Buying your first home will most likely be the biggest purchase you’ll ever make, and it’s not one to be taken lightly. Becoming a homeowner is more than just being able to close on a mortgage – it requires a clear understanding of your financial standing and a degree of foresight to predict and prepare for what’s to come in your financial future.
Since a large portion of Options for Homes purchasers are first-time buyers, we thought we’d share some of our knowledge and experience to help you move forward sooner with your homeownership goals.
Get clear on your finances
Knowing where you stand with your finances is a crucial first step to buying a home – but it’s not one to be afraid of or to avoid. Having a clear picture of your current finances up front will give you the information you need to make a solid plan to purchase your first home.
Write down the honest details of your financial situation, including:
- Your annual household income from all sources
- Any changes you may foresee to your income
- Contingency fund – for example, if your household is made up of only one income and if something were to change, do you have savings to cover your mortgage payment for three to six months?
Establishing how stable your income is will help you assess your ability to afford mortgage payments. It’s also useful to have an idea of what your total debt service ratio (TDS) might be. This is usually a percentage that represents the amount of your annual income required to pay your debts, including your mortgage. Your total debt service ratio should be less than 40%. It is not set in stone and calculated slightly differently by different lenders, so be sure to consult with a mortgage lender to determine how that lender will calculate your TDS.
Know your credit score
Do you know your credit score? A credit score is a number between 300 and 900 with 900 being the highest (best) credit rating possible. It is dependent on several factors and lenders will look at your credit score as part of your mortgage application process. You can learn more about credit scores here.
Most people don’t realize they should be keeping an eye on their credit score by checking it once or twice a year. You can get your current credit score in minutes, online for free at Borrowell, www.borrowell.com or, for a small fee at Equifax, www.equifax.ca, and checking it yourself once or twice a year doesn't affect your score.
A credit score of a minimum of 680 is usually required to get a conventional mortgage pre-approval. Consult with a mortgage lender for more information about credit scores.
If you have a low credit score or damaged credit, there are ways to rehabilitate your credit. Get in touch with counselling services like Credit Canada for more information.
Evaluate sources of down payment
Your down payment amount is a crucial factor in purchasing a home. You will be required to pay a minimum of 5% of the purchase price (and 10% on amounts any amount over $500,000) of your home towards the down payment. In order to avoid paying CMHC (Canada Mortgage and Housing Corporation) insurance premiums, which can cost you thousands of dollars, you will need to make at least a 20% down payment.
The great news is that at Options for Homes, we offer a down payment support of up to 15% to help you avoid these premiums and also lower your mortgage payments through the Options Ready Program. We also have access to other sources of support at times, which can further deepen affordability for eligible purchasers.
There is also a first-time home buyer program designed to help with affordability called the Home Buyers Program which allows you to use up to $25,000 of RRSP savings, per person, towards the purchase of a new home.
Family can also help with your down payment by gifting you money versus loaning it to you. You’ll be required to provide a mortgage gift letter in this case to assure the bank you won’t have the stress of paying back another loan.
Don't forget extra costs
When looking at condo prices, it’s important to remember that they don’t typically include suite upgrades, parking or locker. These items add to your overall cost and should be factored into to your budget.
We also recommend you budget for between 3% and 5% of the purchase price for closing costs on a new construction condo. It is usually less, but it’s best to have a cushion.
Closing costs may include provincial and municipal land transfer tax, lawyer fees, property taxes, maintenance fees, home insurance and any adjustments, such as development charges.
First-time buyers in Ontario may be eligible for up to $7,725 in provincial and municipal land transfer tax rebates. They may also be eligible for a federal tax and HST rebate.
Keep your spending in check
When assessing your financial situation, you’ll likely have recorded all debt owing to credit accounts, leases, or other payments and totalled up how much you pay monthly to service this debt.
Keeping debt under control also requires keeping new spending low because it’s not advisable to take on any further debt if you plan to purchase a home. This includes not applying for any credit cards, taking on a new car loan or lease, or buying any big-ticket items with credit. Doing so can undermine your ability to finalize your mortgage once your condo is built and it’s time for closing.
Remaining diligent about finances during construction is the best way to successfully become a homeowner.