# How exactly does a Mortgage work?



## hedgehog12 (Feb 28, 2011)

I have a very elementary (and possibly dumb) question ,that I'm afraid to go into a bank and ask because I may be laughed out of one.

I've been hearing alot of property buying lately, can someone explain to me how exactly does a "mortgage" work?

For example, say I buy a house of $300,000, and take out a $200,000 mortgage. I understand the $200,000 is a "loan" and has to be paid back to the bank in installments. I have a few additional questions:

1) How does the bank pay the seller? Or does the bank give me the money directly (ie. the $200,000, maybe in a cheque?) and I pay the seller directly? 

2) Isn't this complex to arrange? 

3) Where does the Real Estate Agent come in in all this? Does he act as a representative, and give the money to the seller for me? Does he have anything to do with the mortgage?

Thanks alot!


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## the-royal-mail (Dec 11, 2009)

Each side needs a lawyer and a RE and they coordinate all this amongst themselves and between the banks of course. It all happens on closing day. If the house sells for $200K, then the seller's bank ultimately receives payment for $200K. You then owe your lender $200K and they calculate the payments based on the terms you negotiated with them beforehand. Ask all the questions upfront and don't be afraid to shop around for the best rates the same way you would for anything else. I don't think your RE agent gets too involved in the mortgage side of things. That's something you should work out beforehand. You never personally end up with the money in your hands, unless of course you are the seller, in which case the money ultimately ends up in your bank account, after whatever you still owe has been paid back to the appropriate lenders etc. So if you still owed $75K then your lender would receive discharge of $75K and the remaining $125K ends up in your bank account. You can then use this money in the new house you buy.

Now my question for you, is can you afford it? Some of the stories I've been reading about are quite scary. People who have 10s of 1000s in debt, no rainy day money, no down payment etc. We generally in CMF recommend you aim for 20% down payment to save yourself 1000s in CMHC fees. You should also save additional cash for moving and setup, legal expenses etc in the new place. If you cannot or will not save these things BEFORE talking to any RE agents to buy, you should not buy a house. RE agents are there to sell and are usually very good at what they do. Their fees are around 4% of the selling price, half goes to each side.

Remember that RE prices in cities are super inflated right now. Be careful about what you hear, as the govt has been pumping RE through low interest rates and even certain posters in this forum. Don't allow these groups to influence your decisions. There is no rush.


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## MarcFromOttawa (Oct 22, 2011)

hedgehog12 said:


> I have a very elementary (and possibly dumb) question ,that I'm afraid to go into a bank and ask because I may be laughed out of one.
> 
> I've been hearing alot of property buying lately, can someone explain to me how exactly does a "mortgage" work?
> 
> ...



#1 and #2
Your Real Estate lawyer will take care of transfering funds from the bank to the seller.

#3
A good Real Estate agent will provide you with qualified buyers, list your place on MLS, and perhaps help stage your place. They are not necessary in the transaction.


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## Butters (Apr 20, 2012)

*A mortgage broker, will answer a lot of your questions.* You don't directly pay him anything
His job is to look around to find you the best posted rate, the lender(bank) pays him for bringing them a new client.
If you have history at a bank (had a positive account with one of the major banks) sometimes they are willing to give you a "better than posted" rate
Asking for a "pre-approval" takes a very very small hit on your credit score... anytime you ask for money, it's a hit
So although pre-approval is extremely recommended when making an offer, it can be done within a 48 hour block(or shorter).. you however wouldn't want to be rushing last minute to make an offer on your dream home

banks are so silly, they will pre-approve you for 4-5 times of your yearly wage (gaurenteed hours) so if you say "i make 40 dollars but only get 20 hours a week 40$x20(hours)x52(weeks) = 41,600 (even if you usually work more than 20 hours, thats what they do)

so they'll say, you're pre approved for 180,000 you can in turn add you downpayment lets say 70,000, and you could purchase a 250k house
but, be careful buying more than you chew, 3 times your yearly wage is more recommended so spending say 130k adding 70k, you could AFFORD a 200k house


