Buying a home is an exciting time. But, as one of the largest purchases you're likely to make, it can also be seen as one of your best long-term investments - so it's important that you get it right. This means doing your homework and making sure that the property you will eventually buy is the right one for you in terms of price, location, value, size and lifestyle.
To determine 'affordability' you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is a principal residence you are purchasing, calculate 32% of your income for use toward a mortgage payment, property taxes, and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.Second, calculate 40% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards and lines of credit. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders' usual guidelines.In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don't leave yourself house poor. Structure your payments so that you can still afford simple luxuries.
Good city services, nice parks and playground facilities, convenient shopping and transportation, a track record of sound development and good planning--these are just a few considerations that are important to many people when they choose a community in which to live.
Your original offer is often rejected for one reason or another. But do not let that stop you. When an offer is rejected, you begin negotiating. If you find that daunting, don't worry; I, Doug Blackstock, can help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that would not normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember, do not get so caught up in negotiations that you lose sight of what you really want and can afford! I can help you keep on track.
Once you've found a house you like and have the financial resources to buy it, you must decide how much to offer. In putting together your actual offer, consider the following factors:
The Advertised Price Of The House
Treat this as only a rough estimate of what the seller would like to receive, and recognize that different sellers price houses very differently. Some sellers deliberately overprice, others ask for pretty close to what they hope to get and a few (often the cleverest) under-price their houses in the hope that potential buyers will compete and overbid.
What You Can Afford
What you can pay for a house will probably depend on how much you already have in cash and how much you can reasonably borrow in a mortgage. When figuring out the cost of the house, be sure to factor in your share of the closing costs, which will be about 2%-5% of the purchase price.
A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.
A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase.
A minimum down payment of 5% is required to purchase a home, subject to certain maximum price restrictions. Any purchase price in excess of $250,000 requires a minimum of 10% as a down payment. In addition to the down payment, you must also be able to show that you can cover the applicable closing costs (i.e. legal fees and disbursements, appraisal fees and a survey certificate, where applicable). Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. It cannot be borrowed. Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Where the mortgage loan insurance is provided by Canada Mortgage and Housing Corporation (CMHC), the gift money must be in your possession before the application is sent in to CMHC for approval. Mortgages with less than 25% down must have mortgage loan insurance provided by either CMHC or GE.
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance Company, an approved private corporation. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 75%. The insurance premiums, ranging from .50% to 3.75%, are paid by the borrower and can be added directly onto the mortgage amount. This is not the same as mortgage life insurance.
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for. Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.
Subject to qualification, yes. In fact, even purchasers with 5% down may qualify to buy a home and make improvements to it. For high-ratio financing, both Canada Mortgage and Housing Corporation and GE Capital insured mortgages are available to cover the purchase price of a home as well as an amount to pay for immediate major renovations or improvements that the purchaser may wish to make to the property. This option eliminates the need to finance the renovations or improvements separately. Some conditions apply.
Where the improvements are cosmetic, the mortgage loan insurance premium is unchanged from the standard schedule. Where the improvements are deemed to be structural, the mortgage loan insurance premium is increased by .50% over the standard schedule. For information on mortgage loan insurance premiums see high-ratio home mortgage financing.
Most lenders will accept down payment funds that are a gift from family as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Where the mortgage requires mortgage loan insurance, Canada mortgage and housing corporation requires the gift money to be in the purchaser's possession before the application is sent in to them for approval. Where mortgage loan insurance is provided by GE Capital this is not a requirement. See 'what is mortgage loan insurance?' for further information.
A pre-approved mortgage provides an interest rate guarantee from a lender for a specified period of time (usually 60 to 90 days) and for a set amount of money. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like 'written employment and income confirmation,' and 'down payment from your own resources,' for example.
Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range. In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.
Lenders will often guarantee an interest rate to you as much as 90 days before your mortgage matures. And, as long as you are not increasing your mortgage, they will cover the costs of transferring your mortgage too. This means a rate promised well in advance of your maturity date, thus eliminating any worries of higher rates. And if rates drop before the actual maturity rate, the new lender will usually adjust your interest rate lower as well.
