As a first time home buyer, the process of purchasing a home can seem very daunting, especially with the new rules coming into effect today, October 17th. After helping numerous First Time Home Buyers, I thought I would list the top 10 most common questions I hear from them, and provide answers. My hope is that if you’re a First Time Home Buyer you can use this blog post as a guide/reference when you become ready to purchase your first home.
1. What’s your best rate?
Of course. I get this question asked on a regular basis. Im going to be honest with you, as I am with all of my clients, so read closely. Rate is a small part of your mortgage contract, but often the most talked about. People become “rate sensitive” when they hear their neighbour, friend or co-worker got 2.49%, and they want the same rate. Some lenders dangle low rates to entice new buyers, but don’t be fooled. The lowest rates almost always come with conditions such as high pre-payment penalties, or quick 30 day closings.
Is saving $10-$15/month on your mortgage payment worth paying a penalty up to 7 times higher when you sell or need to refinance in a few years? As Chris Farley said in Tommy Boy when he is speaking with a buyer looking for the lowest price, “If you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer’s sake, for your daughter’s sake, ya might wanna think about buying a quality product from me.”
2. How much do I qualify for?
I answer this question with another question. How much do you feel you could spend per month on your mortgage payment without feeling stretched? Talk with your Mortgage Professional, ask him what your mortgage payment would be based on a determined amount, add $500/month to that amount to cover property tax, strata (if purchasing a condo/townhouse), and utilities. But if you still want to know how we calculate your maximum borrowing amount, I’ll explain.
Their are two ratios used to determine how much of a mortgage one qualifies for; Gross Debt Service Ratio (GDS) & the Total Debt Service Ratio (TDS). Your GDS is composed of your new housing cost, like your mortgage payment (principal & interest), property taxes, heating costs and any strata fees (if purchasing a condo or townhouse). Your TDS includes your GDS, and any other monthly liabilities such as car loans, credit card debts, lines of credit etc.
Depending on your credit score, the maximum GDS/TDS ratio is 39/44. This means your GDS shouldn’t be more than 39% of your gross income. Your TDS shouldn’t be more than 44% of your gross income. If your gross income is $100,000/yr you could allocate $39,000/yr to GDS & $44,000/yr to TDS.
3. How much money do I need for a down payment?
If you are going to be living there full time, the minimum down payment required is 5% of the purchase price for homes under $500,000. For homes over $500,000 a 10% down payment is required on the amount over $500,000, and up to $1M. Anything over $1M requires a 20% down minimum. If you want to avoid CMHC mortgage insurance, then a 20% down payment or greater is required.
VERY IMPORTANT – Rental or Vacation properties require a minimum of 20% down.
4. What happens if I don’t have the full down payment amount?
The most popular option is a gifted down payment. The funds can come from an immediate family member to form part or all of your down payment.
RRSP’s – As a first time home buyer you are eligible to use your RRSP as a form of down payment to a maximum of $25,000 per buyer. Your RRSPs can be used without being taxed if you pay them back within 15 years. The Government will divide however much you withdrew by 15, and expect you to pay that amount back per year. If you do NOT, they will add the amount owing onto your Gross Income for the year, which will be taxed.
Some lenders also allow a flex down program, which means you can borrow the down payment from a line of credit. The loan is factored into your debt service ratios, and must be less than or equal to 39/44.
5. What does a lender look at when approving me for a mortgage?
Generally speaking, the lender will want to look at your source of income, employment history, debt levels, credit history and the actual property itself.
Lenders want stability, and are risk adverse. By vetting, and checking the above by doing what we call in the industry a “stress test”, the lenders will feel confident that you are able to make your mortgage payments, and in the unlikely event you default, they know they can seize the property, and resell it if need be.
6. What’s better, a fixed or variable rate?
It comes down to risk tolerance, and your plan for the property. Fixed rates provide stability over the term of your mortgage, where a variable rate is tied to the prime rate (currently 2.70%). This means your mortgage payment could decrease or increase depending on what the Bank of Canada sets prime at.
Variable rates can also save you thousands if you sell, or refinance during your term. The standard penalty on a variable rate is 3 months interest, or about .5% of your mortgage amount. The penalty on a fixed rate is calculated using the interest rate differential, and depending on your lender, can sometimes be quite a lot of money.
7. What credit score do I need to qualify?
Anything above 680 is considered “AAA” with most lenders. A score above 680 gives you access to all discounted rates. If your score is below 680 there are options, but often at higher interest rates.
8. What happens if my credit score isn’t great?
Take action immediately to increase your credit score. Click here to read a previous post I wrote about how to improve ones damaged credit score.
9. How much are closing costs?
Closing costs will vary, but lenders typically require 1.5% of the purchase price in your bank account for closing costs. For example, if you are buying a condo for $500,000, the bank/lender will want to see that you have access to $7,500. This amount is subject to change, and I suggest speaking with a mortgage professional to confirm the amount required by your lender of choice. Closing costs cover inspections, lawyer fees, property transfer tax, appraisals, and title insurance.
10. How much will my mortgage payments be?
Well let me tell you. Give me a call today, and I’d be happy to help answer this question baed on your specific scenerio!
Best,
– D
*rate subject to change, based on best rates, October 17th, 2016