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For many Canadians, buying a home is on the checklist of dream opportunities and depending on where you live across the country, you may face some barriers along the way with skyrocketing home prices and competitive markets. Homeownership is a lot of responsibility and involves much more than just applying for a mortgage and paying the asking price of the home. Since buying a home will likely be one of the biggest financial transactions in your lifetime, you’ll want to be as informed and prepared as possible.
Getting Financially Prepared
It goes without saying that if you’re interested in buying a home, you’ll want to ensure your finances are in order. While you may be familiar with the requirements for down payment in Canada, you may not realize that that payment is only one small piece of the financial puzzle.
While your credit score is definitely the main factor lenders will take into consideration when you apply for a mortgage, it’s not the only one. Other factors include your work history and income so having this documentation ready and waiting is always smart. Lenders will want to know if you’re prone to job hopping, or have reliable and consistent income. If your work history shows that you’re likely to stay with a company for 2-5 years or more, it exhibits that you’re not impulsive or flighty, characteristics that can lead to troubling money-related decisions down the road. It’s also important to note what the reason for any job changes may have been. Sometimes the reason you left your previous job can give you a leg up with lenders as well.
Down Payment Amount
In Canada, home buyers are required to put down at least 5% of the home purchase price as a down payment. If you put down less than 20%, you’re required to purchase mortgage default insurance. Since the insurance lowers the risk for the lender, this can get you access to lower rates than if you made a larger down payment up front. If you plan to make at least a 20% down payment on your new home, not only will you be able to skip the cost of mortgage default insurance, but it’ll also save you more money in the long run by chipping away at your interest faster and lowering your monthly payment amount. There are pros and cons for each option, but if saving up 20% of your dream home’s purchase price just isn’t possible, know that it’s not required to access better rates.
Government Programs And Incentives
There are many government programs and incentives that home buyers across the country can take advantage of. There are also many province-specific programs you can investigate based on where you plan to buy your home. Keep in mind that each incentive/program comes with a series of requirements and will provide different benefits to applicants. For this reason, it’s important to do your research into each option so you can better understand what each offers and how they may suit your personal situation.
RRSP Home Buyer’s Plan
If you have an RRSP, this program allows you to borrow up to $35,000 tax free from your account specifically to fund your down payment. If you’re planning to purchase a home with a partner who is also a first-time home buyer, you can borrow up to $70,000 combined.
The Home Buyers Plan (HBP) is treated like a 15-year interest-free loan as long as you begin making payments back to your RRSP within 2 years of borrowing the money. It’s important to remember that the money you plan to use from your RRSP must have been in the account for at least 90 days before you submit your application, and you also don’t have to re-pay the money to the same RRSP account.
RRSP First-Time Home Buyer Incentive
The HBI Program is a shared equity mortgage where the government supplies 5%-10% of your down payment on a new home or 5% on an existing home in exchange for some equity in your property. This means when you sell your home down the line, you’ll need to pay back that equity to the government. If your home increases in value over time, you’ll end up paying back more than you originally borrowed.
In order to qualify for this program, buyers must already have a 5% down payment, must be first-time home buyers, have a household income of under $120,000, must not have had a previous divorce or broken common-law relationship and can only borrow less than 4x the qualifying income.
Land Transfer Tax Rebate
Available in Ontario, PEI or British Columbia, this tax rebate gives first-time home buyers back a portion of their land transfer tax paid on a condo, townhouse or house.
New Housing Rebate
If you’re planning to build a new house or renovate your current one, you could be eligible for a rebate of a portion of the building or renovation costs. You can also claim this rebate for non-traditional homes like mobile homes and floating homes. Do keep in mind that this rebate is only available if the fair market value of the house upon completion is deemed to be less than $450,000.
Also known as mortgage default insurance, this is valuable for home buyers who can’t afford to make a 20% down payment. While it’s not the same as traditional insurance, it instead protects the lender against potential default of mortgage payments. Trading an upfront fee and your commitment to make payments on time in exchange for a lower down payment means one less barrier to buying a home for some Canadians.
First-Time Home Buyer’s Tax Credit
This tax credit allows first-time home buyers (or home buyers with a disability) to recover some of the costs related to the purchase of their home. This non-refundable tax credit will cover home inspections, closing costs and legal fees up to $750.
In order to qualify for this tax credit, you’ll need to make sure your purchased home is classified as a single-family home (both existing and newly built), condo, townhome, semi-detached home or duplex.
