Financing Basics for First-Time Homebuyers
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Buying your first home is a huge milestone and one of the most exciting days of your life. You’ve planned, budgeted and saved, and you’re finally ready to take the plunge into homeownership – building your own home equity instead of paying down your landlord’s mortgage.
There’s a lot of information to take in to ensure you understand the ins and outs of homebuying and mortgage financing. We’re here to help each step of the way – answering all your questions and ensuring you have an enjoyable experience with as little stress as possible.
- Being financially prepared for homeownership will always pay off
- There’s a lot of information to take in to ensure you understand the ins and outs of homebuying and mortgage financing, so working with experts is extremely helpful
- Do a credit check at least once a year to ensure everything’s being reported properly and that you haven’t become the victim of identity theft
Are you a first-time buyer?
10 steps for first-time homebuyers
- Begin saving for your down payment as soon as possible. The more you can put down above and beyond the required amount – 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000 – the better. The smaller your mortgage and the lower amount of interest you’ll pay over your time as a mortgage holder, the quicker you can build home equity.
- Build your homeownership budget. This is about more than just mortgage payments. Your budget should also take into account property taxes, utilities, condo fees (if applicable), repayment of your RRSP (if borrowed for your down payment) and home insurance. This will give you a realistic idea of how much you must save to comfortably afford to become a homeowner. (See: Mortgage Payment Calculator)
- Check your credit. When was the last time you reviewed your credit? You should do a credit check at least once a year to ensure everything’s being reported properly and that you haven’t become the victim of identity theft. Fraudsters often only need your current mailing address and your date of birth to open an account. It’s best to check in with both of Canada’s credit reporting agencies – Equifax and TransUnion.
- Know your creditworthiness. Do you have healthy credit? Aside from paying bills on time, the number one way to increase your credit score is to pay down your credit cards. Credit card usage has a more significant impact on credit scores than car loans, lines of credit and so on. Also remember that more established credit is better quality credit. That’s why it’s important to keep using your older credit cards, even if you pay them off right away. Always dispute any mistakes or situations that may harm your credit score. If, for instance, a cell phone bill is incorrect and the company won’t amend it, you can dispute this by making the credit bureau(s) aware of the situation.
- Look into first-time homebuyer government programs. As a first-time homebuyer, it’s important that you’re aware of the various programs available to help offset homebuying costs. Be sure to look into such things as: First-Time Homebuyer Incentive; RRSP Homebuyers’ Plan; Land Transfer Tax Refunds; and GST/HST New Housing Rebate. (See: First-Time Home Buyer Grants in Canada)
- Get preapproved for a mortgage. A preapproval is a conditional commitment by your financial institution to grant you a specific amount of money at a certain interest rate based on your qualifications. Knowing the amount of mortgage for which you qualify, estimating your monthly mortgage payments and locking in the rate will allow for a smooth buying process and efficient mortgage transaction. (See: 6 Things You Need to be Preapproved for a Mortgage.)
- Find a local real estate agent. Navigating the homebuying process on your own can be overwhelming. And using a reputable local real estate agent will also help ensure you’re working with a professional who understands the intricacies of the community in which you wish to live. Be sure to ask friends and family for trusted referrals and interview some agents. When you’re buying a home, you won’t have to pay for a real estate agent – the seller pays a fee split to both the buyer’s and seller’s agent.
- Don’t get confused between ‘down payment’ and ‘deposit’ on an offer. When you’re ready to put in an offer, your real estate agent will ask you for a deposit. This is typically 3-5% of the purchase price that you’ll need to be able to access quickly. Down payment is the total amount of money you’ll be putting towards your purchase price. Down payment money is due a few days before your closing date and is given to your lawyer “in trust”.
- Understand your closing costs. This includes legal fees and disbursements, title insurance, home inspection, appraisal, mortgage default insurance (if making less than a 20% down payment) and any other out-of-pocket expenses you’ll be required to pay when buying a home. (See: Closing Costs What are They & How Much Will You Pay.)