You should look at Home Buyers RRSPs too, you can put 25k of RRSPs as your downpayment (you just ask your RRSPs lender, to take out the money for "home buyers" they send you the cheque, goes tax free on your income tax that year, and (ASSUMING YOU MAKE 30-70k) You can either pay 500 in tax, or put 1600 back into your RRSP account per year, for 15 years
RRSPs will give you a 30% return at income tax time, if you get matched by your company, then its a no-brainer!!!
so your 25k down payment, using RRSPs (between 30-70k) can turn into a 33k down payment, and you just have to pay that 7k back, either by 500 a year, or hide your income with 1600 RRSPs... its basically like a tax free 7k loan for 15 years, imo, very good!! that 7k down, will save you tons of interest on the purchase of the house!
[if you make over 70k it will really pay off!!!!!!!]

20% needed  best rates(which stick with you for a long time) and save 4k for CMHC fee

expect to pay an additional 4k for closing costs... (800$ lawyer fee, land certificate 400$, transfer tax, etc...)
your RE agent, will likely have a mortgage broker he recommends, a lawyer he recommends, etc... he knows exactly what is needed to get you into a house, thats how he makes the money! if he is a young honest guy, he will be willing to help you with all that stuff. if you find a vetern RE agent, he has so many clients, he doesn't want to waste his time earning a reputation with someone who is un-sure if they should buy right now... the vetern cares about money and won't see you as dollar signs, like a young guy who is fighting for business! and the young guy knows, if he does a good job now, the next time you want to buy, or have a friend interested, he knows he will get the phone call, get the busniess!!!! get the money!!!!!!!!!


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## Just a Guy (Mar 27, 2012)

A real estate agent works on finding or selling of the house, he's the "sales guy". After you find a house, you and the Realtor write up the "offer to purchase", basically the contract setting out the terms of sale. If the offer is accepted, you pay the Realtor a deposit. This usually is used to cover all or part of the commission that the realtor gets for selling the house, but it counts as part of your purchase price, so if you buy a $100,000 house, put down a deposit of $10,000, you need to arrange another $90,000 before the sale closes... If you had any conditions on the terms of sale, like a house inspection, you work with the realtor to clear these from the offer. Once you are happy that all your terms are met, we move on to the next step and the realtor disappears for a while.

This is where we move on to banker and lawyers. Say you wanted to put down 20% and finance the remaining. You talk to your bank or mortgage broker about getting a mortgage for $80,000 (shop around and understand your options). Things you usually get a choice about are the interest rates, amortization period (how long the loan is for, generally go for shortest), payment frequency, lump sum payment amounts/frequency, and type (fixed, variable, open, closed, etc.). You'll also be offered mortgage insurance, generally a bad investment, go buy term life to cover the amount it is usually cheaper and the amount remains the same as opposed to declines (if you buy $80,000 mortgage insurance, you pay the same premiums for coverage even on your last few months where you may only cover a couple hundred dollars, if you buy $80,000 term, you get $80,000).

While you are talking to the banks about the money, your lawyer is clearing up the title, calculating the property tax adjustments (property taxes are paid 6 months from last year and six months prepaid for the next, so depending on what month you buy in you may have to pay the seller back for property taxes or you get a credit for property taxes), as well as a bunch of other things. He gets you to arrange for the bank to transfer the $90,000 into his trust account (so you give him a cheque for $10,000 and give permission for the bank to transfer the loan to your lawyer).

The bank will then want you to sign your mortgage documents, and the loan will be higher than $80,000 as they put in their legal and other fees, unless you've negotiated that they won't charge you for them. If you has a lower downpayment your CMHC fees would also be added to the mortgage. You could have your lawyer review the papers, but it would cost you his time and it basically boils down to the golden rule, and the bank has the gold. Be sure that there are no errors in what you agreed to, the forms are very standard with the major banks. One thing that may confuse you is the interest rate will look different than what you agreed to. This, usually, is because of the way interest is calculated but, in some convoluted way, it's is what they told you...legally speaking.

Near the closing day you'll meet with the lawyer too sign the transfer papers, and be presented with your legal bill, usually a couple thousand dollars to cover his time and all the "filing" fees. The lawyer will arrange for the money to be transferred to the appropriate people, as well as all the paperwork. You should get your copies of everything in the mail a few weeks later.

