FIRST TIME HOME BUYERS

How to Prepare to Purchase Your First Home

Buying your first home will most likely be the biggest purchase you’ll ever make. Many people take a long time to make the leap because they're uncertain about their finances, credit ratings, the general affordability or how the whole process works.

Since Options for Homes has been developing condo communities and helping first time home buyers realize the dream of home ownership for 23 years we thought we’d share some of our knowledge and experience, to help you move forward sooner towards your home ownership goals.

1. GET CLEAR ON YOUR FINANCES
We can’t stress enough how important it is to get clear on how much money you have coming in, and how much you have going out. Knowing where you stand with your finances is a crucial first step but it’s not one to be afraid of or to avoid. Information is power and 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; 
    
Income

1.       Your annual household income from all sources

2.       Any changes you may foresee to your income

3.       Contingency fund, i.e. 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 3 – 6 months?

Establishing how stable your income is will help you assess your ability to afford mortgage payments. It is 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.

Debt
Record all debt owing to credit accounts, leases, or other payments and total up how much you pay monthly to service this debt.

Can you pay off this debt? If not, what can you do now to start paying off your debts? (While not incurring further debt!)

It is definitely 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.

What is Your Credit Score?
Do you know your Credit Score? A credit score is a number between 300 and 850 with 850 being the highest (best) credit rating possible. It is dependent on a number of 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 (but no more frequently than that as it dips slightly every time you pull it). 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

A credit score of a minimum of 680 is usually required to get a mortgage pre-approval. Consult with a mortgage lender for more information about credit scores.

Good News!
One advantage to purchasing a new construction condo is that due to construction timelines, you may have time to improve your credit rating before you need to come up with the funds to close on your purchase.

If you have a low credit score or damaged credit, there are ways to rehabilitate your credit. Get in touch with our partner, Credit Canada for more information.

Down Payment Funds
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 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 loan of up to 15% to help you avoid these premiums and also lower your mortgage payments.

Take some time to consider how you may be able to save more money to put towards your down payment as this will go a long way in helping you with affordability!

Funds for Closing Costs
We recommend you budget for between 2% 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, HST, lawyer fees, title insurance, property taxes, maintenance fees, home insurance and any adjustments.

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.

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.

2. GET A MORTGAGE PRE-APPROVAL

The next step should be to get a mortgage pre-approval. This will save you valuable time by clarifying exactly how much you can afford to pay for a home. It is advisable to shop around for a mortgage. You may want to consult directly with a traditional bank for your financing needs or, with a mortgage broker, and preferably both.

There are many different types of mortgage “products” out there and it takes careful consideration on the part of your mortgage advisor to help you fin d the best product for you and your family’s unique situation.

The main components of a mortgage to consider are: Interest rate, type (fixed or variable) and term of the mortgage. However, also very important are the “3 Ps”: Prepayment, Penalties, and Portability.

These last three things can be as important as, or even more important than the interest rate.  For example, if you think you may inherit a large sum of money in the next year or two and want to put it toward your mortgage, you may want to ensure that prepayment is an option that is available to you in your mortgage terms. Or, if you think you may want to or need to move and sell your home before the mortgage term is up, what will the penalty be? Or, will you be allowed to port (carry over) your mortgage to another home purchase before the mortgage term is up without penalty?

These are questions that should arise in conversation with your lending agent or mortgage broker.  A traditional banking will discuss and offer mortgage products specific to that bank, while a mortgage broker will typically be able to offer mortgage products from many different lending institutions. The mortgage broker’s fee is typically paid for by the lender, not you, the borrower.

Once you receive a pre-approval for a mortgage or a commitment letter from your lender, you can then begin to search for and choose your new home. It’s important to be clear on the expiry date for your pre-approval. Typically a mortgage pre-approval is valid for a set amount of time (for example: 4 months).

It’s also important to note that a “Pre-approval” is not the same as an Approval! You are pre-approved as a borrower up to a certain amount of money however, the home you will purchase has not been selected at this point. The full application process takes place once you have selected a home to purchase.

Note: For Options for Home purchasers, our partners at the Bank of Montreal offer a capped mortgage rate guaranteed for 36 months. TD offers a 24-month guaranteed mortgage rate, and Meridian offers the same for 18 months.

3. CHOOSE A HOME!

With a clear understanding of your personal finances and a pre-approval in place you are now in a position to start shopping for your new home. Now that you have a good idea of what you can afford, you won’t waste valuable time looking at homes that are out of your budget. Or perhaps you’ve discovered you can afford more than you had previously thought! Be careful not to overextend yourself though. The goal is not to be “house-poor,” but “well-housed”.

When considering how to select your new home, you may consider some of the following:

Location, proximity to work and leisure activities, access to highways or public transit, current and planned future neighbourhood amenities, schools, amount and cost of home maintenance, and the projected resale value in the future to ensure you are growing equity in your home.

If you’re buying a condominium apartment consider if you will need parking or a locker. Are you willing to pay higher maintenance fees to have amenities like a pool and gym? Or do you want to keep costs down and avoid buildings with extra amenities because you probably won’t use them anyway? Of course we’re biased at Options since this is what we build and how we are able to offer the price and the lowest maintenance fees for new condos in the city.

When you’re in the market for a new home you may wish to engage a Realtor to help you select homes to view, negotiate and write offers on your behalf, advise you on the conditional period and connect you with other resources.

When buying with Options for Homes, we have Purchase Consultants and a Client Support Team to guide you through the entire process of selecting a unit, writing and signing the agreement of purchase and sale, and reviewing and preparing closing documents. Since there is no negotiation on the price of our new construction condominium units, most purchasers find they don’t require the services of a real estate agent.

4. MAKE AN OFFER

Once you have selected a home to purchase you will sign a Purchase Agreement outlining all the terms of the purchase as well as any other required documentation.

Deposit Funds
When you sign a Purchase Agreement your deposit payment is due right away. This amount goes towards your down payment on closing and is considered your show of “good faith” to follow through on the purchase by paying the balance of the purchase price on the closing date. Initial deposits are generally 5% of the purchase price. With Options 5% is all you ever need to put down to purchase. Other developers may require another 5-15% deposit before closing to complete a purchase.

Cooling Off Period
For a new construction home or condominium there is a 10-day cooling off period during which time you may change your mind and back out of the deal, and your deposit will be returned to you.

When purchasing a resale property, you may be able to negotiate on the price or, you may be in competition with other buyers. In either case, there is no cooling off period when purchasing a resale property. A firm, accepted offer to purchase a resale property is legal and binding.

5. MOVE IN TO YOUR NEW HOME!

Closing Day
The big day is finally here! On your closing day your pre-arranged mortgage funds will be transferred to the vendor to pay the balance of the amount owing on the purchase of your new home and you will receive the title / deed to your home. With keys in hand, you’re ready to move in!

There are many things to consider when preparing to buy your first home. We know it can seem daunting but it is also very exciting. We hope this guide helps to give you the information you need to begin moving toward your home ownership goals and to realize “it IS possible.”  At Options for Homes, we are here to help you every step of the way and you can find out more by attending our free Condos 101 events held twice monthly around the city.