Congratulations – you’ve decided to buy your first home! If you’re like most first time home buyers you’re filled with equal parts excitement and dread. It’s exciting to stake your claim to a little piece of property, but getting a mortgage and actually buying a home can be a daunting process. Fortunately, it’s not as tough as you think – the trick is to just take it step-by-step.
Many people decide they are sick of renting and want to make a commitment to purchasing their own home. While this demonstrates you are ready on an emotional level to make the leap from renter to first time home buyer, it says nothing about your financial ability to make the transition.
While first time home buyers are not expected to pay cash in hand for the entire amount of their first property, they are required to come up with a down payment. Down payments range from 5% to 20% of the purchase price. If you have a down payment of 20% (or more) you qualify for a “conventional” mortgage. Anything less than that and you will be required to pay mortgage default insurance, a one-time payment which protects the lender in the event you default on your mortgage. Mortgage default insurance can cost from 1.00% to 3.10% of the total amount of the loan.
It’s not possible for everyone to save 20% of the purchase price of their dream home, but obviously it’s in your best interest to cut out the cost of buying mortgage default insurance. Another reason why you might want to delay your home ownership dreams until you’ve come up with a large down payment is because a larger down payment reduces the amount of the monthly principal and interest payment, as well as the total amount of interest you pay over the life of your mortgage.
You should also keep in mind that there are additional costs associated with buying a home, such as fees for surveys, inspections, taxes, lawyers, insurance and more. These can add from 1.5% to 2.5% to the purchase price of a home.
Look for money
There are a number of government programs and grants for first time home buyers such as the federal government’s First Time Home Buyes’ Tax Credit or RRSP Home Buyer’s Plan. Read more about homebuying incentives on the CMHC’s website.
Reduce your debt
In addition to saving a down payment, you’ll want to reduce your debt as much as possible before approaching a lender for a mortgage. Basically, the less debt you have, the more you’ll be able to borrow from the bank for your mortgage. Lenders will not allow you to carry a debt that is more than 40% of your gross income. Generally speaking, every $1 of personal debt will reduce your borrowing capacity by $5.
Prior to getting approved for a mortgage, the lender will want to see how well you have paid your debts and bills in the past. To review your credit history, the lender will examine your credit report. You can get a copy of your credit history by contacting Equifax Canada Inc. or TransUnion of Canada.
Getting a mortgage
Very few people can afford to buy a property without borrowing some money from a lender. So for most Canadians, their home-buying journey really begins by getting a mortgage. A mortgage is a loan used to buy a home. Financial institutions like giving you a mortgage, because in return for lending you the principal amount of the loan, they will earn huge amounts of interest. (Try out our mortgage calculators to know more).
Lenders also like mortgages because when you sign a home loan contract, the property you purchase is used as security for the loan – should you fail to repay the loan, the lender will take back the property.
Direct or mortgage broker
First time home buyers have two choices when it comes to applying for a mortgage. You can approach a financial institution yourself and speak to a representative of the lender, or you can contact a mortgage broker to help you find a home loan. If you have already done some research on what home loan options are available and have a good relationship with your lending institution, then approaching the lender directly for a mortgage may be a good option for you. The downside of going directly to the lender is the representative will only be able to offer you a mortgage product from that lender’s particular suite of products.
A second option is to go through a mortgage broker. The benefit of using a mortgage broker is that they have relationships with several different lending institutions and can help you find which lender has a mortgage that is best suited to your needs. In addition, the mortgage broker can help you prepare your documents and guide you through your home buying process ensuring greater chances of success. Mortgage brokers are paid a commission from the lender for introducing you as a client, so their service to you is free.
Regardless of whether you choose to go direct to a lender or use a mortgage broker, you will need to determine what kind of mortgage best suits your borrowing style. The lender representative or broker will walk you through the options to help you choose the type of mortgage best suited to you.
The lender or mortgage broker will look at your financial situation to determine your borrowing capacity. This simply refers to the maximum amount of money you are capable of borrowing based on your income, your existing debts, whether you’re buying with someone else, and any other liabilities you may have, such as dependents. Bear in mind that the figure that you are presented with is the MAXIMUM mortgage amount. It’s a good idea to draw up a budget based on your income and expenses to determine what you can realistically repay on your mortgage per month. Remember to factor in costs associated with owning a home, such as council rates, insurance, strata fees, maintenance costs and mortgage repayments. You should also include an amount for unexpected or infrequent expenses such as car repairs, birthday gifts, travel, and dental visits.
After reviewing your financial situation with the lender or broker, you can then get a letter from the bank verifying that you are pre-approved for a mortgage. The letter typically guarantees an interest rate for 60-120 days and will demonstrate to sellers that you are serious buyer.
Finding a home
It may feel like it took a long time to get to this point, but this is truly the exciting part. Now that you have an idea of how much you can spend, you are ready to go shopping. To help narrow your search, draw up a list of what you are looking for in your first property purchase. Considerations will be location, size, parking, local amenities, special features such as storage or swimming pool, new or previously owned, type of home (townhouse, detached, apartment, mobile, etc.) and whether you’re looking for freehold ownership or condominium ownership.
There are a number of ways to find your dream home – word-of-mouth, newspapers or magazines, the Internet, spotting “For sale” signs or visiting new development sites, and using a Realtor.
A Realtor is a very valuable resource when it comes to finding the perfect property. Not only will he or she help you find a home, but the Realtor will write an Offer of Purchase, help negotiate to get you the best deal, give you information about the location and help you arrange a home inspection.
Other professionals you may need to draw on include: a lawyer or notary, insurance broker, home inspector, appraiser, land surveyor, and builder or contractor.
Making an offer
Once you’ve found a property, your Realtor and lawyer/notary can help you prepare an Offer to Purchase. An Offer to Purchase is a legal document that details: your legal name, the name of the vendor and the address of the property. It also includes the price you are offering and the amount of the deposit. In addition, the document includes any items in or around the home included in the offer, such as appliances or wardrobes. The closing day, or date you take possession of the home will also be included, as will be the date the offer expires. The Offer to Purchase will also include a request for current land survey. Any other conditions such as a satisfactory home inspection report, property appraisal, and/or lender approval of mortgage financing can also be included – this means the contract will only become final once these items are met.
Once you’ve made the Offer to Purchase, the vendor can either a.) accept the offer b.) make a counter-offer which you accept, or c.) make a counter-offer which you reject.
Complete your mortgage application
Once the Offer to Purchase has been accepted, you go back to the lender/broker. The lender will verify your financial information and you can complete the mortgage application process. The lender may ask for a property appraisal, land survey or both. And you may also be asked to get title insurance.
At this point your lender/broker can discuss what kind of mortgage is best suited to your situation. A number of factors come into play when choosing your mortgage: interest rates, amortization periods, terms, and repayment schedules.
Becoming a responsible home owner
Once the mortgage contract has been signed and the sale is complete you can move into your new home. You now have a responsibility to make your mortgage repayments on time or you could face foreclosure. It’s a good idea to keep to your budget and put a little extra away for emergency costs associated with owning a home.
To read more about buying your first home, see Mark David's article on costs of buying your first home
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