Most lenders send out their mortgage renewal notices offering existing clients their posted interest rates. The rate you are being offered is usually not the best one. Always investigate the possibility of a lower interest rate with the lender or another lender. If you don't you may end up paying a much higher interest rate on renewing mortgage than you need to.
Most lenders now offer insured mortgages for both new and resale homes with lower down payment requirements than conventional mortgages - as low as 5%. Low down payment mortgages must be insured to cover potential default of payment, and their carrying costs are therefore higher than a conventional mortgage because they include the insurance premium.
With all low down payment insured mortgages, you are responsible for:
Appraisal and legal fees
An application fee for the insurance
Paying the mortgage default insurance premium, although the amount of the premium may be added to the mortgage amount
There are numerous ways to reduce the number of years to pay down your mortgage. You'll enjoy significant savings by:
- Selecting a non-monthly or accelerated payment schedule
- Increasing your payment frequency schedule
- Making principal prepayments
- Making double-up payments
- Selecting a shorter amortization at renewal
Today, about 50% of first-time home buyers use their RRSP savings to help finance a down payment. With the federal government's Home Buyers' Plan, you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help pay for your down payment on your first home. You then have 15 years to repay your RRSP.
To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You'll also need a signed agreement to buy a qualifying home.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers' Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan.
The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.
First and foremost, you have to make sure you have enough money for a down payment - the portion of the purchase price that you pay yourself.
To qualify for a conventional mortgage you will need a down payment of 25% or more. However, you can qualify for a low down payment insured mortgage with a down payment as low as 5%.
Second, you will require money for closing costs (approximately 2.5% of the basic purchase price).
Third, if you want to have the home inspected by a professional building inspector - which I highly recommend - you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the house is structurally sound. Usually the inspector will provide you with a written report. If they don't, then ask for one.
Fourth, you will be responsible for paying the fees and disbursements for the lawyer or notary acting for you in the purchase of your home. We suggest you shop around before making your decision on who to use, because fees for these services may vary significantly.
Additionally, there are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax - a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.
Finally, you will be required to have property insurance in place by the closing date. And you will be responsible for the cost of moving. Remember, there will be all kinds of things you'll have to purchase early on - appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.
The length of mortgage terms varies widely - from six months right up to 25 years. As a rule of thumb, the shorter the term, the lower the interest rate. The longer the term, the higher the rate.
While four or five year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.
Before selecting your mortgage term, I suggest you answer the following questions:
Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.
Do you believe that interest rates have bottomed out and are not likely to drop more? If that's the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.
Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.
Are you willing to follow interest rates closely and risk increased mortgage payments following a renewal? If that's the case, a short mortgage term may best suit your needs.
Needless to say, you'll have financial responsibilities as a home owner.
Some of them, like taxes, may not be billed monthly, so do the calculations to break them down into monthly costs. Below you will find a list of these expenses.
The Mortgage Payment
For most home buyers, this is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term or amortization.
Property tax can be paid in two ways - remitted directly to the municipality by you, in which case you may be required to periodically show proof of payment to your financial institution; or paid as part of your monthly mortgage payment.
In some municipalities, these taxes are integrated into the property taxes. In others, they are collected separately and are payable in a single lump sum, usually due at the end of the current school year.
As a home owner, you'll be responsible for all utility bills including heating, gas, electricity, water, telephone and cable.
Maintenance and Upkeep
You will also have to cover the cost of painting, roof repairs, electrical and plumbing, walks and driveway, lawn care and snow removal. A well-maintained property helps to preserve your home's market value, enhances the neighbourhood and, depending on the kind of renovations you make, could add to the worth of your property.
A longer-term mortgage is worth considering if you have a busy life and don't have time to watch mortgage rates. 4, 5 and 7-year mortgages let you take advantage of today's rates, while enjoying long-term security knowing the rate you sign up for is a sure thing.
If you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower rates and save.
A mortgage in which payments are fixed for a period of one to two years, although interest rates may fluctuate from month to month depending on market conditions. If interest rates go down, more of the payment goes towards reducing the principal; if rates go up, a larger portion of the monthly payment goes towards covering the interest. Some open variable rate mortgages allow prepayment of any amount (with certain minimums) on any payment date.