On the closing day, if everything goes well, you'll meet with your realtor and he will give you the keys and usually a small gift. Congratulations you are now the proud owner of a mortgage.

I may have missed a few things, and it may sound complicated, but it really is just a process, most of which you have very little control of. 

I also left out all the fun stuff like the bank asking for all your financial information, losing the paperwork, land titles being backed up, having to ask for an extension on the closing date, carrying costs, etc...

Basically, whatever happens, don't worry too much, it will work out in the end. I swear making people panic is the only fun these bankers and lawyers have in life.


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## hedgehog12 (Feb 28, 2011)

Thanks! I'm still trying to digest all the information.

I have a a few more additional questions:



SheaButters said:


> *
> 
> banks are so silly, they will pre-approve you for 4-5 times of your yearly wage (gaurenteed hours) so if you say "i make 40 dollars but only get 20 hours a week 40$x20(hours)x52(weeks) = 41,600 (even if you usually work more than 20 hours, thats what they do)
> *



only 4-5 times what I make?? does this mean I'll never be able to get a $200,000 or higher mortgage?? I only make $30,000 per year...


2) So a 300,000 house is not really 300,000 ... wiht everything it's more like $350,000?


3) I hear if I take out my RRSPs (ie. for a down payment), I will get penalized on my RRSPs?? ... I also vaguely remember someone telling me that first-time home buyers are NOT penalized? (regardless of whether the house is old or new) ... does anyone know more about this?


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## Butters (Apr 20, 2012)

hedgehog12 said:


> Thanks! I'm still trying to digest all the information.
> 
> I have a a few more additional questions:
> 
> ...



1) my numbers aren't exact, but with a 30k a year income they will likely pre approve you for somewhere close to 150k DEPENDING ON YOUR CREDIT RATING (assuming its very good and you have no debt)... that's something that you'd have to go to the bank and check... ASKING FOR A LOAN takes a small hit on your credit rating Don't do it OFTEN!
if you had a 50k down payment, and 150k mortgage approval, you could buy a 200k house
you don't want to be extremely house poor, don't forget cable/power/taxes/insurance... once you have a house, everything starts adding up quick

2) 300k house 
(lets assume 2 bidders, it sells for 308k) 
+ lets say 6k for closing costs (lawyer fee, land transfer, etc..)
You're probably looking at 314k
Don't forget, you'll need furniture, lawn mower, vaccum, etc...
(less than 20% down = an additional CMF insurance of around 5k)

3) Home Buyers 
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/menu-eng.html
says you can take up to 25k out of RRSPs, to use as a downpayment (or renos)
as long as you put it back the next 15 years (so say 1666 back per year) or you'll add that 1600 as income, and pay 500 dollars taxes
either way, better to use money now IMO  especially if it helps you get to 20% downpayment to avoid CMF fees of 5k
and especially, if your employer matches RRSPS 

*note the RRSPs have to be in there for at least 90 days
you can take it out whenever in the tax year you are going to purchase the house, and within 30 days after the purchase


**edit** no penalty with home buyers
and I wouldn't recommend going to your extreme limit of pre-approval

Gail Vaz-Oxlade (till debt do us part TV SHOW) says, should be 33% of your wage


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## hedgehog12 (Feb 28, 2011)

Thanks! I just wanna ask, 

Everything in Vancouver, BC costs over $400,000 ... given my current salary and down payment of $50,000, does this mean I can never buy something in that range ?? (since I'll only be approved for a $150,000 mortgage, so 50,000+150,000 = $200,000 total) 

how do people do it then ?? I've heard neighbours buying a $700,000 house and they make the same that I do and I don't think they put down more than $50,000 down payment. does this mean the bank approved them for a $500,000 mortgage??


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## Just a Guy (Mar 27, 2012)

Things you need to understand...

Banks are in business to make money, not for you, but for themselves.

For every dollar in savings you put into the bank, they are allowed to lend out multiples of it (usually between 10-20x, it varies), so they are leveraged. Most of their "losses" are "paper losses".

If you are approved for CMHC, and default, CMHC pays the loss. No risk to the bank.

Mortgages, even at these low rates are CASH COWS for the bank. Most of your payment is interest, after a few years, they can't lose, unless there is a radical downturn. 

