If you’re a first-time home buyer in Canada, there are several things you need to know before starting your search.
Purchasing a home can be a daunting task, but it doesn’t have to be if you take things one step at a time. In this article, we will provide an overview of the entire process, from determining how much you can afford to borrowing money and getting insurance.
We’ll also answer some frequently asked questions from buyers like you. So whether you’re just starting or are already well on your way, read on for essential advice!
Take a look at some typical errors made by first-time purchasers and some advice on how to prevent them before you let your enthusiasm get the better of you.
Not being aware of your actual financial capacity
Owning a home is something that many people aspire to, but not everyone can afford it. How do you determine if you are genuinely prepared to purchase your first home? And how much you be able to spend on it?
If you often turn to no refusal payday loans Canada 24/7 or something similar, consider how stable your financial situation is at the moment. Examining your financial situation in comparison to the criteria used by mortgage lenders to assess your eligibility is one approach to responding to these inquiries.
These consist of:
1) Ratios of debt service: a lender will evaluate your monthly debt obligations, which may include credit card payments, car loans, child support, and alimony, as a proportion of your gross monthly income. They’ll typically want this “debt-to-income ratio” to be below 36%, with no more than 28% of that going towards servicing your mortgage specifically.
2) Low-required down payment: to qualify for a conventional mortgage, you’ll generally need to make a down payment of at least 5% of the home’s purchase price. On an FHA loan, the minimum down payment is 3.5%.
3) Test for mortgage stress: lenders want to make sure that your housing costs don’t eat up too much of your monthly income. So they’ll typically recommend a maximum “mortgage payment-to-income ratio” of 28%. This figure represents the amount spent on housing as a share of gross income.
However, keep in mind that a lender’s requirements don’t necessarily reflect your whole financial situation.
You should consider items like closing costs, non-debt expenses, maintenance expenditures, and future intentions, such as establishing a family, when calculating a reasonable monthly mortgage payment — and overall loan amount.
For example, even if you’re approved for a $1,500 monthly mortgage payment based on your income and debts, that doesn’t mean you can afford it.
If you’re also dealing with $300 in student loan payments, $150 in car payments, and $200 in credit card debt, that leaves you with just $850 in disposable income each month — which might be tight if you have other bills or responsibilities.
And that’s before you even start thinking about things like groceries, gas, clothes, etc. The bottom line is that buying a home is a big financial commitment — so make sure you’re ready before taking the plunge.
Lack of Knowledge of Your Mortgage
One of the most important things to consider when taking out a mortgage is the term. The term is the length of time during which your mortgage agreement is in force, and can range from six months to five years or longer.
The term you choose will have a major impact on the amount of interest you pay, so it’s important to choose wisely.
If you’re planning on staying in your home for many years, a longer term may be best so that you can lock in a low-interest rate.
Reasons for homeowners going over budget when renovating their property in Canada in 2017
On the other hand, if you think you may sell your home soon, a shorter term may be more advantageous as it will save you money on interest payments.
Whatever your plans, be sure to carefully consider the term of your mortgage before signing any papers.
Mortgages are one of the most common types of loans used to finance the purchase of a home. When you take out a mortgage, you agree to pay back the loan principal plus interest over a set period.
The interest rate on your mortgage will determine how much you end up paying in total.
There are two main types of mortgage interest rates: fixed and variable. Fixed interest rates remain constant throughout the life of the loan, while variable rates can fluctuate depending on market conditions.
You may also see mortgages advertised as open or closed. Open mortgages offer more flexibility in terms of repayment and refinancing but usually have higher interest rates.
Closed mortgages typically have lower interest rates but less flexibility in terms of repayment.
Not Using First-Time Home Buyer Programs
Purchasing your first home is an exciting milestone, but it can also be a daunting financial undertaking.
Fortunately, the Canadian government offers several programs to help first-time buyers with the costs associated with buying a home.
The Home Buyer’s Plan allows eligible buyers to withdraw up to $35,000 from their RRSP for a down payment, tax-free.
For couples, the maximum amount that can be withdrawn is $70,000. The money must be repaid into your RRSP within 15 years.
The Home Buyers’ Tax Credit is another program that can assist first-time buyers with costs such as disbursements, transfer taxes, and legal fees.
On a qualified residence, this credit provides a non-refundable income tax credit. If you are planning on purchasing your first home, be sure to check if you are eligible for these or other aid programs.
Reducing the financial burden of buying a home can help make your dream of homeownership a reality.
The First-Time Home Buyer Incentive is a government-backed program that helps purchasers to buy their first home.
Under the program, qualified purchasers can borrow 5% or 10% of the purchase price of their home to use as a down payment. When they sell their house or after 25 years, they must repay the loan in full.
The incentive is available on homes with a purchase price of up to $500,000. For example, if you buy a $400,000 home with a 10% incentive, you would only need to provide a down payment of $10,000 instead of the usual $40,000.
The incentive can help you to save for your down payment more quickly and reduce your monthly mortgage payments.
If you are looking to purchase your first home, the First-Time Home Buyer Incentive may be able to help you.
The Bottom Line
Purchasing your first home is an exciting time, but it’s important to be prepared before you start the process.
Determine how much you can realistically afford and get pre-approved for a mortgage. Learn about government programs that can help with the costs of buying a home.
And be sure to avoid these common mistakes so that you can enjoy your new home stress-free.