First Time Home Buyer
The decision to become a home owner is an exciting one. After all, a home is probably the largest purchase you will make. Traditionally real estate is a great investment and is an integral part of your financial security. Sometimes the process of purchasing a home can seem overwhelming. How much can I afford? How much of a down payment do I need? Which mortgage product is best? How much are closing costs? Let one of our experienced Mortgage Centre Agents provide you with valuable information you need to make your home purchase as easy and stress free as possible.
Rent vs. Buy
Owning your own home may be more affordable than you think. For what you are paying in rent, you could be a home owner building equity!
Over 1 Year
Over 5 Years
*Proposed payment is based on $179,000 at a rate of 4.49% (Jan/09), monthly payment amortized over 25 years with interest calculated semi-annually and rounded to the nearest dollar. Mortgage principal reduction assumes that all payments were made on time. Home Value Increase is based on $179,000 @ 2%/year. Increase in net worth home owner is based on mortgage principal reduction combined with home value increase. Mortgage payment amount does not include property taxes, insurance premiums, utilities and common expenses.
Should you buy? Try the Rent Vs Buy Calculator to find out**
** Information is provided for sample purposes only and should not be relied upon as legal, financial, or other advice.
Qualifying for a Mortgage
The biggest mistake that home buyers can make is buying the most expensive home they qualify for while not taking into account the true costs of owning. There are numerous other expenses you will need to budget for on top of your mortgage payment, for example property taxes, utilities, insurance premiums, and common expenses.
Lenders qualify you on your gross income prior to taxes or other deductions.
Usually, most lenders will allow you to allocate 35% of your combined gross income for housing costs, including principal, interest and property taxes (P.I.T.) plus heating costs of $75-$100 per month. This is called the Gross Debt Service Ratio (GDS).
When all of your other debt payments are added in (car loans, credit card payments etc.) the total, including your housing costs, normally should not exceed 42% of your combined gross income. This is called your Total Debt Service Ratio (TDS). If your beacon score or credit rating is above 680, some lenders will qualify you on your TDS of up to 44%.
Click on Mortgage Tools to find the Maximum Mortgage Calculator **
** Information is provided for sample purposes only and should not be relied upon as legal, financial, or other advice.
In order to purchase a home you will need to have a minimum down payment of at least 5% of your home purchase price.
A conventional mortgage down payment is 20% of the value of the home. A high-ratio mortgage is when you have less than a 20% down payment and is subject to mortgage insurance by CMHC or GE. An insurance premium will apply.
There are several down payment options:
- Personal Savings
- Gifted Funds
- Cash-Back Mortgage
- Flex-Down Mortgage
- RRSP Home Buyers Plan
You will be required to show documentation of the source of the funds, for example a bank account or an investment certificate.Gifted Funds:
Acceptable sources of gifted funds are family members, e.g. father, mother, grandparents, brother, sister, aunt, uncle. Gifts from non-family members are generally not acceptable. Most lenders will require a gift letter that states the relationship between the parties, the address of the purchased property, the amount of the gift, and sometimes the source of the funds used to make the gift. The gift letter, signed by all parties, states that the funds are a gift and need not be repaid.
Cash Back Mortgages:
A small number of lenders offer cash-back mortgages. These mortgages allow a buyer allow a buyer to use the 5% cash-back for their down payment. This is calculated by taking 95% of the purchase price plus the insurance premium and multiplying it by 5%.
Purchase price $200,000
Down Payment required $200,000 X 5%=$10,000
95% of the purchase price = $190,000 + mortgage insurance premium 2.90% (25 year Amortization) $5,655.00
195,655.00 @ 5% = $9,782.75 Cash Back
In this example the buyer would be responsible for the down payment shortfall of $217.25 ($9,782.75+$217.25=$10,000) and any closing costs. ** Information is provided for sample purposes only and should not be relied upon as legal, financial, or other advice.
There are some things to consider with a cash-back mortgage
Flex Down Payment Mortgage:
- A minimum credit rating of 650 or higher is required.
- The property has to be single family 1-2 units and owner occupied, doesn’t apply to rentals or cottages.
- Business For Self (BFS) clients can be considered for these mortgages as long as their income is verifiable.