Identifying Your Budget
Knowing and sticking to your budget is a big part of being prepared to buy a home. If you have the ability, make time to see as many properties as you can before making any decisions. Knowing what’s available on the market will help you better understand what you can afford based on your budget and will ensure you find the home of your dreams, and not just the first home you can afford.
You should also make it a point to get preapproved for a mortgage so you’re aware in advance what you can afford to buy, instead of just guessing. You may also consider saving up more money than necessary for a down payment to give you some leverage over other buyers.
Checking Your Credit Score
Your credit score is a very important metric when it comes to how much money financial institutions will lend you and at what interest rate. The better your score, the better rates you’ll have access to. If you’re unsure what your credit score is or how to improve it, you’ll want to start by signing up for a service that allows you to monitor your score regularly. Once you know what your credit score is, you can focus on how to improve it, if steps are necessary. Focus on not exceeding your credit limit by 30%, avoid applying for new credit cards, make a plan to repay your credit card debt and ensure you keep your oldest credit card active to strengthen your credit history.
Getting A Mortgage Preapproval
Taking the steps to get preapproved for a mortgage is always a wise decision when it comes to being as prepared as you can be. Obtaining mortgage preapproval means the lender has approved you for a specific amount of money to purchase a home (subject to conditions like a property valuation). It’s important to note that it’s not a guarantee that you’ll receive a specific rate or mortgage from that lender as circumstances may change from the time you’re preapproved until the time you’re ready to make a purchase. Your final approved mortgage amount will depend on the value of the property and the amount of your down payment. The lender will want to make sure you can afford to pay for all the costs associated with the loan and the home purchase before they offer you any money.
Finding The Right Home Loan For Your Budget
As interest rates rise and the housing market gets more competitive, it’s important to do your homework and put in the time to compare your mortgage rate options. It’s also vital that you control the elements you can control (i.e., credit score) so you know you’re giving yourself the best chance to find a great option within your budget. Above and beyond the factors listed above, the type of mortgage and amortization period you choose will have a big impact on your financing options and how they fit into your budget. The last thing you want to do when you’re applying for a mortgage is jump at the lowest rate thinking it’s the best deal, without realizing that’s not always the case. There are so many factors to consider when choosing a mortgage that’s the right fit for you. Take the time to really look at your budget, consider how much of a down payment you can afford and look into the type of mortgage you want to pursue.
Identify How Much House You Can Afford
While getting preapproved for a mortgage can help you gain better insight into how much you can afford to spend on a house, there is a way to calculate beyond an estimate for the sake of being more accurate.
Lenders will typically look at two debt-to-income ratios to assess your creditworthiness. They’ll use your gross debt service (GDS) ratio to determine affordability. Your GDS ratio covers all things related to housing, including your mortgage, taxes, heating costs and condo maintenance fees (if applicable). They’ll be looking for a ratio that doesn’t exceed 32% of your before-tax income.
Lenders will also measure your total debt service (TDS) ratio, which covers all the expenses in the GDS ratio, plus your debt service payments on any personal loans, credit cards and lines of credit. This figure should be within 40% of your before-tax income.
What lenders won’t consider is all of your other expenses like what you plan to save for retirement, how much you intend to spend on your yearly family vacation or how much it’ll cost to raise your children. Be sure that when you look at your budget, it factors in all these extra “unmeasured” costs because if you max out your mortgage, your lifestyle could take a big hit.
Searching For Your Next Home
Once you get to the fun part of looking for your next home, you still have a lot to consider as part of this portion of the process:
When you’re on the lookout for a new home, you’ll want to put as much effort into researching your chosen neighbourhoods as you do your desired home layout:
– Look at the prices of homes that have recently sold in the area and compare them to your budget; can you realistically afford to live in this neighbourhood?
– Take a look at access to transit and surrounding road networks. Do you want to be in an area that’s very accessible by bus? Would you prefer not to be located right near a large high-traffic roadway system?
– Consider planning out routes to/from work to get a better idea of how much time you can expect to spend on commuting each day. Check for proximity to your friends/family as well so you can ensure you choose the best possible location based on what (and who) you’d like to be close to.
– Look for amenities like shopping centres, necessities, parks, healthcare providers, etc. to see what’s near your desired location and if it meets your expectations.
Identifying Home Features You Want
Make sure you take the time to ask yourself all the important questions about what you truly want in a home. The more you’re able to determine up front, the easier it’ll be to find a house that checks all the boxes. Ask yourself questions like:
– What type of home do I want?
