Home Buying Guide
STEP 1. ASSESS FINANCIAL READINESS
Make Sure You’re Ready. Owning a home is exciting and it has many advantages, but it’s also a big commitment. There are a number of questions to ask yourself when determining whether you’re ready. These are some of the things you might want to consider.
What do lenders require?
Mortgage lenders use two calculations to help determine your eligibility for a mortgage – your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio. Your GDS ratio is the percentage of your gross monthly income used for mortgage payments, taxes and heating costs or - if you are buying a condominium - half of the monthly maintenance fees. As a general ruleof thumb, your GDS ratio should not be more than 32% of your gross monthly income. Your TDS ratio is the percentage of gross monthly income required to cover monthly housing costs, plus all your other debt payments, such as car loans or leases, credit card payments, lines of credit payments and any other debt. Generally, your TDS ratio should not be more than 40% of your gross monthly income.
How Much Down Do You Need?
The down payment is the amount of the home price that you pay up front. The larger the down payment you’re able to save, the smaller the loan you’ll need. This will allow you to get a better interest rate. You will need at least a 20% down payment in order to qualify for a conventional mortgage. You can still get a mortgage if you have less than that, as long as you have at least a 5% down payment. If your down payment is 5% or higher but under 20%, you will qualify for a high-ratio mortgage, meaning your loan value will be more than 80% of the price of your home. In this case, lenders will require you to get mortgage loan insurance.
Have you been pre-approved?
Getting pre-approved for a mortgage before looking at properties gives you a more realistic expectation of what you can afford. However, keep in mind that the pre-approved amounts can overestimate what you can actually afford to pay. Pre-approval does not guarantee you will be approved once you actually apply if market conditions, interest rates, or your personal circumstances change.
Do you know your credit rating?
Order a copy of your credit report to make sure it does not contain any errors because lenders will check it before approving you for a mortgage. A credit report is a summary of your financial history and shows whether or not you have had any problems in the past paying off debts. The Financial Consumer Agency of Canada (FCAC), a federal government agency, has tips on how to order your credit report for free and how to improve your credit rating. Visit FCAC’s website at: www.canada.ca/en/financial-consumer-agency.html
STEP 2. CONSIDER MORTGAGE OPTIONS
What type of mortgage is best for you?
A mortgage is a loan, generally used to buy a property. How much you pay depends on how much you borrow (the principal), the loan’s interest rate, and how long you take to pay it back (the amortization period). Do not be afraid to negotiate interest rates and mortgage terms with different lenders. They are offering you a product and talking to more than one lender helps you make an informed decision.
Your interest rate is locked in for a specified period called a term. Your payments stay the same for the mortgage’s term so you will not pay more if interest rates increase over time.
Rate of interest you pay may change if rates go up or down.
Require a down payment of more than 20% of the property’s value. You are not required to get mortgage default insurance with a conventional mortgage.
A mortgage that can be paid off at any time during the term, without having to pay a charge. The interest rate for an open mortgage may be higher than for a closed mortgage with the same term.
The mortgage cannot be paid off early without paying a prepayment charge.
Contact our recommended mortgage expert to learn about best mortgage options for your specific needs. For more information visit: http://primariamortgages.com/
What mortgage features are best for you?
Portable mortgages: If you sell your existing home, you can transfer your mortgage to your new home while keeping your existing interest rate. You may be able to avoid prepayment charges by porting your mortgage.
Prepayment privileges: You can make lumpsum prepayments or increase your monthly payments without having to pay a charge. This can help you pay off your mortgage quicker and save on interest charges.
How often can you make your payments?
By switching from monthly payments to accelerated weekly or biweekly payments, you can pay off your mortgage faster. Explore your options for mortgage payments and see how much interest you could save by using FCAC’s Mortgage Calculator Tool at: http://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MC-CH-eng.aspx
What types of mortgage charges might you have to pay?
