offer to purchase a property that contains certain conditions that must be met before the purchase can occur. Common examples include an offer being conditional on the purchaser obtaining financing, or the property passing a home inspection, or on the buyer selling their current home by a certain date.

Condominium (aka: Condo)

If you live in a big city you’re probably more familiar with condos than homes. A condo is a form of property ownership in which the owner has title to a dwelling unit that is part of a larger property and owns a share of the common elements (such as elevators, hallways and the land).

Conventional Mortgage (aka: Low-Ratio Mortgage)

A mortgage that provides financing for up to 80% of your property’s value.  A Conventional Mortgage does not require mortgage default insurance. However, borrowers will be happy to know that if a lender decides to insure a Conventional Mortgage, the cost is borne by the lender, not the borrower.

Credit Report

Your credit report is a summary of your credit history dating back to the very first time you applied for credit. Lenders of all types share your credit and payment information with credit reporting agencies. The data on your credit report includes current and past financial debts for up to the prior 7 years, and a record of debt payment history. 

A lender uses the information from a credit report, together with other information you have provided, to decide whether to accept or deny your mortgage application. Lenders get credit reports from third party credit reporting agencies, like Equifax and TransUnion.

Credit Score

Ah, the golden ticket to a great mortgage. A credit score is a three-digit number that is calculated using a person’s prior credit history. Lenders use this number as an indication of a potential borrower’s capacity to repay a loan.  So, what gets factored into your credit score? Things like your track record for making debt payments on time, the length of your credit history, the amount of debt you have and your utilization rate. Third party credit reporting agencies, like Equifax and Transunion, perform these calculations.

The better you manage your credit the higher your credit score. Your credit score will change over time as current activity is updated.  Looking to improve your credit score? Focus on consistently making payments on time, paying down debts and avoiding taking on too much debt.

Credit scores range between 300 and 900 and are generally grouped as follows:

Excellent (741-900) – rare late payments, generally pay down debts, and low credit utilization;

Good (681-740) – very few late payments and low utilization;

Average (641-680) – several late payments combined with a higher overall debt load.  Possibly defaulted on a loan in the past;

Below Average (575-640) – have experienced serious credit trouble in the past including defaults on more than one loan;

Poor (300-574) - have experienced serious credit trouble in the past including defaults on more than one loan with high debt loads and possibly prior bankruptcy.

Lenders in the Canadian market generally consider 680 and above to be prime credit scores and borrowers with these scores often qualify for the best rates.  A credit score of 620 or lower is generally considered a poor credit score and borrowers with these credit scores can often find mortgages from B-lenders that charge higher rates.  A mid score between 620 and 680 is still considered ok but the outcomes for borrowers in this range can vary.

Creditor Life Insurance

Also referred to as mortgage critical illness insurance, mortgage disability insurance or mortgage life insurance, Creditor Life Insurance helps you prepare for the unexpected. This type of insurance can cover your mortgage payments or reduce or pay off your mortgage in the event of death, critical illness, disability or job loss. Creditor Life Insurance is typically offered to Borrowers whenever they take out a new mortgage.

Debt Service Ratio

Your Debt Service Ratio is a number lenders will look at to assess your ability to repay a mortgage.  The objective is to ensure debt payments don’t exceed a certain percentage of your income. There are two types of Debt Service Ratios - Gross Debt Service ratio (GDS) and Total Debt Service ratio (TDS). 

Default

A Default occurs when a borrower fails to meet their legal obligations in the mortgage contract. The most common cause of default is when a Borrower fails to make their monthly payments on a mortgage. 

So, what happens if you default on your mortgage? Your lender can take possession of the property, either via Foreclosure or Power of Sale, and recover the amounts owing to them under the Mortgage.

Delinquency (aka: Arrears)

Occurs when a Borrower fails to make their mortgage payments on time.

Discharge Statement

Once you are ready to pay off your mortgage in full (yay!) a discharge statement will be provided by your Lender.  This statement details the amount required to pay off a mortgage as well as any terms and conditions that must be met before the lender will release the Borrower (and any Guarantors) from their obligations under the mortgage agreement and release the lender’s claim on the borrower’s property. Once the remaining amount has been paid off and all of the conditions have been met, the Lender will discharge the mortgage from title to the property of the Borrower.  

