Studying real estate terminology might not be your top priority as you’re getting ready to buy your first house. Instead, your thoughts are likely preoccupied with what neighbourhood you want to be in, and what it will be like to finally own a place that is truly yours. 

All the same, a background on how the market works and what the various definitions mean will make the process of buying a home more straightforward. That’s why we put together this collection of the top real estate terms to know in Ontario. Though it’s designed for first-time buyers, it’s also a great refresher for the rest of us!

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Mortgage Pre-Approval Vs Pre-Qualification

Financing is one of the primary components of a real estate purchase. You’ll put up a small portion of the funds, and your lender covers the rest. A house is a major investment, so understandably, there’s a qualification process before you can get a mortgage. 

Mortgage pre-approvals and pre-qualifications are often confused for each other, but they are very different processes. 

A pre-qualification is casual and quick. By answering a few basic questions about your income and debts, you can get an idea of how much you might be able to borrow. 

The disadvantage for serious buyers is that a pre-qualification is a very rough estimate. The final amount could be more or less once you’ve completed the application. 

If you’re just getting started, the process is quick, there’s no credit check, and absolutely no obligation whatsoever. It’s a great step if you’re just testing the waters and are not entirely sure you’re going to proceed. 

A pre-approval is more involved. You actually go through the steps of applying for a mortgage. The lender runs a credit check and does a deeper scrutiny of your finances. The results are still an estimate and are not guaranteed; if your employment status or financial situation changes, your approval amount could as well. 

Getting a pre-approval offers several advantages over a pre-qualification. Though the numbers aren’t final until your transaction closes, it is much more accurate. You can lock in an interest rate that stands for the next 90 to 120 days. If there are changes in the meantime, you are automatically entitled to the lowest rate.

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Down Payment Vs Deposit

Almost nothing in real estate causes more confusion than the difference between the down payment and the deposit. Overall, the concept is simple. The down payment represents the entire portion you will pay out of your own pocket for your home. 

This amount ranges from a minimum of 5% to 20% of the final purchase price. These funds should be liquid and readily available so you can act quickly when you find a home that works for you. 

The deposit is where the confusion comes in. It is part of the down payment; the difference is when it gets paid. Once you make an offer and the seller accepts, you will place a deposit to secure your purchase. 

The required down payment follows national guidelines; the deposit is negotiable, typically anywhere from 5% to 8% or more. Note: offering a higher deposit can be a way to stand out from other buyers in a competitive situation – and you don’t need to pay more for the house!

Once your transaction closes, you’ll provide the rest of your down payment. The lender finalizes your mortgage, and you’re ready to get your keys.

High Ratio Versus Low Ratio Mortgage

Since we’re on the subject of financing, let’s talk about mortgages. A high-ratio mortgage occurs whenever your down payment is less than 20%, as it means the lender must cover more than 80% of the purchase price. 

Technically, you can buy a property priced at $500,000 with a $25,000 down payment. Since that’s only 5%, the lender is providing the remaining 95%. All high-ratio mortgages require mortgage insurance to protect the lender from loss. You pay less up front, but your closing costs will be higher. 

If you can afford a 20% down payment, the lender is now only responsible for 80%, making it a low-ratio mortgage. At this amount, you no longer need mortgage insurance. 

A higher down payment makes your purchase less expensive over the long term. Once your price point exceeds $1.5 million, high-ratio mortgages are no longer available. You will need at least 20% upfront to qualify for a mortgage.

Appraisal Vs Valuation

A valuation is often called a home evaluation or CMA (Comparative Market Analysis). It’s a service provided by a real estate agent, often free of charge, to give the homeowner an idea of how much a house will sell for in the current market. 

An appraisal is more formal and is usually performed on behalf of the buyer’s lender to ensure the price is not more than the house is worth. A home evaluation and an appraisal are both tools for determining property value; however, the results can be different. 

In a competitive market, a buyer may have to offer the seller more than fair market value. The lender will not surpass this amount, which means you will need to cover the additional funds on your own. This is critical information before buying a house!

MLS® Listing 

The MLS® stands for Multiple Listing Service. It’s a single source of information about a wide selection of homes that are available on the market today. 

The general public can gather some basic data and get a feel for a property. A licensed real estate agent has access to far more detail, including its sale history and any private notes about the house. 

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Listing Agent and Buying Agent

The listing agent represents the homeowner who is selling the house. They are under a fiduciary duty to work for the seller’s best interests, and their primary goal is generally to earn the highest amount possible for their client. 

If you spot a house you’re interested in, you could fill out the form for more information. That contact likely goes directly to the listing agent, who represents the seller. 

A buyer agent has a fiduciary duty to protect you. They advocate on your behalf, and will give you the information you need to determine if a particular property is right for your needs. 

That level of service is particularly critical for a first-time buyer. A dedicated buyer agent will work with you and ensure that the listing that looks so fabulous on the surface really is the best choice for your new home. 

Do you want customized guidance when buying your first home? Our Midtown Toronto real estate agents are here for you. Reach out to us at david@batorigroup.com, bobby@batorigroup.com or call (416)-485-7575 with any questions.