Whether it be your first or fifth, buying a home is not an easy thing to do. However, help is available in the form of your friendly REALTOR®. I will be blogging excerpts from the very helpful website howrealtorshelp.ca. I trust that these may help make the decision much less daunting for you.
Planning Your Finances
4. Figure out how much you can afford
Before you start looking for your dream home, let's find out how big you can dream. Knowing your true budget is the first and most important step in buying a home.
A home is a big purchase
It's probably the most expensive thing you'll ever buy, and there are lots of expenses you might not even know about. Some of them include:
Cost of buying
a home = One Time Costs
+ Monthly Costs
Everybody's total costs are different, but it's almost guaranteed you won't have that much money saved up. Hopefully you have enough for a nice down payment, but for the rest...
Yes, you need a mortgage. So determine how much a bank will lend you
Head over to the next step where you'll find helpful tips on arranging your mortgage. But the first step in determining how much a bank will lend you is to understand how much you can afford each month. This is determined using two lending principals.
Gross Debt Service Ratio (GDSR) calculation:
This lending principle simply states that your monthly housing cost should not exceed 32% of your gross monthly family income.
Total Debt Service Ratio (TDSR) calculation:
This lending principle summarizes that your monthly housing cost and payments on all of your other debts (including loans, credit card and lease payments) should not exceed 40% of your gross monthly income.
Our What You Can Afford calculator will help you easily estimate your maximum affordable mortgage payment of principal and interest. Just enter your monthly income and expense amounts, and the calculator will do the rest.
Once you have used the What You Can Afford calculator to estimate your maximum monthly total, you can compare this number to the mortgage payments for specific loan amounts. Simply enter the loan amount in our mortgage calculator and the monthly principal and interest will be figured out for you.
5. Arrange a mortgage
Money makes the world go round, and a mortgage gives you the power to buy a home. This isn't the most fun step in buying a home, but it's vital.
Who do you talk to?
There are hundreds of banks, credit unions and other lenders out there who would love your monthly mortgage payments. So talk to everybody and don't be money-shy! Talk to your banker, other banks and people you know. REALTORS® can be very knowledgeable about mortgages and have lots of good advice.
Call a mortgage broker
Mortgage brokers are another great resource. They find low rates for a living, and they usually don't get paid unless you sign a mortgage through them, so they're highly motivated to get you the best deal.
Your best mortgage might be the seller's mortgage
Often, you can take over or 'assume' the seller's mortgage. This is a great idea if the seller is locked into a lower interest rate than you can get right now. Your REALTOR® may have additional information.
Refers to how long the bank has agreed to lend you the money – typically from six months to five years. At the end of the term, you usually renegotiate a new term.
The length of time it will take to pay off the whole mortgage, often as long as 25 years. The longer your amortization, the lower your monthly payments, but the more you pay in interest over time.
Interest is the cost of borrowing money, and the interest rate tells you exactly how much. Using this mortgage calculator, check the difference between borrowing $100 000 at 6% and at 9% at the same amortization. Surprising, no?
That interest rate not only affects how much you pay, it also affects how much you can borrow. So keep searching for the best rate!
How big a down payment?
You want as small a mortgage as possible, which means making the biggest down payment possible. Just remember to set money aside for all the fees associated with buying a home. Not to mention moving, repairs, renovations, new furniture... think ahead.
The Home Buyers' Plan – A little sweet relief
If you're a first-time homebuyer with money in an RRSP, you can withdraw up to $25,000 without paying any income tax. If your spouse is also eligible, that's $50,000. Ask your REALTOR® how to best take advantage of this plan.
Lock into an interest rate? For how long?
It's a tough question. What if you 'lock in' for five years and the rate goes into a period of decline? That could mean you're stuck paying more than you had to for a long time. But if rates were to steadily climb over the next five years, locking in for five years now would be a great move. Your REALTOR® may have a lot of good advice.
What you need to apply for a mortgage
Letter of employment confirmation
(include your position, your pay and how many years you've been with the company)
List your assets
(your car, stocks, bonds, GICs, etc)
List your liabilities
(car payments, student loans, credit card debt, etc)
Social Insurance Number
Your chequing account number
Your lawyer's contact information
Information about the house you want to buy
Don't forget these extra costs
Some mortgage lenders charge a fee to process your application. But ask to see if you can get it waived.
Your mortgage lender may need to have your new home appraised by a professional, and they often pass the bill on to you. Sometimes your lender will also waive this fee.
Mortgage broker's fee:
Your mortgage broker may charge a fee that's payable on your closing date. Ask your broker to avoid surprises.
Land survey fee:
Lenders may require a survey of your property, even if it's an existing survey. Get your lawyer on the case.
Home inspection fee:
A home inspection is so important, we devoted an entire step to it. Avoid surprises and protect yourself... this is money well spent.
Mortgage lenders require you to carry fire and extended-coverage insurance because your home is the security deposit on the mortgage. Often you can have these payments added to your monthly mortgage payments. Shop around.
It's not mandatory, but protects you from all sorts of fraud and potential errors surrounding the title to your land. Ask your lawyer for details.
You'll pay your lawyer for their invaluable time and "disbursements" which are the costs involved in title searches, drawing up the title deed, and preparing your mortgage.
The previous owner may have paid property tax or utilities in advance, and they want to be credited for those payments. Ask your REALTOR® and lawyer what might come up on the closing date.
Maintenance and utility costs:
Remember, you'll now have more regular monthly payments in the form of property tax and utilities.
Property Transfer Tax:
The amount of this tax varies from province to province.
The GST/HST and new homes:
Resale homes don't involve GST/HST, but new homes do. If you intend to live in your new home (instead of renting it out) there is some relief. Consult your REALTOR® and/or lawyer for more information.
REALTOR® Commissions or fees?
REALTOR® commissions or fees are subject to GST/HST.
Until tomorrow, have a wonderful day.
Robert Vergura, REALTOR®