- The down payment difference and closing costs can be gifted or borrowed. If borrowed, it has to be included in your GDS/TDS. (35/42)
- Posted rates, which can be 1-2% higher than the “best” discounted rate, apply.
- The mortgage is available only on a 5-year term.
Flex down payment mortgages allow you to borrow the required 5% down payment from a source other than the lender who will hold the first mortgage. The source can be a credit card, loan or line-of-credit. The borrowed down payment is now called a non-traditional source and must be disclosed. The payment of the loan will be included when calculating the debt service ratio.RRSP Home Buyers Savings Program:
You can borrow/withdraw up to $25,000 from your RRSP ($50,000 for a couple) in the tax year in which you buy or build a qualifying home. Provided you comply with the conditions governing the plan, the withdrawal is not taxable.
- You must be a first time home buyer or you (or your spouse or common law spouse) must not have owned a home that you occupied in the last five (5) years. Provided you satisfy all requirements, you may re-activate the program. Before withdrawing RRSP funds, you must have a written agreement to purchase a home.
- You must use the home as your principal residence in Canada within one year of completing the purchase.
- You must be a resident of Canada for the period between the date of withdrawal of RRSP funds and the closing date of the house purchase.
- The home can be new from the builder or a resale.
- At the time of the RRSP withdrawal, you must not owe any money to your RRSP for a prior borrowing from RRSP to buy a home.
- RRSP funds must have been on deposit for at least 90 days before they can be used under the program.
- RRSP funds cannot be withdrawn later than 30 days after the house purchase is completed. If multiple withdrawals are made, they must be made in the same calendar year or in January of the next year at the latest if the house was purchased in December.
- The funds can be applied to the down payment, land transfer tax, legal fees and disbursements, improvements to the home, even furniture and appliances.
- After an initial grace period of the year in which the withdrawal was made (plus one more full calendar year), you are required to pay back the funds borrowed (beginning in the second year following the year of withdrawal) over a period of 15 years by depositing 1/15th of the amount withdrawn, annually to your RRSP.
For more information visit the Home Buyers' Plan (HBP) at the Canada Revenue Agency web site at http://www.cra-arc.gc.ca
or call Revenue Canada at 1-800-959-8281.Mortgage Insurance
If you're buying a home and are borrowing more than 80% of the home's value, the mortgage must be insured. This insurance protects the lender against borrower default, and enables them to give you mortgage financing for the purchase of a home with a small down payment.
The mortgage insurance premium is determined by the loan-to-value and amortization of the mortgage. The premium can be either paid up-front or added onto the amount of the mortgage and is subject to provincial sales tax. Premium rates are listed on the insurer’s web page and will be listed on your mortgage commitment. Canadian Housing and Mortgage Corporation (CMHC):
Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC is Canada’s premier provider of mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research.
A 10% premium refund and extended amortization period without surcharge may be available when CMHC Mortgage Loan Insurance is used to finance energy-efficient homes.
For more information visit CMHC Web Site at http://www.cmhc.ca/
Genworth Financial Corporation (GE): Genworth Financial Canada, The Homeownership Company, is the leading private sector supplier of mortgage default insurance in Canada. Genworth works with lenders, mortgage brokers, real estate agents and builders to make homeownership more accessible throughout Canada. The company combines global experience in mortgage insurance with technological and service leadership to deliver innovation to the mortgage marketplace.
For more information visit the Genworth Financial Web Site at http://www.mortgageinsurance.genworth.com/.
Beacon or Credit Score
It is important to maintain your credit and keep your beacon score high. Some simple ways to maintain your credit are:
- Make your minimum payments on time. A late payment is reported to the credit bureau no matter how much it is.
- Use, at most, only 70% of your available credit.
- Limit credit inquiries.
- Check your credit report once a year to make sure there are no errors.
You can access your credit score and report from the following credit reporting agencies: EQUIFAX, TRANSUNION or EXPERIAN.
Pre-approved buyers are financially qualified to purchase a home. Pre-approval can be a useful negotiating tool. It's absolutely critical for you to find out what kind of mortgage you can afford before you start looking for a home, especially if you are a first time home buyer. Too often, arranging a mortgage is left to the very end forcing borrowers to scramble for financing.
