Buying a house is a common dream for almost everyone. Considering house prices are in the hundreds of thousand of dollars, particularly, in Metro Toronto Area, a buyer needs a mortgage financing. There are two common types of mortgage financing.
One type is called, Conventional Mortgage where a buyer has a down payment of at least twenty percent (20%) of the purchase price. What a buyer would do is simply go to a bank to apply for a mortgage loan. When a buyer has a good credit rating and meets the income requirement the Mortgage Loan Application is usually approved. If for any reason the mortgage application is not approved, a buyer could still go to another bank(s) to secure a mortgage approval.
The other type of mortgage financing is called, High-Ratio Mortgage where the down payment is at least five percent (5%) and less than twenty percent (20%) of the purchase price.
Just like the Conventional Mortgage a buyer could go to a bank and apply for a mortgage loan. Good credit rating and good income are also required for approval.
Since it is a High-Ratio Mortgage (down payment less than twenty percent of the purchase price), the bank approval of the mortgage loan application is dependent on the approval by a Mortgage Insurance Company like CMHC.
A buyer would pay a one-time premium to the Mortgage Insurance Company from 1.75% to 2.75% of the mortgage amount. The lower the down payment the higher is the premium.
The mortgage insurance is a guarantee to a lender-bank, that in the event the buyer defaults on the mortgage payments and the house is taken by the bank and sold with a shortfall (proceed of sale is less than the amount of mortgage owing) through the Power of Sale process, the Mortgage Insurance Company will pay the shortfall to the lender-bank.
What You Need to Know
In a Conventional Mortgage, if disapproved by one bank you can still go to another bank(s) to apply for a mortgage loan, and you still have a chance of getting approval. Whereas, in a High-Ratio Mortgage once disapproved by one bank, your chance of approval by another bank is practically zero.
Therefore, if you are applying for a High-Ratio Mortgage, it is advisable for you to seek assistance from a Mortgage Professional to package your Mortgage Loan Application properly before submitting it to a bank.