– What size do I want it to be?
– Do I want it to be in a specific neighbourhood(s)?
– How many bedrooms/bathrooms do I need?
– Do I want extras like a garage, pool or finished basement?
– Would I prefer a newly remodeled home that’s move-in-ready or a fixer-upper waiting to be customized?
Heating And Cooling Costs
Many home buyers are fixated on the purchase price of the home and forget all the other expenses that come with adding your signatures on that paperwork. Heating and cooling costs are a great example of a large home expense you’ll encounter and ones you’ll want to think about as you hunt for a new home. Do you want a space with central heating/cooling, or can you make do with baseboard heat? Keeping an eye out for what type of insulation a home has, its exterior finish and when the windows/doors were last updated will also give you insight into energy management within the home.
Estimate Property Taxes
Don’t forget about property taxes! As a homeowner you’ll be required to pay these taxes to the city each year through monthly instalments. Before you decide to purchase a home, it’s wise to learn how much the property taxes are for a specific property you’re interested in or a general area/neighbourhood you may want to look at. On this note, you’ll want to pay a visit to city hall to learn more about what infrastructure projects may be planned for your desired area like road repaving, sidewalks, gutters, watermain/sewer upgrades, etc. If you intend to start a home-based business, you’ll also want to ask about zoning or bylaw restrictions so you don’t end up caught between a rock and a hard place when you buy a home that isn’t able to house your business.
Hire A Real Estate Lawyer
Consider hiring a reputable real estate agent to help you navigate the home buying process from start to finish. Buying a home comes with endless amounts of paperwork, forms and processes to follow, and all of this can be incredibly daunting if you don’t have the proper support. The last thing you want to do is miss a huge red flag because you aren’t trained to spot it.
Real estate agents can also get you exclusive access to properties, help you negotiate with strength get you access to better deals, navigate a mountain of paperwork and be a solid support system as you move through the home buying process.
Putting A Bid On A House
As you start to look homes, you’ll eventually come across a property that you love and absolutely want to put an offer on. Your Realtor’s® job is to draw up the paperwork and recommend a price along with any conditions. While the current housing market in Canada suggests that you may not win the first home you bid on, when you do place an offer that’s eventually accepted, you can take comfort in your preparedness and focus on being excited!
Finalize Your Finances
When it comes time to finalize the deal, your lender will have to do one final check on your finances to make sure things haven’t changed since you were originally preapproved. Once everything is confirmed, you’ll have your mortgage in place and you’ll be ready to move to the next step.
Canada’s housing market is super hot and, as such, the condition of requiring a home inspection has begun to fall by the wayside for a lot of buyers who are desperate to compete with multiple offers. Regardless of your stance, hiring a certified home inspector to examine the infrastructure for age-related or general damage is always advised. The inspector will look at things like:
– Exterior walls: Are there any damaged bricks or spots on the siding?
– Foundation: Are there cracks you should be concerned about?
– Basement: Do there appear to be signs of water damage?
– Plumbing: What type of fixtures and pipes are hiding inside the walls?
– Heating & Cooling: How old is the furnace and what type of furnace is it?
– Water/Sewer/Septic: How old is the system and what type is installed?
– Roof: What type of roofing is installed, how old is it and what condition is it in?
– Wiring/Electrical: What kind of wires are in the walls and what amperage are they?
– Windows: What type of windows are installed, how old are they and what condition are they in?
Closing Documents For Your Home
Being prepared for closing day is vital to ensure everything goes smoothly for both you and the seller. At closing you can expect to review and sign some legal/financial documents including the agreement between you and the seller transferring ownership of the property and the agreement between you and your lender regarding the terms and conditions of the mortgage.
The final document review and signing will usually take place at your lawyer’s or notary’s office, sometimes a few days before the official close date. On closing day, your lawyer/notary or closing agent will handle arranging the delivery of closing funds to the seller’s lawyer, registering the transfer and mortgage and releasing keys to you for your new property.
You’ll want to bring a cashier’s check or proof of wire transfer for the amount of your closing balance (the buyer’s statement of adjustments), two forms of ID and proof of property insurance. Your real estate agent will help you review all documents thoroughly and make sure your personal information is correct on all forms.
Buying a home in Canada can seem like a daunting process, especially for first-time home buyers. This checklist can help you approach the prospect of buying a home with precision and strategy so you can feel prepared and confident through each step of the process.