Documentation

To obtain a mortgage, you need to provide certain documentation to the Lender. This documentation will be used by the lender to confirm your identity, employment, income and other material factors in your mortgage application.  Any information you provided to the lender or broker for the mortgage application must be confirmed in the documentation provided.  Here are some examples of the types of information you might be required to provide:

• Letter of employment

• Current paystub

• Tax documents – T4 for the past two years

• Notice of Assessment (NOA) from the CRA

• Copy of your tax returns

• Bank statements

• Financial statements (if self employed)

• Government issued photo ID

• Other documents specific to your circumstances

Down Payment

To obtain a mortgage a Borrower must provide an upfront cash payment called a Down Payment.  How much will the down payment be? That depends on the type of mortgage product and the customer profile. 

There are three broad categories:

1. High-Ratio Mortgages require a down payment of between 5% and 19.99%. They must be insured (by CMHC, Sagan or Canada Guarantee) but are only eligible for insurance if the mortgage balance is less than $1 million;

2. Conventional Insurable Mortgages require a down payment of at least 20% and if the mortgage balance is less than $1 million the mortgage is also eligible for insurance. Although, the insurance is not necessarily required.

3. Conventional Uninsurable Mortgages of over $1 million require a down payment of at least 20%.

• Properties valued under $500,000 - the minimum down payment must be at least 5% 

• Properties valued between $500,000 and $999,999 - the minimum down payment must be at least 5% on the first $500,000 and 10% on the amount above $500,000. 

• Properties valued at $1,000,000 or more - the minimum down payment must be at least 20%.

What if you don’t have the money for a down payment? You should be aware that borrowing a down payment will make you ineligible for some mortgage products.  Many first-time home buyers receive a gift from family for some, or all, of their Down Payment.  This is acceptable to most lenders as long as the Borrower provides a letter from the giftor showing whether the funds are repayable or not. How would a lender even know where the funds for your down payment came from? Borrowers are required to provide documentation proving the source of the funds.

Firm Offer

A firm offer is an offer to purchase a home without any conditions attached. If you need financing to complete the purchase of a home, do not opt for a Firm Offer until your mortgage financing is fully approved by your Lender.

First Home Savings Account

A savings account that is a registered plan that allows first-time homebuyers to contribute up to $8,00 per year, with a total limit of $40,000. When money is deposited in a FHSA you get the benefit of tax deductibility like an RRSP and amounts withdrawn for a house purchase are tax-free, like with a TFSA.

First Mortgage

This is the mortgage registered in first position on title against a property. Why does your position on a mortgage matter? Because, the first mortgage has priority over other claims in the event of a sale or default. This means it would be paid first ahead of the other claims.

First-Time Homebuyer Incentive

A shared home equity program with the Government of Canada that helps you with the down payment for a mortgage. The incentive can help you meet the minimum down payment requirements for a mortgage and/or reduce the size of the mortgage you need. The incentive offers up to:

• 5% or 10% for a FTHB’s purchase of a new build home;

• 5% for a FTHB’s purchase of an existing home; or

• 5% for a FTHB’s purchase of a new or existing mobile home.

By sharing the equity, the government will share in the upside or downside of the future property value, up to a maximum of 8% per year. The borrower will have to repay the incentive within 25 years or upon the sale of the home. The amount to be repaid is the amount of the incentive plus the rate of gain in value of the home, capped at 8% per year, or minus the rate of loss of value of the home, capped at 8% per year. The borrower can also repay the incentive at any time without penalty.

Fixed-Rate Mortgage

With a fixed-rate mortgage, your interest rate and monthly payments stay the same for the entire mortgage term. The downside of a fixed-rate mortgage? They tend to have higher interest rates than Variable-Rate or Adjustable-Rate Mortgages. However, there is a potential upside, if mortgage interest rates go up during the term, you're protected because your rate stays the same.

Typically, the longer the term of the mortgage, the higher the mortgage rate. For instance, a 5-year mortgage will typically have a higher interest rate than a 2-year mortgage.

Foreclosure

If you miss enough mortgage payments to be considered to have gone into Default, your Lender can take legal action called Foreclosure. Foreclosure is a lengthy legal process that involves the court system. In most jurisdictions, your Lender can take over your property under a legal process called Power of Sale that takes less time to complete. You will be notified by your lender, providing you the chance to bring the Mortgage back into good standing. If you are unable to do so, the Lender can sell your property to recover the money owing on your Mortgage, including principal, interest, legal fees and other charges.

Gross Debt-Service (GDS) Ratio

The percentage of gross annual income that is needed to pay all costs associated with housing. The most common formula is:

mortgage payment + property taxes + heating + 50% of condo fees (if applicable) / gross household income.

The GDS ratio is capped by most lenders at 39% for the best borrowers.

Gross Monthly Income

The total income a person earns each month before taking into account expenses or deductions.