19 Sep Am I Ready To Purchase A Home?
The housing market in Canada has been tricky for the last few years, but now may be the perfect time for a prospective first-time home buyer to finally get a foothold in the housing market. Are you ready to buy a house? Can you handle the up-front costs of becoming a first-time homebuyer?
In this post, we will discuss some of the upfront costs and long-term considerations that all first-time homebuyers will face, as well as provide a checklist to determine if purchasing a home is within your reach.
Things to Consider When Buying a House
Do You Have a Good Down Payment?
Before you start looking for houses, you’ll need to save up a down payment first. A down payment is money you put down towards purchasing a house, in addition to the mortgage loan you’ll take out to pay for the rest. The larger the down payment you have, the easier it is in most cases to secure a home loan.
A general rule of thumb is that a minimum down payment should be between 5% of the purchase price, up to the preferred down payment of 20% of the home’s purchase price. A larger down payment means you’ll need to borrow less, which can mean that you’ll save a lot in interest over the years.
Plus, a higher down payment allows you to avoid paying for mortgage default insurance required by the Canada Mortgage and Housing Corporation (CMHC). Mortgage insurance can add a significant expense to your mortgage payments and is usually only avoidable for buyers with a down payment of at least 20% of the home purchase price.
Allocate Money For Closing Costs
Many new home buyers are surprised when they realize they have to pay to close the transaction! But, home buying closing costs and other fees, like real estate commissions, are just part of the home buying process. The average closing costs are 1.5-4% of the home’s value. Remembering to save for these and other legal costs, too, can make it easier not to be strapped for cash when it’s moving time.
Your closing costs include:
- Property transfer tax, a percentage of the price of the house. It varies depending on where you live
- Legal fees for the real estate lawyer to prepare the closing documents (about $1,500)
- Title insurance, to protect against an ownership dispute, about $300
- Mortgage default insurance, mandatory if you have less than a 20% down payment
- PST on mortgage default insurance, sales tax on your mortgage insurance
- GST or HST, which is assessed on a new house or condominium
- Home inspection – it’s optional, but you definitely need one, just in case there are problems that you didn’t notice. These are about $500 per inspection
- Property taxes and a land transfer tax, which varies depending on your location and the purchase price
These are the fees you’ll pay at closing, but don’t include your moving costs, like movers, or deposits for new utility services. To cover these, consider signing up for a Tax-Free Savings Account (TFSA), which covers closing fees. There is no tax on the balance of the account, nor dividends, interest, or capital gains, and you can withdraw the money tax-free.
Get Your Finances in Order
Make sure that you’ve cleaned up your finances before you start applying for a mortgage loan, so that you’re in as good of a position as possible to purchase your house. First, check your credit score, which can range from 300 (very poor or no credit) to 900 (superior credit).
Mortgage lenders use your credit history and your credit score to determine how risky it is to loan you money. Most lenders will look askance at borrowers with a credit score of less than 650. If yours is lower than you’d like, then you may pay a higher mortgage interest rate, which will increase your monthly housing costs.
Then, make sure that you have all the documents that a mortgage lender will ask for, including documents that state your current assets, income, and debt. You may need:
- Government-issued photo ID
- Proof of gross monthly income, including pay stubs, T4s, bank statements, or self-employment documentation
- Proof of the down payment and where it comes from, such as a savings account balance or RRSP
- Information about other assets you have, like a car or boat
- Debt information, including credit card statements, car loans, lines or credit, or student loans
If you have these collected, you can easily see where you can improve your credit a little bit and have everything that a lender needs to start the loan approval process.
Get a Mortgage Pre-Approval Letter
Once you have your finances organized and your down payment and closing cost monies set aside, the next step is to determine how much of a loan you’ll qualify for. You can go to a financial institution or mortgage broker and have them issue a pre-approval letter, which is like a soft approval for a home loan.
Pre-approved mortgages give you and your real estate agent an idea of your price range. Your pre-approval letter also states the interest rate you can expect to pay so that you can calculate your monthly mortgage payment based on that. In fact, some real estate agents will require you to have a pre-approval letter before they will work with you since it marks you as a serious buyer. And, the letter can lock in the mortgage interest rates for 60 to 120 days.
Look Into First-Time Home Buyers Programs and Incentives
Canada offers several first-time home buyer incentives, which can save you money on your house purchase, reduce your interest rates, and make the process a little easier for you, including:
- Registered Retirement Savings Plan (RRSP) Home Buyer’s Plan – Allows you to withdraw up to $35,000 from your RRSP to finance the down payment
- First-Time Home Buyers’ (FTHB) Tax Credit – A non-refundable $5,000 tax credit on a qualifying home purchase
- GST/HST New Housing Rebate – This rebate will reimburse part of your GSTor HST for the purchase price of a house, or the cost of building a new home, or your property transfer tax
- Land Transfer Tax Rebate – Open to first-time home buyers in Ontario, PEI, and British Columbia
For most people, buying a home for the first time is exciting, challenging and nerve-wracking all at once, but a little planning and preparation can make the whole process much easier. Once you understand what you need, including reviewing your finances and gathering your documents, getting your pre-approval letter, and applying for first-time home buyer programs you may be eligible for, then most of the work is done – and it’s time for the fun part, house-hunting!