I've found that affordability is probably the single biggest concern of today's first-time homebuyers. Given the wide range of media coverage regularly devoted to the issue, it's not surprising that many young families wonder how long it will take them to afford their first home.
The amount of a mortgage for which one can qualify is generally founded in what are known as qualification ratios: Gross Debt Service ratio and Total Debt Service ratio, or "GDS" and "TDS". Lenders evaluate one's monthly income, as well as their monthly debt obligations, to determine a fair and feasible amount of mortgage available to the prospective borrower. This figure is calculated via their GDS and TDS guidelines. Generally, lenders will have an acceptable Gross Debt Service ratio ranging from 28-32%. In other words, 28-32% of one's monthly household income can be reasonably set aside for one's mortgage payment, in the eyes of the lender. Furthermore, most lenders will have an acceptable Total Debt Service ratio of 36-40%. In other words, 36-40% of one's monthly household income can be reasonably set aside for one's total debt obligations, including their impending mortgage payment.
My advice: Don't sell yourself short. Talk to a mortgage broker or lender. There are many financing options available today, and some include low down payments. Your lender will help find an option that fits your budget, and you may be surprised at just how much home you can afford.
According to the guidelines of the Canadian Mortgage and Housing Corporation (CMHC), one must have a minimum down payment of at least 5% of the total cost of the prospective property. With a down payment between 5 - 24.99%, one's mortgage is deemed "high-ratio". A high ratio mortgage is subject to a CMHC premium in accordance with the following schedule:
With a down payment of 25% or greater, the mortgage is deemed "conventional". A conventional mortgage is not subject to any CMHC fees. Thus, a larger down payment represents a two-fold advantage to the prospective homebuyer. First, the prospective homebuyer will avoid CMHC premiums with 25% down payment. Secondly, a larger down payment will relate into smaller monthly payments, or a shorter amortization; both of which lead to interest savings over the life of the mortgage.
- Yes, you can buy a home with a down payment of less than 10%:
- Single-family dwelling: 5%
- Two-unit dwelling: 7.5%
Minimum equity of 5% from your own resources is required. Gift down payments from an immediate relative are acceptable.
Maximum house price ceilings apply for 5% down payment. Limits of $125,000, $175,000 or $300,000 apply to locations throughout Canada.
On the day one actually purchases their new home they are required to pay certain costs associated with this endeavour. In addition to one's down payment, the prepaid property tax and homeowner's insurance premiums there will be other fees to consider:
- Survey charges
- Land transfer taxes
- Attorney fees and Disbursements
- Garbage disposal fees
- Title insurance
- Fire insurance
Don't forget that your purchase will most likely be subject to the Goods and Services Tax. Please ask me, Doug Blackstock, about this and I will have an answer for you.
The "term" of the mortgage should not be confused with the "amortization". The amortization of the mortgage refers to the entire length of time that it will take for the mortgage to be paid and the house to be thusly, "free and clear". The term is the period for which your current payment obligations are valid. In other words, you may choose a five-year term and a 25-year amortization. This would mean that your interest rate, your payments, and your pre-payment options would be the same for the next five years. At the end of these five years you would re-negotiate the term, and the amortization would now be 20 years. Fixed rate Mortgages can be "closed" or "open".
Allow one to pre-pay some, or all of, their outstanding mortgage obligation at any time, without penalty. Generally, open mortgages have a six-month, and a one-year term option with higher interest rates than closed mortgages of the same term length.
Generally, closed mortgages are offered in terms ranging from six months to ten years. Generally, closed mortgages offer more stringent pre-payment options subject to various pre-set regulations. For most people, such pre-payment options can be vital to reducing the amortization of one's mortgage and should be properly discussed with one's lender/agent.
The simplest way to accomplish this is to decrease your principal; thus, decreasing your interest obligation. There are a number of very feasible approaches to performing this task:
Increase Payment Frequency
Instead of paying monthly, consider paying bi-weekly. This simple step is very feasible for most working Canadians who are paid bi-weekly. It can cut your mortgage amortization by up to five years, and can save you tens of thousands of dollars.
