Your Guide to Home Buying
Speak with a mortgage professional as soon as possible. This will allow you to shop in a price range that is realistic for your situation. At the same time, make sure you are prepared financially for the standard costs associated with a purchase of real estate. Some of these costs may include:
- Deposit – Once you have an accepted offer on a place, there is generally a one week period to remove subjects (ie. inspection, financing, etc.) Once those subjects have been satisfied, you are required to put down a deposit on the property. This amount varies, so make sure to ask your realtor.
- Property Purchase Tax – If you are a first time home buyer and you meet the qualifications, this does not apply to you. However, if you have ever owned property, anywhere in the world, this tax will be charged on your purchase completion date. You calculate the amount by taking 1% of the first $200,000 and then 2% of anything over that.
- HST – When purchasing a brand new property, HST will be charged. I will advise you of this amount, and it does not apply to used homes.
- Closing/Legal Fees – Be prepared for a legal bill of approximately $1000 for a standard purchase or sale. If you are buying and selling at the same time, budget approximately $2000 for this expense.
- Property Tax Adjustment – This is calculated at the lawyers office. A person is always responsible for the property taxes due during the time lived in the home.
- Appraisal – Depending on the lender and how much money you have down, an appraisal of the property may be required. A standard, residential appraisal will run between $280-$350, and is due at the time of appraisal. Different properties will have a higher cost, so ask your mortgage professional once you have decided on a property.
- Insurance Premium (If Applicable) – In Canada, if you are financing a property to more than 80% of the property value, the mortgage needs to be insured (This is called a “high ratio” mortgage). This is generally done through CMHC, or Genworth Financial, and they charge an insurance premium that is added to your total mortgage. The percentage that you pay will vary depending on how much money you have down, and how straight forward the approval is. If you have a 20% down payment, or you are refinancing to no more than 80% of the property value, a fee is generally not charged. A typical fee ranges from 1.75% to 3.10% of the mortgage amount.
Your credit score, also known as a beacon score, is generated by two main organizations in Canada; Equifax and Trans Union. They have a system which tracks any personal loans, credit cards, or lines of credit that you have. The system gives you a score somewhere between 300-900, with 300 being the worst and 900 being the best. In order to obtain the very best mortgage rates, you generally need to have a score of 660 or better, however exceptions are made when it makes sense. If your credit score is not this high, there are a whole other group of lenders willing to help you out, but generally at a higher cost.
What determines your score?
All of your creditors will report monthly to Equifax or Trans Union. They report how much you owe, what your monthly payment is, and whether you have made your payment on time. A record is kept for as long as you have the debt, showing how many times you have ever been 30 days late, 60 days late, or 90 days late. It will also show if the account has ever been sent to a collection company. The longer that you have had credit reporting to the credit bureau without late payments, the higher your score will climb. Also, if you have credit cards or lines of credit, try to keep your outstanding balance under 50% of the limit. Points are deducted for high balances in comparison to the limit, late payments, collections, and too many inquiries for credit.
Important things to note:
1.) Your utility bills, cell phone, gym membership, car insurance, etc., do not give you credit for paying on time. They will never show up on the credit bureau unless you don’t pay them. If you plan on arguing or disputing a charge with one of these companies, expect it to show up as a collection on your credit bureau and drastically lower your credit rating. It’s generally better to just pay the amount owing, and dispute your case after the fact.
2.) Unless your mortgage is with a credit union, it probably doesn’t report to the credit bureau either. So, even though you might pay your mortgage perfectly for 5 years, you won’t have any credit score at all unless you have established some unsecured personal credit. (ie. credit card, car loan, personal bank line of credit, etc.)
3.) Bankruptcy and Credit Counseling programs make it near impossible to qualify for a mortgage until you have been finished with the program for at least a year or two, and reestablished some new credit for another year or two. If you are considering one of these options, don’t just take your trustee’s advice. Make sure to talk to a mortgage broker about how this will affect your ability to purchase a home.
1.) Unless you are a self employed person (need to prove self employment), be prepared to obtain a job letter from your employer, as well as a recent paystub. The mortgage amount that you qualify for, will be based on how much income you can verify per year. If you are self employed, and your credit is good, you can qualify for mortgages without having to prove all of your income. (Call me to discuss this.)
2.) If you have a good credit rating and verifiable income, you can purchase a home with as little as a 5% down payment. If you have no down payment, there is even an option where the lender gives you the down payment, but you pay a slightly higher interest rate. If you are tired of renting and would like to get into the market, please call me to discuss your options.
3.) Unless you are new to the country, or brand new to credit, you will likely need to have at least 12 months worth of credit history on your credit bureau. So, if you have always paid cash for everything, please keep in mind that this will make it very difficult to qualify for a mortgage. Try getting a line of credit at your bank, credit card, auto loan, or small personal loan to begin establishing your credit score. For new immigrants, there are purchase programs with no credit if you have at least 10% down payment.
4.) Most standard houses, townhouses, and apartments are fine with the majority of lenders. If, however, you are considering one of the following property types, please call to discuss as it may be more difficult:
- - Leased-Land Mobile Homes
- - Former Grow-ops
- - Leaky Condos
- - Remote Areas
- - Farm Land
When you select a mortgage approval, you will have a term and an amortization. The term is anywhere from 6 months to 10 years, and this is the length of time that your negotiated rate applies. At the end of the term, your mortgage is up for renewal and you can then decide if you’d like to change lenders or programs.
The amortization is the length of time to pay the mortgage down to $0.00. This is traditionally 25 years, but lenders are now offering amortizations as long as 40 years (only on non-insured mortgages). This longer period of time will lower your monthly payment and enable you to qualify for a larger mortgage amount. You do, however, end up paying a lot of extra interest for those extra years.
A good rule of thumb for approval is to add up the monthly mortgage payment, monthly strata, monthly property taxes and heat, and make sure that it doesn’t exceed 35% of your gross monthly income.
- Income of $50,000/year = $4166/month
- $4166 x 35% = $1458/month
Therefore, you need to keep your mortgage payment, taxes, strata, and heat, below $1458/month if your total income was $50,000/yr. There are exceptions to this, depending on your amount of down payment and your credit score.
Renting vs. Buying
Even with the higher market values, it is generally better to own a property as opposed to renting it. Although property values climb and fall from year to year, they have always risen in the long run.
Let’s consider an average apartment at $175,000 and let’s say the rent is $900/month. Over 1 year, you will have paid $10,800 in rent, which has nicely paid for someone else’s mortgage. At an example rate of 4.15%, with 5% down payment, you can get a monthly payment of approximately $775/month. You now pay strata because you own the place (approx $125/month) and you will have to pay the property taxes of approximately $100/month.
After 1 year, you will have paid $12,000 in mortgage payments, strata, and property taxes, but you will be an owner of real estate, which generally appreciates over time. At a conservative appreciation of 5% in a year, your property will now be worth about $183,750. After 5 years of 5% average appreciation, your place will be worth approx $224,000 So, although you have had to pay a little more out of pocket each month, your equity position, in the long run, should more than make up for it. (Obviously dependant upon an appreciating real estate market as well as which type of rate you decide on.)