A pre-approved mortgage includes a mortgage amount, an interest rate commitment for a set length of time, and terms and conditions of the approval. You are also protected from interest rate hikes with up to a 120-day rate hold. Your interest rate is adjusted if rates go down between the time you get your pre-approval and the closing of your home.
Once you have received your pre-approved mortgage, you can confidently negotiate the purchase of a home. It is a no-cost service that lets you know before you go house hunting how much you can afford to buy based on what you can afford to borrow.
Choosing Your Mortgage
Our Mortgage Centre Agents are here to find you the best mortgage product to meet your needs. Some mortgage features to consider are closed or open, term, variable or fixed rate, pre-payment privilege and penalty.
Closed vs. Open: Closed mortgages usually offer lower interest rates than open mortgages of the same term, but open mortgages let you pay off as much as you want, anytime, without penalty.
Short term vs. Long term: The term you select is important. You can choose from a 1-10 year term. Short term mortgages are appropriate if you believe interest rates will be lower at renewal time. Long term mortgages are suitable if you feel current rates are reasonable and you want the security of budgeting for the future. This is especially important for first time homebuyers.
Fixed rate vs. Variable rate: You can choose a fixed or variable interest rate. A fixed rate mortgage allows you to budget precisely for whatever term you select—from one to as many as 25 years. A variable rate mortgage fluctuates with the lender prime lending rate.
Prepayment Privileges: Lenders have different prepayment privileges policies which let you pay down your mortgage faster. Most commonly the maximum prepayment is 15% or 20% of your principal amount annually. Some mortgages do not allow any prepayment.
Prepayment Penalty: The penalty is the amount charged by a lender to pay off or break the mortgage before the end of the term. Most lenders charge 3 months interest or the interest rate differential.
Acceptance of Offer to Purchase
Once your offer to purchase has been accepted, it is necessary for you to meet all conditions of the agreement. This can include confirmation of financing, real estate lawyer information, home appraisal and/or inspection.
The documents needed by the lender include the following:
- A copy of the agreement of purchase and sale
- A copy of the MLS listing, which contains property details and photo, if applicable
- Address and contact information for your lawyer or notary
- Confirmation of income via current pay stub and a signed job letter stating length of employment, income, status (e.g. full-time), and possibly a T4
- Financial statements for 2 or 3 years and a Notice of Assessment (NOA) for commissioned or self-employed individuals and, possibly, business registration for Business For Self (BFS) appliants
- Confirmation of your down payment (i.e. bank statements, RRSP statement or a gift letter)
- A void cheque to set up pre-authorized payments.
Making your offer conditional upon home inspection allows you to have a professional assess the home you are buying. The inspection will point out both the positive aspects of the property as well as areas of concern, and provide you with a detailed, unbiased report of the findings. The cost is usually between $200 and $300.
The lender may require a appraisal to determine the value of property. This must be performed by a Certified Residential Appraiser (CRA). The cost is usually between $200 and $300. This may or may not be covered by the mortgage insurer or lender.
Closing costs are the legal and administrative fees and disbursements associated with buying your home. It is important to understand them so you can budget accordingly.
Lawyers charge different fees for real estate transactions. Getting a quote from your lawyer can limit budgetary surprises. On average it should cost between $1000 and $1200 to purchase your home.
It is important to know how much adjustments will cost to close you home purchase. Unforeseen expenses can lead to shortfalls.
Resale home: Adjustments include items already prepaid by the seller beyond the closing date that benefit the purchaser. For example prepaid property taxes or prepaid condominium fees. A credit is given to the seller as an adjustment on closing.
A new home purchased from a builder: Adjustments can include meter installation costs, Ontario New Home Warranty, and a hydro and water enrolment fee.
Interest Adjustment: This adjustment is the accrued interest between the mortgage closing date and the first payment date. For example, a mortgage is closed and funded on January 25 and the first mortgage payment is due on February 1. The interest adjustment would be the per diem (daily interest rate) for 6 days (Jan 26-31), the total number of days from the mortgage funding to the first payment. Lawyers and notaries routinely collect interest adjustments at closing.
