Everything you wanted to know about buying a home.
Making the right choice when it comes to purchasing a home is a matter of
good planning. There is so much to learn, especially on your first purchase,
that it's essential to surround yourself with qualified professionals throughout
the process. Even with the help of qualified professionals, you’ll need
to understand, in a general sense, how the process works. Our hope is that
this article we be a very helpful introduction to the process of buying a home
and qualifying for a mortgage.
Affordability and Financing
The question of ‘How much can we afford?’ is largely answered by
comparing your income to expenses in two different formulas:
- Your gross
income to your future mortgage payments, heating costs, strata fees and
property taxes, commonly called the Gross Debt Service Ratio (GDS
- The three previous expenses plus all other debt servicing costs that
you regularly pay on a monthly basis. This formula is commonly called the
Total Debt Service Ratio (TDS). The TDS Ratio often includes the payments
on credit card debt, automobile loans, existing lines of credit and student
loans as well as other similar loans.
The current maximum ratios for individuals
and couples with a 5% to 25% down payment are 32% for GDS and 40% for TDS.
In English, this means that lenders
will allow you to use a maximum of 32% of your total pre-tax or gross income
to pay for your mortgage payments, property taxes and heating costs. And a
maximum of 40% of your total pre-tax or gross income for these payments plus
all other debt servicing cost you may have –see previous paragraph for
By using these ratios I can help you select a price range for your new home
that you are going to be comfortable with and let you know what the maximum
mortgage that you will qualify for. This will save you time , money and disappointments
you may incur by looking at homes over your price range.
Why get pre qualified?
There are 3 good reasons to get pre qualified;
- It saves you time from looking at homes outside your price range.
can get you an interest rate locked in for up to 120 days. This protects
you from any rate increases that can happen after you have written and offer
but before you close on the purchase. This could save you thousands of
- It makes your offer more appealing to a seller, if they know
you are a qualified buyer. This means they will look at your offer more
seriously which can even
result in a lower purchase price.
This pre-qualifying stage is also a good time
to find out about the differences between conventional mortgages and high ratio
insured mortgages. Ask about
assistance for first time the federal government's "RSP Homebuyer's Plan" letting
you use funds from your RSP to purchase a home and the option of using a gifted
down payment to help you qualify.
Applying For Your Mortgage - A Checklist
- A copy of the accepted Offer To
Purchase, MLS print out, Strata Documents and the land survey.
- A current
salary letter from your employer.
- Self-employed individuals need financial
statements for the past three
years as well as personal income tax returns.
- Confirmation where your down payment
came from (i.e. bank statements
or a gift letter).
If you are buying a home to be constructed you will need a
copy of the building plans and specifications, the land survey, plus your agreement
With these documents in hand, I can move quickly to secure an unconditional
mortgage approval once you’ve found the perfect home.
Making House Hunting Fun
By taking care of your mortgage needs first you can focus your attention on
the details of the home you are buying.
Take the guesswork out of shopping for a home by taking advantage of all the
professional resources available to guide you through the many choices available
when purchasing your first home.
Mortgage Life Insurance
You should look at mortgage life insurance, disability and critical illness
insurance, especially where two incomes are involved. Just like fire insurance,
you will sleep better knowing that you are covered for those curve balls
that life throws at us.
I could go on at length about the various features of each mortgage type but
in the interest of time, our best advice is to contact me with the questions
you are most concerned about. I know the pre-payment privileges of the various
financial institutions on the system. These let you pay down your mortgage
faster. Also be aware that the longer the amortization period (the time it
takes to pay off a mortgage), the more interest you will end up paying. Amortization
periods range from five to twenty-five years.
Accelerated mortgage payments such as Bi-weekly payments divide the monthly
payment in half and make them payable every 2 weeks. This means you will make
26 half payments a year or 13 full payments a year. This extra 2 half payments
can reduce your mortgage from 25 years down to 17 years.
Some clients find having a payment every 2 weeks hard to budget for as there
will be 2 months in every year that have 3 half payments in it. This extra
payment can through your bank account balance out of whack if you are not very
careful and not following which months have the extra payments.
You can accomplish the same goal by just increasing your monthly payment by
10% and making 12 monthly payments a year.
Monthly Vs Accelerated Bi Weekly
# of Payments
|Monthly + 10%
|Accelerated Bi Weekly
Portable and Assumable
Another option to consider is portability. If later, you decide to sell your
home and buy another, you should be able to take your mortgage with you or
transfer it to the buyer of your home without penalty. This can turn out to
be a major advantage if your mortgage rate is below current market rates.
the Right Mortgage
The basic choices to look at in selecting a mortgage
- Conventional or high ratio mortgages
- Term length
- Closed or open mortgages
- Fixed rate vs. variable rate
A conventional mortgage is a loan for less than 80% of the appraised value
or purchase price of the property, whichever is less. A high ratio
mortgage is usually for more than 80% of the appraised value or purchase
This type of mortgage is often referred to as an NHA mortgage because
it is granted
under the provisions of the National Housing Act and must, by law,
be insured through CMHC, GE or a private insurer for which the borrower
premium, application, legal and property appraisal fees.
The term you select is important. Short term mortgages can be appropriate
if you believe interest rates will drop come renewal time, but in
many of these
circumstances, they are inferior to a variable rate mortgage. Long
term mortgages are suitable if you feel rates will rise in the next
provide you with the security of knowing what your payments are for
a long term. This
can be especially important for first time homebuyers. The key is
to choose a mortgage that fits your tolerance to risk.
A closed mortgage usually offers a lower interest rate than an open
one of the same term, but the open mortgage lets you pay off as much
any time, without penalty. This is a feature many consumers pay for
and do not use. The pre payment options that come with most closed
You can choose a fixed or variable interest rate. A fixed rate mortgage
allows you to budget precisely for whatever term you select anywhere
from six months
to 35 years. A variable rate fluctuates with the market and allows
you to follow the rates as they drop. These mortgages are very useful
The Next Step
This article offers an outline of the basic steps to buying a home
and qualifying for a mortgage. But it has probably left you with
a few questions.
love to hear from you! Please call me