If you default, the banks gets your house, sells your house, and probably gets another mortgage on your house, plus can probably claim a number of "paper losses" that let them keep tax dollars.

There is nothing, in their best interest, that isn't in their best favour to try their hardest to get you that loan, and we have a fairly conservative banking institution compared to places like the US.

Now, these are vast generalizations, but you must understand, they don't care about your financial well being...that's just a sales pitch. They want you to live your dreams because it's profitable to them. Most of the "advice" I've gotten over the years from the bank's "financial planners" may have made me money, but no where near as much as it would make for the bank, nor anywhere close to the amount I was able to make by learning about money.


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## hedgehog12 (Feb 28, 2011)

So if I have decent credit, I can usually get more than what is "pre-approved" on the bank's website??

I did a pre-approval using the bank website calculator and got a very low sum of around $190,000 ... all the property near here is around $400,000


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## Andre112 (Apr 27, 2011)

hedgehog12 said:


> Thanks! I just wanna ask,
> 
> Everything in Vancouver, BC costs over $400,000 ... given my current salary and down payment of $50,000, does this mean I can never buy something in that range ?? (since I'll only be approved for a $150,000 mortgage, so 50,000+150,000 = $200,000 total)
> 
> how do people do it then ?? I've heard neighbours buying a $700,000 house and they make the same that I do and I don't think they put down more than $50,000 down payment. does this mean the bank approved them for a $500,000 mortgage??


You probably can but it's not a good idea to overstretch yourself. Find a mortgage calculator online, see how much mortage payment you will need every month and add up all the expenses (prop tax, utility, condo fee, property maintenace, hydro, gas bills). You will see the money is super tight with your salary. Renting before you can afford a property is not a bad thing.

If you neighbour has two incomes, they can borrow more.


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## VJ99 (Apr 24, 2012)

*mortgage madness*



hedgehog12 said:


> So if I have decent credit, I can usually get more than what is "pre-approved" on the bank's website??
> 
> I did a pre-approval using the bank website calculator and got a very low sum of around $190,000 ... all the property near here is around $400,000


Hi Hedgehog, 
You raise some good points - how are people able to buy these incredibly expensive properties on middle-class incomes? That is the question every sane market watcher is asking. 
The bad news is that with 30k income and no big downpayment, it doesn't offer you much. 
The good news is that if others have managed to just squeak into a mortgage, you just have to wait for rates to rise and then house prices will fall. 

If you bought a house for, say $425,000 and put down $125,000, leaving a mortgage of $300,000:
In order to pay off the mortgage in 25 years, you would need to pay about $1650 each month.
Here's a spreadsheet I use to manage my mortgages. Actually - I don't see a way to upload it. 
If you would like a copy, send me an email.
vj


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## Plugging Along (Jan 3, 2011)

I know you are just doing some research, but I have to ask, do you really think it is wise getting a house that is well above even what a pre approval amount is? A $150K mortgage is about $1100/month, while a $350K is just over $2000, that’s at a all time low interest rate of 3%. When you add in taxes, maintenance, utilities, insurance, etc, you are probably closer to $3k a month, that’s more than what you GROSS a year! I honestly don’t think you should be allowed to take out a $350K mortgage on a $30K/year income. If you really want to buy a place for $400K, you need to either save up a much larger down payment such as $300K or find a way to increase your income. I don’t believe that you can afford a $150K mortgage, which is really 5 times your income or 11.5x your income for a $350K mortgage. 

The guidelines for affordability less than 10 years ago were about 2.5x your income, 3x was considered really risky. Affordability ratios shouldn’t change.


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## Mall Guy (Sep 14, 2011)

Just a Guy said:


> On the closing day, if everything goes well, you'll meet with your realtor and he will give you the keys and usually a small gift. Congratulations you are now the proud owner of a mortgage.


Small gift, usually a Yucca plant, cause you look at it and say "uck"

Not to make too big a point (as there has been some good information shared) but the lender is the "mortgagee" and the homeowner the "mortgagor" . . . meaning you are giving the mortgage to them in return for some cash, and they receive the mortgage from you, much like the lessee receives a lease from the lessor.


