How to make sure you’re financially ready to own a home: mortgage basics & the costs of home-ownership
Are You Ready For A Mortgage?
Who hasn’t thought about buying a home? For most people, it’s the Canadian dream. But many renters, who can actually afford to buy their own home, continue to rent. As we learned from the sub-prime fiasco in the U.S., prudence can be a very good thing; but there are also some not-so-valid reasons why we continue to pay our landlords instead of paying ourselves. Here are some worries common to first time home buyers:
- Many tenants believe they need to save a big down payment, which is difficult if not impossible to do while trying to keep up with all their other bills
- Some are convinced that they won’t qualify for a mortgage,
- Some believe a monthly mortgage payment would be too difficult to carry,
- Others are overwhelmed by the financial red tape which often surrounds the purchase of a first home.
The truth is…
- Many people do qualify for a 5% down payment mortgage and don’t realize it
- The average mortgage payment costs about the same as the average monthly rent
- Funds held in RRSPs can be used as part of a down payment without paying tax on the withdrawal – more help for that down payment
- It’s very easy to find out whether you qualify for a mortgage, how much house you can afford, and how to navigate the loan forms and documents.
Jamie will refer you to an experienced mortgage professional who will consult with you about all your options, explain the whole process, and answer any questions that you have. If you are ready to take the next step, that’s wonderful – but you will never be obligated to ‘buy’ something. Home buying – when you are ready – should be easy and fun, not stressful or pressured!
Suitcase by Drew Coffman
Your Monthly Expenses
Before you sit down with a mortgage professional, you might want to take a good look at where you stand financially. Knowing the facts about your current money situation will help prevent any surprises when you apply for a mortgage. Here are important things to know:
- Your current monthly debt payments (credit cards, student loans, car loan, etc.).
- All household expenses (there is a great worksheet provided by the CMHC that you can access here.
- Your credit history: Obtain a copy of your credit report from Equifax, just to make sure that it accurately reflects your credit history. Report any mistakes immediately.
Once all this is written down, you will have a baseline as to what you currently spend, and what your credit rating is. These expenses will be deducted from your income and other assets to help determine how much of a loan you can afford to carry. These figures will provide something you can work with, in the event that you have to pay off certain debts or make budget cutbacks in order to qualify for the mortgage you want.
It’s common to get pre-qualified for a mortgage before you begin looking at homes, because you will know what you can afford. And when we do find a house or condo that you love, you will be in a better position to submit an offer without having to scramble to get fast financing – or put a ‘conditional on the buyer obtaining satisfactory financing’ clause in your offer.
When you are pre qualified, it just means that the lender has reviewed the financial information from your application and has determined a maximum amount of financing you can afford. The information required for a pre-qualification is almost as detailed as that required for an actual mortgage approval.
The pre-qualification process has four steps:
- An initial pre-qualification is given based on unverified gross income figures.
- A full pre qualification is done based on information provided in the mortgage application.
- Verification of all financial information including income and employment, savings and equity, etc.
- Verification of creditworthiness
You should then receive a letter or certificate from the lender outlining their findings when it comes to amortization period, payment schedule, mortgage term, and interest rate (some lenders guarantee the rate they have offered you for up to 90 days).
Once you have pre-qualified, consider applying for a pre-approved loan to speed up the purchasing process.
Of course, aside from the monthly mortgage payment itself (principal and interest) it is wise to consider all the costs inherent in owning a home, both as part of the buying process and then on an ongoing basis. Whether you are a first time home buyer who is used to paying all-inclusive rent, a condo owner moving to a house, or a boomer buying your ‘forever’ home, don’t forget to plan (and save up!) for the following:
- Down payment
is the part of the home price that does not come from the mortgage loan but from your own money. The minimum down payment is 5% of the purchase price of the home, and you will need mortgage loan insurance from CMHC for another 15% of the home’s purchase price. For a conventional (uninsured by CMHC) mortgage, you need a down payment of at least 20%.
is paid when you make an offer to purchase, to show that you are a serious buyer. The deposit will form all or part of your down payment with the remainder owing at time of closing. If for some reason you back out of the deal without having covered yourself with purchase conditions, your deposit may not be refundable! The typical size of the deposit is 5% and up.
- Home inspection
is often recommended and usually costs about $400.
may be needed in some cases, if there is no existing sketch or survey. Ordering a survey will usually draw about $1000 from your wallet.
- Title insurance
is usually purchased through lawyer, approximately $200.
- Land transfer tax
With the municipal tax in Toronto plus the provincial tax, expect to pay $8200 on a $400,000 property (some exemptions apply; ask your Realtor® for details)
- Property tax
depends on the date & accuracy of the assessment, but usually ends up being several thousand dollars per year.
- Property insurance
Policies vary based on coverage selected. Expect premiums of about $400 per year.
- Legal fees & disbursements
Plan on paying up to $2,000 for your real estate lawyer.
- Moving expenses
vary depending on the type of mover you selected.
- Renovations or repairs
If you plan to make changes to your new home shortly after moving in, factor in any costs of repairs you are expecting to undertake.
- Condominium or townhouse fees
Where applicable, condo fees and townhouse fees typically amount up to a few hundred dollars per month.
- Service connection fees
This includes telephone, gas, electricity, cable TV, satellite TV, Internet, and so on. Some utilities may ask you to pay a deposit.