Preparing to Buy a Home
by Jane Johnston & Pat Dodds
Buying a home is the most important financial decision of your life.
Too often, people get emotionally attached to a home they are
subsequently not able to purchase because they've made an offer without
adequate financial approval. There are several things to consider
before starting to search for a home. The first step in getting a
mortgage is to qualify yourself, financially. This means setting up a
meeting with a mortgage broker or your lender so that you know how much
down payment you'll have available and how much you'll be able to
spend. Here are some tips to think about before you visit the mortgage
broker:
Start Saving Your Money Before You Are Ready to Buy
The bank will want to see if you have been saving your money. They will
look at the trends in your accounts over the past few months. If you
can, save up a substantial down payment before you start looking.
RRSP
The federal government has an incentive through RRSPs to help people
get into the housing market. You may use up to $20,000 of RRSP savings
towards a down payment for a home. However, remember that this money
must either be paid back annually over 15 years or it will be
considered as income on your taxes. Make sure you have a chat with your
mortgage broker about using RRSP money so that he or she can direct you
to the correct forms.
Down Payment
If you have a down payment, you have to identify your source of those
monies. If they are from a parent, then you'll have to get a letter
signed from your parent or friend that the money is a gift and there is
no intention of re-payment. If the money is a loan and will be repaid,
this must be stipulated.
Have a 20 per cent down payment, if you can; then your mortgage will
not have to be insured by the Canadian Mortgage and Housing Corporation
(CMHC). If you put 5 per cent down, then you'll be paying a premium of
2.75 per cent for CMHC Insurance on top of your mortgage. With 10 per
cent down, you'll pay a premium of 2 per cent and with for 15 per cent
down, you'll pay 1.75 per cent on the mortgage. Also, if you extend
your mortgage over 25 years, then, for every 5 years over 25 years, add
.20 per cent. These percentages add up so save money by having your
savings in place before you buy a home.
Being Pre-Approved
What does this really mean? There are two aspects to bank approval of a
purchase of a home; buyer approval and house approval.
Buyer approval: This is the amount of money your mortgage broker has
determined you may spend on a home, and roughly, what your monthly
payments will be. Likely you will be given different scenarios for
different price ranges; as well you might be able to spend more if the
house has a suite. Note that different banks have different rules and
regulations with regard to loans, so what one bank may lend you may be
different than another. A mortgage broker will shop different
institutions for you. To finalise your financing, you have to get the
home you want to buy approved as well.
House Approval: After there is an accepted offer on a home, you have to
send your contract for purchase and sale to the lender for approval.
The lender will then conduct an appraisal of the home to determine if
it is worth what you have offered. This will determine their lending
limit (called the lending value) and that, in turn, will determine how
much you may borrow against the home.
Total Costs
Besides the purchase of your new home, there are some additional costs
to be considered as well. These include:
- Property inspector; $300-$400
- Lawyer or notary fees; $700-$1000
- Property Transfer Tax; there is no tax for first-time home buyers
purchasing a home under $425,000. A first-time home buyer means you
have not purchased anywhere else in the world. For those buying a home
between $425,000 and $450,000, then incremental increases in tax start
at $425,000 and increase to full property transfer tax at $450,000. For
any home buyer purchasing a home over $450,000, you will have to pay 2
per cent on the first $100,000 and 1 per cent on the balance of the
purchase price.
- GST; brand new homes only, add 5 per cent to the cost of the home,
unless the listing stipulates that the GST is included in the purchase
price.
Working With a Realtor or Buyer Agency
A realtor is your advocate when looking for a home. They will work with
the mortgage broker and you to determine your spending limit, find you
the types of houses that interest you, and scout out homes in the areas
in which you are interested. Further, they will show you homes online
and in person and follow up on any questions you may have. Generally,
realtors' services are paid for by the seller of the home you want. In
exchange for the realtor's loyalty in representing you, a realtor will
ask you to sign a buyer agency agreement. If you are happy with the
services they intend to offer you and feel they will represent your
best interests, read the agreement through carefully and if you feel
comfortable, sign it.
Your mortgage broker, your realtor and you will work together as a team
to find you a home. Buying a home is an emotional rollercoaster ride.
As you move through the process, your realtor and mortgage broker will
guide you through the decisions that will have to be made. Being
prepared financially is the first essential step you'll take with your
real estate team to making the best home buying decision.
Jane Johnston, M.Ed., is a realtor with Pemberton Holmes
(
http://www.InsightVictoria.com), and Pat Dodds is a mortgage broker with The
Mortgage Group (
http://www.patdodds.tmgbroker.com).