First Time Home Buyers

When it comes to buying your first home, the questions seems to be endless. It may feel overwhelming not really knowing what your options are, what is available to you, and how much you can afford.

If you are renting now, there are a few comparisons to make between home buying and renting. This will help you decide if now the right time for you to buy is.

Being a home owner can be rewarding with property appreciating regularly increasing your net worth, as well you can expect the equity in your home to increase over time as you pay down your mortgage. On the other hand it is typically more expensive to own a home, from utilities, home repairs, interest rates and insurance for your home, and depending on your down payment the size of your monthly mortgage payments it can add up to more then you’re paying in rent.

Renting it is all your opportunity cost. As a renter you may enjoy lower living expenses, less maintenance obligations that come with owning a home, that give you opportunity to invest in other interests whether that is traveling, starting a business or just saving for a larger down payment for a home in the future.

At the end of the day it is truly rewarding to have your own home, and real estate is always a good investment.

Basic Questions to ask yourself before deciding to buy or continue renting

What can you really afford?

Home ownership should be fun, rewarding and enhancing to your standard of living. The last thing you want is mortgage and debt payments running your life. First time buyer’s sometimes take on more debt than they can handle comfortably and find themselves ‘mortgage poor’. This is a stressful situation to get into because it can put strain on your relationships, and inhibit you from participating in other activities or interests.

What type of home will best suit life style?

There are so many types of homes that all have something to offer potential buyers, but choosing a home that is unique and special as you are can be tricky.
A lot of the time the homes that we want are out of our initial budgets, and that’s okay. As a first time home buyer you may not be able to get your dream home but it is a starting point that is going to help you get there…eventually.

New home or resale home…that is the question

New homes offer convenience to first time home buyers, especially those with young families that are looking for a ‘turn key’ home. You just turn the key and move in. With building standards today new homes are becoming more energy efficient and built up to new building codes and regulations as well offer the buyer a chance to customize features of the home is often appealing. If you get into a new development early you will definitely make money on your new home investment, even if you only stay in the area for a few years.

On the other hand resale homes offer different benefits to home buyers. Established schools, community centres, and neighborhoods will give you a sense of the area. Resale homes can also be turn key, but a lot also require some minor and major renovations. Do you have the time and skill to take on home renovation projects? If so then a resale fixer upper, may be a great investment, because you may be able to get into a more established area for less. If mature landscape is something you value then resale homes may be for you, even though maintenance and up keep of the home is typically more costly.

I can help you to figure out which direction you would like to go in. As a professional realtor I will access your goals, wants, and needs and narrow your focus, making the home buying process feel less overwhelming and more enjoyable.

Before deciding if it is going to be resale or new for you, getting pre-approval for a mortgage will make your financial questions about affordability that much more clear. As well be pre-approved, enables the house hunting process to be focused and realistic. The last thing you want is falling in complete and utter love with a home, and later being disappointed that it does not fit into your home buying budget.

When you meet with a mortgage broker you will learn about all the different types of mortgage products available that will meet your financial needs and requirements. Special Programs for first time home buyers like the 5% CHMC Mortgage Down Payment, and RSP Home Buyers Plan.

The closing cost discussion should also be on the agenda at your meeting with a mortgage broker. Closing costs are the legal and administrative fees and disbursements associated with buying your home. Including and not limited to CMHC or GEMICO insurance, Land transfer taxes based on a percentage of the purchase price of the property. In Ontario, for example, the rate is ½% on the first $55,000 of the purchase price, 1% on the next $195,000, 1.5% on the next $150,000 and 2% on the remainder. Legal/notary fees and fire insurance from the date you take possession of your new home. Understanding each one will help you budget more accurately and lead to a more comfortable home-buying experience.

TD Bank suggests as their rule of thumb, is to save approximately 2% of the purchase price for closing costs.

Other expenses to remember to account for are everyday living expenses from food, clothing, cell phones, cable, land taxes, gas, car payments it is easy to forget how quickly bills can add up. And do not forget about vacations, and other social activities.

Mortgage Calculator insert HERE

So what is your ideal debt load? The easiest way to figure out how much of your income can be spent on your debts to live comfortably. The calculations will come out to the maximum ratio amounts for owning your home; ideally try to have lower ratios to insure you are not living on KD and hotdogs for the year.

