A home can be one of the most personally and financially rewarding
investments you’ll ever make. But if you’ve never bought a home before, the process may seem a little overwhelming without a first-time home buyer plan. To help you, we’ve put together this special report. It provides answers to 20 of the most frequently asked questions that Dwelly's home-buying clients ask.
1. Why should I buy a home instead of renting?
Some of the many advantages of buying a home versus renting one include:
- Homeowner status enables tax deductions
- Building Credit
- Becoming an owner of an asset that appreciates in value over time
- Gaining equity
- Additional rental income, if you own multiple properties
- Rent payments are constantly on the rise, while the mortgage payments are more stable
- Forced Savings
- Enjoying stability, emotional satisfaction and a feeling of achievement
2. Am I ready to buy a home?
Before making such a major decision, you have to ask yourself the following questions when considering whether you’re ready to become a homeowner:
- Is my job situation steady and stable during the last three years?
- Am I doing well enough financially?
- Am I ready and able to take responsibility for all the costs that come with owning a home?
- Can I devote the time or resources towards home maintenance?
- Am I able to pay my bills on time?
- Have I ever defaulted on a loan?
- Can I keep up with my other long-term debts (ex. monthly car payments)?
- Can I afford the required down payment?
- Can I keep up with all the costs, including property taxes, mortgage payments and mortgage insurance?
3. How do I buy a home and remain financially stable?
According to prominent financial advisors, your monthly housing costs should be at or under 32% of your gross monthly income as a new homeowner. Additionally, total monthly debt (mortgage included) should not go over 40% of your gross monthly income. Taking care of some of your debts prior to applying for a mortgage is always recommended.
4. What are the factors I should be considering when choosing a home?
There are more than few things you will need to consider when making this decision. These factors can make or break your purchasing experience and your long term investment, so you should really think about them.
- Neighbourhood, location, school district (check our neighborhood guide)
- The size of the property and home, number of bathrooms, bedrooms, etc.
- Home type: condo, townhouse or loft etc.
- Length of daily commute to work
- Traffic, levels of noise and pollution, safety
- Additional features — storage, parking space, accessibility upgrades
- Your current lifestyle, and possible plans and changes in the future
- New, resale or custom-built home, based on your preferences and price range
5. What are the different types of home ownership?
You can choose between four ownership types in Canada, with each offering advantages to different needs and budgets:
Freehold — you are in possession of the land and the building on it
Leasehold — you are in possession of the building but you are renting or leasing the land
Condominium — you are in charge of your unit and share common elements within the apartment building
Co-operatives (co-ops) — you own a share in the building and live in one of the apartments
6. How much does my credit score matter?
Credit score is one of the detrimental elements when being considered for a loan, and it will decide your interest rate. Mortgage lenders use the score to decide who receives loans and at what interest rate. The higher the score means the better the chance of getting a loan with an attractive interest rate. It is a system mortgage lenders use to determine which applicants are eligible for loans, and at what interest rates. It is simple, higher credit score means better interest rates.
7. How much do I need for a down payment?
Money you pay in advance when purchasing a home is called down payment, and it is a portion of the total cost of your new home, and is deducted from the purchase price. Your cover rest of the expanses by paying of your mortgage loan.
The minimum amount for the down payment is determined by the value of your home.
- Homes that have a purchase price of $500,000 or less are sold with the minimum 5% down payment.
- Homes that have a purchase price of $500,000 to $999,999 are sold with the minimum 5% down payment for the first $500,000, plus the 10% of the portion of the price that is above $500,000.
- Homes that have a purchase price of $1 million or more are sold with a minimum of 20% down payment.
8. Where should I get my mortgage from?
Different lenders offer different interest rates and conditions, so it is strongly advised to take time and consider your options. Reach out to different lenders, and make a lot of phone calls. Usual ways to get a mortgage are:
Mortgage lenders – With banks and credit unions being the most common ones, lenders are working with you directly, without a middleman. These lend money directly to you. It is advised to do your own thorough research before deciding on a mortgage.
Mortgage brokers – Brokers are middlemen who work with different financial institutions. Their job is to connect you with these institutions, advise you and help you find a suitable mortgage. They are getting paid by the banks for selling their services, so there is no additional cost for you.
9. What is the difference between an Insured and an Uninsured mortgage
Mortgage default insurance, also known as CMHC insurance, is mandatory for down payments that are between 5%-19.99% of the purchase price. The CMCH insurance protects the lenders in the case the borrower can no longer make mortgage payments. The mortgage insurance is calculated as a percentage of the loan and is based on the size of the down payment. To minimize the mortgage insurance paid, you must increase your down payment.
Insurance rates are as follows:
5%-9.99% down payment – 4.00% insurance premium rate
10%-14.99% down payment – 3.10% insurance premium rate
15%-19.99% down payment – 2.80% insurance premium rate
20%+ down payment – 0% insurance premium rate
In the case of homes that cost over $1,000,000, mortgage insurance is not available. A 20% down payment is required on homes that have a purchase price of $1,000,000.
For more details visit CMHC
10. What is the mortgage stress test?
Lenders use mortgage stress testing as one of the tests to qualify you for a mortgage. As of May 9th, 2018, the Bank of Canada introduced a higher testing rate for homebuyers who want an insured mortgage with less than a 20% down payment. The current qualifying mortgage rate is 5.34%.