You may have to pay charges if you prepay large portions of your mortgage early or if you break your mortgage due to unforeseen life changes, such as marital breakdown, death of a spouse or relocating for a job. It is your right to know how lenders calculate prepayment charges. Read your mortgage contract carefully and make sure you understand how charges will be calculated before you sign.
How much do you need for your down payment?
A down payment is the portion of the property’s price not financed by the mortgage. You will need a down payment of at least 5% of the purchase price of the home. For example, to buy a home for $200,000, you will need at least $10,000 as your down payment. If your down payment is less than 20%, you will need mortgage default insurance.
STEP 3. MORTGAGE DEFAULT INSURANCE
When you buy a home with less than a 20% down payment, the mortgage needs to be insured against default. This type of insurance protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you.
What Is Mortgage Loan Insurance?
Lenders require mortgage loan insurance if your down payment is under 20%. This helps them protect themselves in case you default on your mortgage payments. Should you default, the insurance will cover the cost of your mortgage, with the lender being the beneficiary of the payout money. To get mortgage insurance, you would pay an insurance premium, either as a lump sum or on a monthly basis. In the latter case, it usually gets added to your mortgage payments. The premium is a percentage of your total mortgage amount, and will vary according to the size of your down payment. It typically ranges from 0.5% to 3%. There are three mortgage loan insurance providers in Canada: the government-owned housing agency Canada Mortgage and Housing Corporation (CMHC), Genworth, and Canada Guaranty.
There are a lot of variables to keep track of when trying to figure out how much you’ll be paying for your mortgage. You have to factor in your down payment amount, the amortization period, the interest rate, your payment period.
STEP 4. GOVERNMENT PROGRAMS
Tax Credit for Home Buyers
The federal government has assistance programs to help homebuyers. Research government program requirements to see if you are eligible.
The GST/HST Rebate reduces the GST or the federal part of the HST (whichever applies in your province) from 5% to 3.5% for homes below $350,000. You can still get a rebate for homes priced in excess of $350,000 up to $450,000, though it will be less, depending on the exact value of your home. More details on CRA’s website.
The BC HOME Partnership Loan contributes to your down payment, up to a maximum of 5% of the purchase price. The amount of your personal down payment, plus the BC HOME Partnership loan, must meet minimum down payment requirement for an insured first mortgage loan. www.bchousing.org/housing-assistance/bc-home-partnership
A $5,000 non-refundable income tax credit on a qualifying home. The credit provides up to $750 in tax relief to assist first-time buyers with purchase costs. For more information, check the Canada Revenue Agency’s (CRA) website: www.canada.ca/en/revenue-agency.html
A one-time withdrawal up to $25,000 from a Registered Retirement Savings Plan (RRSP) by first-time buyers to help purchase or build a home. Generally, you have to repay all withdrawals from your RRS P within 15 years. For more details, visit CRA’s website at: www.canada.ca/en/revenue-agency.html
When you use CMHC-insured financing to buy or build an energy-efficient home or make energy-saving renovations, you may qualify for a premium refund of 10% on your mortgage default insurance and a premium refund for a longer amortization period (if applicable). Check out CMHC’s website for more information: www.cmhc-schl.gc.ca/en/
STEP 5. FINDING A HOME
Finding the right home can be a long process, but you can increase your chances of finding the right home quickly by viewing more homes that match your criteria. There are a number of things you can do to look for the right home.
Start your research online with yorkproperties.ca listings page you can find properties you like.Our York Properties realtor will know if it is still available, when it was listed and other details about the property or area.
Where do you want to live?
Urban, suburban or country? Will you need to commute? Do you need access to public transit? How much will commuting cost? Are there schools nearby? How will your children get there?
What type of home do you prefer?
Single-family detached homes stand alone on their own lot. Single-family semi-detached homes are joined on one side to another home.
Duplexes contain two single-family homes, one above the other.
Row houses (townhouses) are several single-family units, located next to one another and joined by common walls.
Other types of homes include stacked townhouses, link or carriage homes, condominiums and co-op apartments.
What are the types of ownership?
You own the land and house and are responsible for everything inside and outside of the home.
