Porting a Mortgage – How to Do it Properly?
What it Means to Port Your Mortgage
Moving from one home to another is an exciting part of any homeowner’s life. Unfortunately, the cost of breaking your mortgage contract before it is paid off can be debilitating. If you are looking to avoid incurring these penalty fees, porting your mortgage may be the best option for you.
Porting your mortgage means taking the mortgage rate and contract you currently have with your lender and transferring it to a new property. It is especially beneficial when mortgage rates have increased since you signed your current mortgage contract. Keeping the same rate you had before, despite the increase in market rates, can lead to huge savings on your new property.
It is important to note that porting only impacts the terms of your mortgage and interest payments; the down-payment on your new property should be paid as per usual. Through porting, you will not be damaging your credit score, and you will avoid much of the extra costs that you would incur by breaking or defaulting on your mortgage.
The cost of porting a mortgage tends to be significantly less than that of breaking a mortgage contract early— with breaking penalties often amounting to the greater of three full months of interest or interest rate differential which can be astronomically high on many mortgage-style loan payments.
Am I Eligible for a Ported Mortgage?
If you are thinking of porting your mortgage, the first step is to discuss the situation with your lender and gauge your eligibility. Make sure to read the terms of your current mortgage contract; if the option of porting is not included in your current contract, it will be very difficult to renegotiate the terms now.
Qualification can also be dependent on the interest rate you are currently paying; porting is usually only possible if you are currently paying a fixed rate. If you are paying a variable rate , you may need to renegotiate the rate with your lender before you can qualify for portability. Furthermore, lenders can choose to submit you to another background screening before approving your porting request. Your income, employment status, state of debt, credit score, and other indicators of financial standing may be used to determine if you are creditworthy enough to qualify for the porting process.
It is a good idea to look into your current financial standing before even approaching your lender. Make sure you have no major outstanding debts, and that you are up to date on your tax and income filings.
Of course, even after following these guidelines, there is still a possibility of your request being denied by your current lender or bank. Here are some additional reasons why you may not be successful in porting your mortgage:
- You are no longer able to prove your current income (this may occur if, for instance, you have been self-employed for the past year and a half but failed to present the appropriate tax return paperwork)
- Your income has fallen since the time in which you applied for your current mortgage contract
- Your monthly debt-to-income ratios have increased since you last applied for a mortgage and are now too high
- Your credit score has fallen and no longer meets your lender’s acceptable threshold
- The qualification guidelines have changed and despite no change in your income, credit, or income-to-debt ratios, you no longer qualify based on the new guidelines
- Your new property does not fall within your lender’s criteria for eligibility (e.g. the lender is concerned with the marketability of the property, the property is outside the lending area, etc.)
- You currently hold a Home Equity Line of Credit (HELOC) and your lender does not port HELOCs
Challenges You May Not Expect When Porting Your Mortgage
You Have to Close Within a Tight Timeframe
One challenge many homeowners face when attempting to port their mortgages is the tight timeframe they are forced to operate within. Most lenders will only provide 30 to 120 days for the completion of the porting process. This may not be enough time for you to both sell your old property and move into your new one.
The situation is further complicated if you are moving to a new town but do not yet have a job secured; this may impact your creditworthiness in the eyes of your lender and might interfere with your ability to gain their approval. The best strategy in this situation is to make sure you have all your affairs in order before beginning the moving process; this will greatly increase your odds of success and will help you plan for the worst-case scenario.
Your New Property is More Expensive than Your Current One
If your new home or property is more expensive than your current home, additional challenges may arise. You will need to negotiate a new agreement for the extra sum of money the lender will provide you, potentially at a much higher interest rate if mortgage rates have gone up. Luckily, many lenders will allow you to blend and extend your mortgage payments, blending your new interest rate with your previous one to find a balance somewhere in between.
Unfortunately, this solution usually also involves extending the mortgage term, regardless of how much of your original mortgage you have managed to pay off already. Sometimes, the mortgage term may even be reset to its original length, which can be extremely inconvenient for many borrowers.
Your New Property is Less Expensive than Your Current One
Challenges may also arise if your new property is less expensive than your current one. Most lenders will still allow you to port without charging a penalty fee, but you will be required to make a large pre-payment to help settle your previous mortgage. Some lenders may also have guidelines about how much cheaper your new property can be, compared with your current one. Generally, you should have no problems if your new property is up to 25% cheaper than your current home, but it is always advisable to discuss this with your lender prior to committing on purchasing the new property.
You are Unable to Make the Down Payment
The final challenge to consider is whether you can afford to make the down payment on your new property. In the instance that you close on your new property before selling your old one, you will need to pay the down payment without having the cash from your sale on hand. Some lenders offer bridge loans to help mitigate this gap, but that is not the case for all lenders. If you cannot currently afford your down payment and your lender does not offer bridge financing, you may be forced to break your current mortgage or take on a 2nd mortgage or private mortgage. This will, in some cases, disqualify you from the porting process.
How to Ensure the Porting Process Goes Smoothly
The best way to ensure a successful porting process is to be prepared and informed. Before deciding to port your mortgage, make sure you have considered all the factors that may affect your eligibility. Inform yourself of all the alternatives available to you. Porting your mortgage is an important financial decision, and it should not be made without certainty and forethought. Like all major decisions, there will be upsides and downsides regardless of how you choose to proceed. By considering these potential benefits and consequences before deciding to begin the porting process, you are likely to remove much of the anxiety from your experience.
It is also a good idea to involve your lender in the decision-making process. Ask them if they offer the option of porting, and work with them to determine if you meet their criteria for eligibility. While you may be porting your mortgage for the very first time, your lender likely has prior experience and will be an invaluable resource as you navigate the porting process.
Of course, the best way to ensure a smooth porting process is to set yourself up for success before you even begin searching for new real estate to purchase. Consulting mortgage professionals can be a gamechanger for you and your finances. Working with a mortgage broker can help you navigate mortgage rates and make sure you are getting the best possible terms and contract, saving you thousands of dollars in the long run.
If you are interested in porting your mortgage and would like a free consultation, schedule an appointment with Clover Mortgage and speak with an experienced and knowledgeable mortgage broker today!