Buyers who do not require mortgage insurance must qualify at the greater of the central bank’s five-year benchmark rate or 2% higher than their contractual mortgage rate.
11. What to do if I am unable to qualify for a mortgage?
Banks need to make sure that lending money to an individual or an organization will be profitable for them, and cannot just lend money to anyone. If you have been rejected there are different measures you can take, including asking for an advice from credit counselor, or deciding on a cheaper home. Paying off some of your debts will increase your credit score, and help you qualify.
Delivering a larger down payment will surely make you shine in the eyes of lenders. Last thing that is often overlooked is making sure that you had made a good look on your daily expenses, budget and your personal finances.
12. How do I choose from different types of mortgages?
There are many types of mortgages, and the more you know about them before you start, the better.
Low Ratio Mortgages
This is a type of mortgage with a larger down payment, 20% of property value or more. It usually does not require mortgage protection insurance.
High Ratio Mortgages
This is a type of mortgage with a smaller down payment, less than 20% of property value.
This is a more flexible type of mortgage. The borrower is able to repay at any time without penalty. The downside to open mortgage is that it usually come with higher mortgage rates than closed mortgages.
This is more of a long-term type of mortgage with conditions determined by the bank. It offers lower interest rates, but it cannot be refinanced or prepaid except if the contract states otherwise.
Fixed Rate Mortgages
This type of mortgage comes with a fixed rate. There is often an option to partially or completely repay this type of mortgage before the end of contract, if the borrower decides to do so.
Variable Rate Mortgages (VRM) / Adjustable Rate Mortgages (ARM)
Mortgage rates can be changed and adjusted during the term of VRM/ARM mortgages. These mortgages start with the current mortgage rate. This rate is then adjusted at future points, if the market standards have changed. The mortgage is reviewed for rate changes, adjustment of payment term or amortization period and alteration of mortgage plan.
13. Pre-qualified versus Pre-approved? What is the difference?
Pre-qualification should give you a rough estimate on how much mortgage you can afford. It is informal in nature, and differs from pre-approval, which is a written conformation with the exact maximum amount approved by the lender.
14. What is First-time home buyer’s tax credit?
If this is your first time buying a home, you can claim a non-refundable tax credit of up to $750. This new non-refundable tax credit is based on a percentage of $5,000. You or your spouse or common-law partner can claim the home buyer’s tax credit.
15. How can I make an official offer and confirm the deal?
When you’ve decided on which home you want, it’s time to make an official offer to the seller.
That offer must include:
- Property address, your legal name and the name of the person selling the property
- Purchase price and the amount of your deposit
- Additional items you want to include in the purchase (for example, window coverings)
- Closing day – exact date when you take ownership of the property
- Current land survey request
- Offer expiration date
- Other conditions that must be met before the end of contract (for example, satisfactory home inspection)
16. How much money should I offer?
Generally, you can make your decision based on various factors such as:
- Prices of similar homes in the same area
- Do you need to invest in repairs, remodeling and redecoration, or you are content with the current state of the property?
- You may get a better price if the property has been on the market for a while. Seller may become impatient, and eager to accept a lower offer.
- Am I going to be able to endure the financial burden of the mortgage? Make sure you really can afford what offer.
- Is getting this particular property your absolute priority? The closer your offer is to seller’s asking price, greater are the chances that you are getting that deal. In certain circumstances, you may want to go slightly above the asking price, in case there is heavy competition around that real estate.
17. What to do if my offer is rejected?
It is not uncommon that your first, or maybe even the final offer gets rejected. This is when you start negotiating. That is something your broker can help you with. Make a better offer, but on the other hand ask the seller to cover some of the closing costs. Negotiations can sometimes be long and exhausting, but do not let that stop you from getting what you want. Try not to get lost during negotiations, set limits, and always remember what you came for and how much you can afford.
18. Besides a mortgage payment, what other recurring costs do I need to pay for my home?
As a new homeowner you will come across new responsibilities – new bills to pay. If your utilities have been covered as a part of your rent, you need to gather information from your broker to see how much you’re going to spend on a monthly or yearly level. Property taxes, city or county taxes and homeowner or condo association dues is also something you will have to consider. In practice, taxes are usually rolled into your mortgage payment, but make sure you talk with your broker in order to avoid unpleasant surprises.
19. What are closing costs?
Fees and expenses, over and above the price of the property incurred by the buyer and/or the seller in the property ownership transfer. Examples are title searches, lawyer’s fees, survey charges, and deed filing, appraisal fee, etc.
20. What happens on closing day?
You legally take possession of your new home on closing day. The final signings usually take place at your lawyer or notary’s office.
To complete the process, your lender will transfer the mortgage money to your lawyer. You will then transfer the down payment amount (without the deposit) to your lawyer along with the closing costs (usually 1.5% to 4% of the purchase price).
Your lawyer will then pay the seller, register your new home in your name, and hand you over the keys of your new home.
Once you buy your home:
- Make sure you are never late on your mortgage payments Make your mortgage payments on time
- Always consider home operating costs
- Take care of your personal finances and always stay within your budget
- Put some money on the side for emergencies
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