Land Transfer Tax
This is a tax that is paid to the provincial government to transfer the title of a property from one owner to another. First time homebuyers may be eligible for a refund of all or part of the tax whether the home is newly constructed or a resale to a maximum of $2,000.
The requirements to qualify for the refund are as follows:
- The purchaser must be at least 18 years of age.
- The application for a refund must be made within 18 months after the date on which the conveyance or disposition occurred. (Note that an application for the refund can be completed upon the electronic registration of the conveyance).
- The purchaser must occupy the home as his or her principal residence no later than nine months after the date of the conveyance or disposition.
- The purchaser cannot have previously owned a home, or had any ownership interest in a home, anywhere in the world, at any time.
- If the purchaser has a spouse, the spouse cannot have owned a home, or had any ownership interest in a home, anywhere in the world, while he or she was the purchaser's spouse. If this is the case, no refund is available to either spouse.
- The purchaser cannot have previously received an Ontario Home Ownership Savings Plan (OHOSP) based refund of land transfer tax.
For more information contact Ministry of Revenue, Land and Resource Taxes at 1 866 ONT-TAXS (1 866 668-8297) or visit the Ministry web site at http://www.rev.gov.on.ca/.
Goods and Services Tax Rebate
The G.S.T is not charged for resale homes and is only applicable when buying a new home from a builder. The rebate available for the GST is typically in the purchase price and is almost always assigned directly to the builder.
At the time of the sale your lawyer will determine whether the seller has already paid all property taxes for the year. If they have, the lawyer will determine on a pro-rated basis, how much is owed back to the seller. If the taxes have not yet been paid, the seller is required to pay them up to the date of closing from the proceeds of the sale of the home. Your property taxes can be paid with your mortgage payments. This is a good idea for a first time home buyer.
These are miscellaneous charges assessed by the municipality for special services provided to the homes in the area that cannot be paid from general tax revenues. Large road and sewer improvements are an example.
Registration fees are paid to the provincial government for recording the transfer of the title and registering the mortgage.
Title Insurance is insurance against loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.
The following example demonstrates the need for title insurance. You find out two years after purchasing your home that you have been a victim of identity fraud. Someone stolen your identity and sold your home without your knowledge. A third party purchaser now has a legitimate claim to your property. If you purchased title insurance prior to purchasing your home, the policy will protect your investment.
Mortgage Life and Disability Insurance
Seriously consider mortgage life insurance. The cost is low and can be incorporated into your mortgage payments. In the event of death, terminal illness, or permanent disability, your balance will be paid in full. The maximum varies among financial institutions. Quotes are available with each approved mortgage.
Fire and Contents Insurance
The purchase of a home cannot be completed without a fire insurance binder in place. This must be given to the lender and lawyer prior to closing. If the residence is a condominium it is necessary for the unit owner to arrange insurance for the contents of the unit purchased and for public liability only.
Purchasing a Condominium
There are many rules that affect condominiums. Make sure you are aware of the rules imposed by the condominium corporation that manages your home.
Rules may address issues such as the following:
- Office, business or commercial uses within condominium units
- Pet restrictions that might relate to the kind of pet, the number of pets or the maximum weight of a pet
- Types and colour of window coverings, (white or off-white) as can be seen from exterior of the building
- Barbequing on balconies
- Satellite dish use (perhaps use of a common area cable T.V. system is required)
- Parking of commercial or recreational vehicles
If you do not comply with a specific rule affecting your condominium, the corporation has the right to get a court order directing compliance and ordering payment of legal costs by the unit owner. If you intend to rent your unit, insert a clause in the tenancy agreement that the tenant will comply with all rules and by-laws of the condominium corporation.
Tips for First Time Buyers
- Have your mortgage payment and property taxes debited from your bank account at the same frequency (bi-weekly, monthly, etc) you are paid.
- Ask your Mortgage Centre Agent questions to make your first home purchase as smooth as possible.
- Make sure you understand the mortgage product, rate and terms that you have chosen.
- Make a budget of all home purchasing expenses including moving expenses and utility hook-ups.
- Leave yourself a “cushion” for incidental costs that were unforeseen.
- Do a mock budget of your post-purchase expenses based on your net pay to see what your monthly finances look like.
- Enjoy purchasing your first home.