I am often asked: is now a good time to buy my first home? I think so, and there are 3 main reasons why:
- Real estate prices have been increasing every year by an amount roughly equal to a 5% down payment on an average home price. As a result house prices may move out of reach for First Time Buyers.
- Interest rates and mortgage payments have never been lower than they are now and can only go up over time.
- It is easier to qualify for a mortgage now than it will be in the future.
The next question is most often: What do I need to do to be in a position to buy my first home? Well, you wouldn’t go shopping for a new car, or go out to a restaurant and a movie, or go grocery shopping for that matter, without first knowing how much money is in your pocket to spend. So the first thing you do is make a call to your bank or a mortgage broker.
Here is the breakdown of the 3 basic requirements needed to qualify for a mortgage to buy your future home:
Income: (most important of the 3 requirements)
- Approximately 40% of family income (before tax) should be equal to the mortgage and property tax payments, and other payments such as a car loan or lease, credit cards, etc.
- The income should be provable and can be salary, hourly, contract, commission or in business for yourself.
- A year or two on the same type of job is good.
- Example: on a $300,000 purchase with a 5% down payment of $15,000, the family income required to qualify for the mortgage will be about $46,000 per year assuming there are no other payments, or $55,000 per year if car and card payments total $300 per month.
Credit: (often overlooked, but still very important)
- A two year credit history is best with two or more credit cards in use.
- All payments should have been made on time and kept within the card credit limit.
Down Payment: (least important of the 3 requirements)
- A down payment of 5% of the purchase price will earn the first time buyer the best mortgage rate.
- A down payment of 20% may not obtain the best rate, but the purchaser will not be required to pay the CMHC (Central Mortgage and Housing) high ratio insurance which will be added to the mortgage principal. (it gets added into your monthly mortgage payment)
- The down payment must come from the purchaser’s own resources and/or a gift from a close family member.
- Up to $20,000 of each purchaser’s RRSP savings can be used for the down payment without paying income tax provided the funds are replaced over thirteen years. (like a no-interest loan you make to yourself)
- If First Time Buyers have not been able to save a 5% down payment but have good credit and income, a bank will provide the 5% down payment which will be paid back over the 5 year term of the mortgage by means of a higher mortgage interest rate.
- In addition to the down payment, the purchaser must have about 1.5% of the purchase price set aside for closing costs (lawyer and land transfer tax.. first time buyers may be entitled to the land transfer tax rebate. Ask your banker or mortgage broker about this).
Your time is precious, and you may not have enough of it in your day to shop banks for the best rates. So why not obtain your mortgage through a Mortgage Agent?
- Seldom charge brokerage fees for bank qualifying mortgage approvals.
- Will likely obtain lower mortgage rates from a bank because of mortgage referral volume.
- Are not limited to any one mortgage lender and can take advantage of special offers made by a number of lenders.
- Have as much, and in some cases more, mortgage experience as most bank Customer Service Representatives.
- Seldom require an appointment in order to provide a mortgage approval or pre-approval, and the paperwork can be completed by email and fax.
- Are available after hours so there is no need for First Time Buyers to take time off work to obtain a mortgage. (A 15 minute phone call can save you time and money, not to mention peace of mind in finding your financial comfort zone quickly and easily)
- Provide similar pre-payment and payment privileges to those offered by banks and other lenders.
- Bank employees aren’t able to shop around with other mortgage lenders on your behalf. They can only offer their bank mortgage products.
If you are comfortable with your bank, and have a good relationship with them, then have a frank and open conversation with their Mortgage / Loan Manager. They want to keep your business, and will no doubt do their best to help you achieve your goal.
By the same token, don’t be afraid to call around to other banks. Interest rates can differ significantly from one money lender to another. Banks are like any other business: they want customers, and will compete to have you as their client.
Whether you decided to go with a Mortgage Broker, Bank or other money lending institution, the place to start is with a phone call. A few minutes of your time, with any of these businesses, is well invested to help you realize your dream of home ownership.
Once you know how much ‘jingle’ is in your pocket, that’s the time to start looking for an Accredited Buyer’s Representative to make the next steps easy, and yes, fun! It’s a big decision to buy your first home, and it doesn’t have to scary or complicated.
Drop me a line, or give me a call if you have any questions about how to buy or sell a home. The more information you have, the better (and easier) the decision will be to make later. And, it never hurts that I always enjoy helping people start the next chapter in their lives.
Happy House Hunting!
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