Drive around the neighbourhood. This helps you get familiar with the area and you can sometimes stumble upon a For Sale By Owner Sign. Try to drive around during the day as well as eveing hours to get full picture of the neighbourhood.
You own your unit and share ownership of common spaces. The condominium association is responsible for upkeep of the building and common interior elements, such as halls, elevators, parking garages and the grounds. You pay a monthly fee to the condominium association to cover maintenance costs. You may also have to buy or rent your parking space. Condos often have strict rules regarding noise, use of common areas and renovations to units. Be aware of your condo’s rules before putting in an offer.
Similar to condos but instead of owning your unit, you own shares in the entire building or complex with the other residents. Co-op residents pay for maintenance and repairs through monthly fees and are subject to the rules and regulations of the co-op board. Be aware that if you decide to sell or rent your shares, the co-op board has the right to reject your prospective buyer or tenant. Read the co-op’s rules before making an offer.
STEP 6. MAKING AN OFFER
Alright! You’ve fallen in love with a home and want to make an offer. What are the next steps? A real estate agent can be a huge help through this process, to ensure that you don’t miss anything important and that you understand the conditions of the contract.
What is an offer?
An offer is a formal, legal agreement to purchase a home and is legally binding once accepted by the seller. Offers to purchase a home can be made conditional on factors such as financing or a home inspection. If any of the conditions are not met, you can change or cancel the offer, even if the seller has already accepted it.
Do you have your money ready
You will need to present a deposit along with your offer. The amount varies based on the home’s purchase price and the market.
Do you have up to date identification
The federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) requires REALTORS® to identify clients involved in the buying and selling of real estate. REALTORS® need to record your name, address, date of birth and occupation for their files which are kept for at least five years. They need to see valid government issued ID. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) provides more information about the Act on its website: http://www.fintrac.gc.ca/intro-eng.asp
Once you've made the offer
After you’ve had your real estate agent (and maybe even your lawyer, to be safe) look over the offer, your agent will send it to the seller. The seller can respond in one of three ways:
Accept the Offer - If the seller accepts the offer as you’ve made it, you’ll receive the signed copy and the contract becomes legally binding (provided the conditions are met).
Reject the Offer - If the offer is very far from what the seller is seeking, it may get rejected outright. At that point you will not be legally bound to any of the terms in the offer.
Send a Counteroffer - If the seller likes some of the terms in the offer but takes exception to others, you may receive a counteroffer with a modified sales price, modified conditions or modified list of things included. At this point you are yourself free to accept, reject, or send another counteroffer.
STEP 7. CLOSING AND RELATED COSTS
Closing costs are the legal, administrative and disbursement fees associated with buying a home. Understanding these fees will help you budget more accurately. Remember these are additional costs over and above the price of the home.
When you’re saving up for buying a home, don’t forget to set aside at least $10,000 to $12,000 (perhaps more, depending on your situation) for closing costs.
How much land transfer tax will you have to pay?
The land transfer tax is a one-time tax levied by your province when you purchase a property. The tax is based on a percentage of the purchase price of the property, and varies from province to province. Some municipalities also charge a land transfer tax (for example, Toronto).
Have you budgeted for the associated legal costs?
- Reviewing the terms of the offer
- Conducting a title search on the property and registering a new title
- Obtaining documents, such as surveys and evidence of liens on the property
- Checking the statement of adjustments for taxes, utility and fuel bills, and other costs that have been pre-paid by the seller at the date of closing.
Do you need a home inspection?
A home inspector assesses a property’s condition and can tell you if something is not working properly, needs to be changed, or is unsafe. They may be able to identify where there have been problems in the past, such as a leaking basement or termite damage.
What other costs can you expect?
- Interest adjustments between date of closing and first mortgage payment
- GST/HST on a new home or a home that’s been extensively renovated
- Service charges from utility companies for hook-ups on electricity, gas, internet and telephone services
- Appraisal fees and Title insurance fees
- Moving costs, storage costs, purchasing new furniture and appliances.