Gross Debt Service ratio (GDS)

The GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs, and 50% of condominium fees, if applicable). Generally speaking, this amount should be no more than 32% of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in monthly housing expenses.
Total Debt Service ratio (TDS)

The TDS ratio measures your total debt obligations (including housing costs, loans, car payments, and credit card bills). Generally speaking, your TDS ratio should be no more than 40% of your gross monthly income.
Purchasers can use up to 32% of their gross family income for payments of mortgage principal and interest, property taxes and heating. A buyer’s total debt load (including consumer loans, etc.) cannot exceed 40% of the gross family income.

If you are not inclined to calculate the above try this.
Add up the household incomes and multiply it by 3.4.

An example: Annually income within house is 60,000 x 3.4 = $204, 000 this is the amount of home you can afford.
$204,000 x .05% = $10,200 (would be the 5% down payment)

Let’s go back to finding you the perfect home that fits into your life. Have you ever thought about the condominium lifestyle?

Condominiums are greatly for a variety of reasons, the condo expenses stay roughly the same month to month, and there is no maintenance required on your part so you have more free time. On the other hand living in a condominium means you are subject to the rules and regulations of that Condominium Corporation and well as you must share in the common spaces with your neighbors. No maintenance does seem fantastic on the surface but remember condominium fees can be subject to change and you are going to have to accept the changes in cost that will be in addition to your regular mortgage payments.

Homes may not have the maintenance fees but are your responsibility to take care of the property which costs money and time as well. Homes are great for the fact that you can renovate and upgrade what you like and you only have to pay for the items that want and needs. Unlike a condominium fees that are lump sums for all services offered in the development regardless if you use the pool or not.

What else should you be thinking about?

Hopefully this has helped you make a decision with regards to the type of housing that suits your lifestyle and budget. There are other criteria to consider and that is where your home is going to be located.
You want to look for a community that can offer you services you value. For example if you have young children you want to look into the schooling system, what schools are available in your desired area. Are their high schools for them to attend in a few years? Are they in walking distance or will the children need to be bused in? Many of these types of factors are over looked when finding a home. Here are a few more factors to consider when starting you housing search;

• Amenities
• Yearly land taxes
• Distance from your current work, or your spouses work. Spending half you day driving would make even the happiest person miserable.
• Proximity to schools, community centres, arenas, etc.
• How busy is the traffic in the area? Do you prepare or do thrive on the rustle and bustle.
• Zoning and local by-laws that could inhibit renovations or accessory apartments.

Mortgages

At the end of the day a larger down payment equals a greater long term savings; it reduces the amount of monthly principal and interest payments, and reduces the total amount of interest you pay over the full term of your loan.

Down payments are generally anywhere from 0%-20% of the purchase price.

Conventional Mortgage: A loan for no more than 75% of the appraised value of the property. Home Buyer is required to put down at least 25% of the purchase price or appraised value of the home (whichever is less) as a down payment.

High Ratio Mortgage: Home buyer is not required to put any money down, but it requires buyer to purchase mortgage default insurance which can be pricy. CMHC may insure a mortgage up to 100% of the lending value of the house. To be eligible for a high ratio mortgage, you must be being a home in Canada with the intention to occupy it as your principal residence.

RSP Home Buyer’s Plan: This plan lets first time home buyers withdraw up to $20,000 from RSP’s for a home purchase. The withdrawn amount must be repaid within fifteen years, subject to a minimum annual repayment that is 1/15 of the amount withdrawn. If the full $20,000 is withdrawn, the minimum annual repayment is $1,333. If less than the minimum is repaid in any particular year, the balance is added to the taxpayer’s income.

A loan with CMHC comes with a premium. The premium is based on the down payment and loan amount. Typical fees range from 1.00%-3.50% of the principal amount of your mortgage. These fees can be paid up front or added to the principal amount of the mortgage. The term of the mortgage will be set by the lending institution.

To get final approval for a mortgage on a property you have put an offer on, you should bring the following documents to your mortgage company.

• Confirmation of income or employment earnings — a signed letter from an employer for salaried employees or three years of tax assessments for commissioned or self-employed individuals
• Current banking information
• Evidence of your down payment amount
• A list of assets, including property and vehicles
• List of liabilities, such as credit card balances, car loans, the total amount you owe and your monthly payments
• Survey of property
• Address and contact information for your lawyer or notary
• A copy of the agreement of purchase and sale
• A copy of the MLS listing, which contains property details and photo, if applicable
• Contract and building plans, if you are having a home built