With home prices slipping lower and lower, the Canadian Real Estate Market is being bombarded with first-time homebuyers and it is important that these young buyers understand the legal contracts they are entering in to. Real estate and mortgage financing terms and conditions can be confusing and misinterpreted if you do not possess a clear understanding of the industry’s “lingo”.
Below we have comprised a basic glossary of frequently used terms in both real estate contracts and mortgage commitments which will enable you to enter into your binding agreements with confidence.
If any of these terms are unfamiliar and you would like clarification, contact your Calgary Mortgage Specialists at MBN Mortgage at 1.866.955.9662 and we can assist you.
Commonly Used Terms:
Agreement of Purchase and Sale: A legal agreement that offers a certain price for a home. The offer may be firm (no conditions attached), or conditional (certain conditions must be fulfilled before the deal can be closed). This offer may come with addendums and will always contain a closing date (date of possession).
Appraisal - The process of determining the value of property, usually for lending purposes. This value may or may not be the same as the purchase price of the home. An appraisal may be required by your financial institution when obtaining mortgage financing.
Appraisal Value – An estimate of the market value of the property. This appraised value is used by lenders to ensure homebuyers are purchasing properties at fair market value.
Closing Costs – Various expenses associated with purchasing a home. These costs can include, but are not limited to, legal/notary fees and disbursements, property land transfer taxes, as well as adjustments for prepaid property taxes or condominium common expenses, if any. The lender may require you to prove that you have a percentage of your mortgage available to you in liquid capital form to cover these closing costs.
Closing Date – The date on which the sale of a property becomes final and the new owner usually takes possession.
Conditional Offer - An offer to purchase subject to conditions. These conditions may relate to financing, or the sale of an existing home. Usually a time limit in which the specified conditions must be satisfied is stipulated.
Conventional Mortgage – A mortgage that does not exceed 80% of the purchase price of the home. Mortgages that exceed this limit must be insured against default, and are referred to as high-ratio mortgages (see below).
Deposit - A sum of money deposited in trust by the purchaser when making an offer to be held in trust by the vendor’s agent, broker, lawyer or notary until the closing of the transaction.
Fire Insurance – Before a mortgage can be advanced, the purchaser must have arranged fire insurance. A certificate or binder from the insurance company may be required on closing.
Firm Offer – An offer to buy the property as outlined in the offer to purchase with no conditions attached.
Fixed-Rate Mortgage – A mortgage for which the rate of interest is fixed for a specific period of time (the term).
High Ratio Mortgage – If you don’t have 20% of the lesser of the purchase price or appraised value of the property, your mortgage must be insured against payment default by a Mortgage Insurer, such as CMHC.
Inspection - The examination of the house by a building inspector selected by the purchaser.
Interim Financing – Short-term financing to help a buyer bridge the gap between the closing date on the purchase of a new home and the closing date on the sale of the current home.
Mortgagee and Mortgagor – The lender is the mortgagee and the borrower is the mortgagor.
Mortgage Term – The number of years or months over which you pay a specified interest rate. Terms usually range from six months to 10 years.
Payment Frequency – The choice of making regular mortgage payments every week, every other week, twice a month or monthly.
P.I.T. – Principal, interest and taxes. Together, these make up the regular payment on a mortgage if you elect to include property taxes in your mortgage payments
Prepayment Option - The ability to prepay all or a portion of the principal balance. Prepayment charges may be incurred on the exercise of prepayment options.
Principal – The amount of money borrowed for a new mortgage.
Term – The length of the current mortgage agreement. A mortgage may be amortized over a long period (such as 35 years) with a shorter term (six months to five years or more). After the term expires, the balance of the principal then owing on the mortgage can be repaid or a new mortgage agreement can be entered into at the then current interest rates.
Total Debt Service (TDS) Ratio - The percentage of gross income needed to cover monthly payments for housing and all other debts and financing obligations. The total should generally not exceed 42% of gross monthly income
Understanding the legal agreements you are entering into as a homebuyer is critical and both your real estate agent and mortgage specialist should be coaching you throughout the process and providing you with guidance on the types of contracts you engaging in, and discussing with you their benefits and drawbacks so that you can make an informed decision.
At MBN Mortgage we ensure our clients are confident in their decisions when purchasing a property or refinancing an existing one. We understand that whether you are a first time homebuyer or a savvy real estate investor you must have a firm understanding of the terms of your real estate and mortgage contracts and we provide the guidance and knowledge that assists you in doing so.
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