Use every advantage that the term of your mortgage offers you to prepay your mortgage. One way to do this would be to use your RRSP tax refund to make a yearly pre-payment.
Round up your bi-weekly payment. For example, if you have a bi-weekly payment of $531.59, round your payment to an even $550.00. This will have a profound effect on the interest paid, and the amortization of the mortgage.
Pre-qualification is the first step in obtaining the mortgage that you need to purchase the home of your dreams. It's a simple step where an institution examines your financial situation in terms of income and liabilities in order to establish your lending potential in terms of GDS and TDS.
This is accomplished through the review of a simple application process that includes the pertinent information. It is important to note that this is not the same as a pre-approval, as credit has not been reviewed and income has not been verified and funds for closing are not verified.
Refers to the verification of the applicant's ability to borrow. A pre-approval gives a potential home-buyer the advantage of knowing how large a mortgage they will qualify for and the ability to use this information in negotiating the final selling price of a home.
Parts of the pre-approval process include an analysis of the borrower's credit history, a review of the client's employment history, and a verification of down payment funds.
Full Loan Approval
Full loan approval occurs when the lender has underwritten the application, and is satisfied that all conditions have been met. Furthermore, full loan approval refers to the approval of a mortgage for a specific property. Once full approval has been received, arrangements will be made by the lender to have the funds appropriately forwarded.Wah
If you plan to sell your home without the aid of a real estate agent, then you must seriously consider working with a mortgage agent. Even though you are not buying a home or getting a loan, it is the mortgage agent that actually puts the entire transaction together for a smooth closing after you and the buyer decide on the terms of the contract.
A mortgage agent is an independent real estate financing professional who specializes in the origination of residential and/or commercial mortgages. Typically they do not fund or service the loan itself, but instead, they act as an agent or manager for capital sources who act as loan wholesalers.
A mortgage agent is also an independent contractor working, on average, with 40 wholesale lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, an agent provides consumers the most efficient and cost-effective method of offering suitable financing options tailored to the consumer's specific financial goals.
Protecting purchasers against loss is accomplished by the issuance of a title insurance policy, which states that if the status of the title to a parcel of real property is other than as represented, and if the insured suffers a loss as a result of title defect, the insurer will reimburse the insured for that loss and any related legal expenses, up to the face amount of the policy.
Title insurance differs significantly from other forms of insurance. While the functions of most other forms of insurance is to guard against future events (such as death or accidents or in the case of property, fire or flood), the primary purpose of title insurance is to eliminate risks and prevent losses caused by events that have happened in the past. To achieve this goal, title insurers perform an extensive search of the public records to determine whether there are any adverse claims to the subject of real estate. Those claims are either eliminated prior to the issuance of a title policy or their existence is exempted from coverage.
real estate appraiser is an impartial, independent third party who provides an appraisal -- an objective report on the estimate of value of real estate. The appraisal is supported by the collection and analysis of data. Most licensed appraisers will provide an advance estimate of the cost to perform the appraisal, and many will commit to a fixed fee for the appraisal. It is always wise to obtain a written contract for services that includes a description.
Selecting a 2, 3 or 5 year, open Variable Interest Rate Mortgage may provide you with access to interest rates as low or lower than a banks Prime Rate - plus gain the flexibility to be able to increase your payments to any amount. You can also pay off all or part of your mortgage without penalty (an administration fee applies in year one and two only). That means lump sum payments of any amount can be made at any time. You can transfer your mortgage to any bank at any time with no penalty ($200-$300.00 discharge penalty applies). Your monthly payments will remain the same, but the portion of the payment that's applied to reducing the principal can vary. When interest rates are on their way down, a variable-rate mortgage could end up saving you thousands of dollars. But if rates go up, more of each monthly payment will go toward paying the interest. When interest rates fall, more of your set monthly payment goes toward paying off your mortgage principal and less towards interest. That means your mortgage gets paid off faster. Should interest rates rise, more is applied toward interest.
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