- Provide income verification. Are you self-employed, on contract or a permanent full-time employee? Lenders look at each employment status differently. If you’re an employee, lenders will want a letter from your employer indicating your position and the length of time you’ve been employed with the organization and a recent paystub. If you’re self-employed or in a contract position, lenders will request a two-year taxation history to determine your income.
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First-time homebuyer mistakes to avoid
The biggest mistakes to avoid involve not taking into consideration the full costs associated with homeownership – above and beyond the monthly mortgage payments you’ll be required to make.
Closing costs are a significant expense that must be included in your budget. And many of these expenses must be paid out-of-pocket leading up to and on the closing date. (See: Step #9.)
Not saving enough for after move-in expenses such as furniture and appliances is another common error that can be avoided by adding these important components to your budget.
Important: Putting money aside for ongoing maintenance is an issue many first-time buyers fail to take into account.
Putting money aside for ongoing maintenance is also an issue many first-time buyers fail to take into account. When things go wrong in a home, they can prove quite costly, so it’s important to have a ‘rainy-day fund’ set aside to cover unknown future upkeep costs.
Not choosing the best mortgage product for your situation has also been known to cause first-time homebuyers grief. There are numerous mortgage choices available, including fixed- and variable-rate products, hybrid and no-frills mortgages, lines of credit, term options and amortization choices, to name a few. And although choice is great, it can be quite overwhelming without expert advice. (See: Should I get a Fixed or Variable Mortgage Rate?)
Finally, failing to plan ahead for a mortgage approval can also be a downfall. If, for instance, you know that you’ll be in the market shortly for a new mortgage (or renewing/refinancing an existing one in the future), it’s essential to plan for it by ensuring your debt management and credit worthiness are in order. If they’re not, start preparing immediately. Don’t make any purchases on your credit cards that you can’t pay off and, if you carry a balance on your credit cards, start paying them down. Pay down as much debt as possible to help with your debt-to-income ratio. Refrain from making any large purchases before securing your mortgage. If you’re planning to buy a car, for instance, wait until after your mortgage funds, as your debt-to-income ratio will rise, and you don’t want this to prevent you from qualifying for the best mortgage. (See: What’s an Ideal Debt-to-Income Ratio for a Mortgage?)
Mortgage application tips
One of the biggest mistakes you can make is only looking at the interest rate when getting a mortgage. Sometimes the lowest rate isn’t always your best choice, especially if you’re planning to move in a couple years. If you end up locking into a low rate that doesn’t enable you to break the mortgage without paying a big penalty, for instance, then the low rate you selected upfront can end up costing you a lot more in the future.
Important: One of the biggest mistakes first-time homebuyers can make is only looking at the interest rate when getting a mortgage.
If possible, you’ll want to have the ability to increase your mortgage payments or make lump-sum payments to help pay your mortgage down faster. Even if you don’t think you’ll be making extra payments, remember that every bit helps, so it’s best to have this prepayment option just in case. Be sure to find out the amount you can prepay without facing penalties.
Tip: What happens if you decide to move to a new home during the lifecycle of your existing mortgage? You’ll want to transfer it to your new home. Be sure you have a ‘portable mortgage’.
It’s tough to predict the future and know exactly how long you’ll remain in your home. What happens if you decide you want to move from your current home to a new home during the lifecycle of your existing mortgage? In this case, you’ll want to ‘take your mortgage with you’. In other words, transfer it to your new home. This is known as a portable mortgage.
House shopping tips
Before you start checking real estate listings for homes, it’s important to be preapproved for a mortgage so you know what you can comfortably afford. After all, there are several different types of homes available, which must also take your personal needs into account. Some of the most common types include condominiums, townhouses and single-family detached homes – each with its own unique features. Your preapproval will determine what you can spend on a home, which will then narrow these choices down for you. (See Step #6.)
It’s also important to work with a local trusted real estate agent. (See: Step #7.)
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