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## SlowandSteady60 (Feb 19, 2012)

Hedgehog,
One thing I haven't seen and maybe I missed it is your age. Making $30,000 isn't a bad thing and having $50K in the bank is a really good start. I question why the $300,000-400,000 home is so important to you. I am assuming you are young and the best advice I can give you is to have patience. I asked the same question when I was young and now own three homes and looking for more. There are many good books for you to read to accumulate wealth such as The Wealthy Barber, The Millionaire Next Door, and Millionaire Teacher to name a few. Several have mentioned but don't bite off more than you can chew. Start small, build some equity, buy a fixer upper if your handy, own it for a bit, fix it up, sell it and move up the ladder. After a while, it comes easy and you know what to look for. Before you know it, you have your house that you want. Keeping up with the Jones' isn't always what it's cracked up to be? Good luck, go slow and stay the course.


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## Butters (Apr 20, 2012)

What is your age?
What is your partner situation? Planning to buy and have a room-mate?
What is your job? Any room for advancement? Other jobs interested in?
I think 30k is like the "average" and being on a single income you're below average!
BC is also super expensive!!!!

the big key to this puzzle, is you need to make more money!!!!
if you had 60k income or more even
to be honest, in your current position, to afford a 300k mortgage you probably need over DOUBLE your current income, or save to buy out a house 

like think about this... if you made say 1 dollar more an hour... thats 2000 more a year, over 25 years thats 50k, the total you currently have... so you probably saved for a long time...
and they say our generation will be working in the work force longer!

having the bigger money coming in, makes you a bigger deal 



Plugging along has the right idea, 150k mortgage would be just under 1k but... food, water, taxes, you're looking at over 2k when everything is said and done... and thats the same as you make... you can't afford that, one parking ticket would put you in the hole, what if you slept in a day? were late? got injuried? wanted an ice cream?

you can save 300k get a 100k mortgage, and have a nice house you could afford!

best thing to do is to learn, and look at ways of making money...
say you invested 10k into schooling, became a nurse(2 years), making 65k a year... after 2 years of work thats 130k (minus your 10k investment)
total time = 4 years 120k earned

you work 4 years at 30k = 120k

but now your 5th year, well you're doubling your (previous) income and going into the big profits... and NOW you can look at getting a larger mortgage!

25 years is a long time, every dollar counts!


i like you, have boggled my brain several times about when the right time to buy a house is

i live in a city that is half your prices! and i make nearly double your wage, but im still mouching off of mom

describe your scenario better, reason for wanting to buy a house? are you getting kicked out of your current place? want to come live with me?


the more you save now, the less you pay later... the less you work later
early retirement FTW


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## 44545 (Feb 14, 2012)

HedgeHog12,

We rent.

The $500,000 condo across the street from us has higher condo fees and property taxes than our total rent.

Now add in mortgage payments.

Total: _triple_ our rent.

Why would you _want_ to buy in this market? Rent and save. 

Buy when the market crashes and the _total cost of ownership_ (taxes, utilities, condo fees, mortgage, maintenance +++) is lower than the cost of renting a comparable place.

Further reading: http://www.greaterfool.ca/


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## the-royal-mail (Dec 11, 2009)

Excellent post by CJ. I absolutely agree with the concept of renting and saving. I've lived in both condo and apartment type tower dwelling and they're identical except that one comes in and repairs your broken faucet while the other requires you to repair it yourself. Oh and as CJ says it costs you 3x as much for the privilege of doing it yourself and saying you "live in a home". LOL

There has never been a worse time to buy. I will continue to rent and save. In the future I'll be poised for a proper DP once the market crashes and prices come down to earth as they did in the US. It's just a matter of time. I just have to save and be patient.


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## calator (Jun 3, 2011)

It is unbelievable how different is the perception of debt and home ownership these days…. This bubble in real estate was created by this mentality… I breathe and I want to buy a house. Our T4 in 2011 was over $150k, we have savings over $200k (without including pensions) but we rent… and it’s not in Vancouver, it is in a city where you can buy a decent SFH for $380-$450k. We decided to rent because it is way cheaper and doesn’t make sense to get 200-250k in debt (even if we can pay it in 4-5 years).


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