FAQ's
01. How much can I afford to pay for a home?
02. What is the minimum down payment needed for a home?
03. What is mortgage loan insurance?
04. How does bankruptcy affect qualification for a mortgage?
05. Can I use gift funds as a down payment?
06. What is a pre-approved mortgage?
07. What is a down payment?
08. How can you use your RRSP to help you buy your first
home?
09. What are the costs associated with buying a home?
Answers
How much can I afford to pay for a
home?
To determine 'affordability' you will first need to know your taxable
income along with the amount of any debt outstanding and the monthly payments.
Assuming it is your principal residence you are purchasing, calculate
32% of your income for use toward a mortgage payment, property taxes and
heating costs. If applicable, half of the estimated monthly condominium
maintenance fees will also be included in this calculation.
Second, calculate 40% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders' usual guidelines.
In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don't leave yourself house poor. Structure your payments so that you can still afford simple luxuries.
What is the minimum down payment needed
for a home?
A minimum down payment of 5% is required to purchase a home, subject to
certain maximum price restrictions. For instance, in the Greater Vancouver
area the maximum purchase price with 5% down is $250,000. Any purchase
price in excess of $250,000 requires a minimum of 10% as a down payment.
In addition to the down payment, you must also be able to show that you
can cover the applicable closing costs (i.e. legal fees and disbursements,
appraisal fees and a survey certificate, where applicable).
Regardless of the amount of your down payment, at least 5% of it must be from your own cash resources or a gift from a family member. It cannot be borrowed.
Lenders will generally accept a gift from a family member as an acceptable down payment provided a letter stating it is a true gift, not a loan, is signed by the donor. Where the mortgage loan insurance is provided by Canada Mortgage and Housing Corporation (CMHC), the gift money must be in the your possession before the application is sent in to CMHC for approval.
Mortgages with less than 25% down must have mortgage loan insurance provided by either CMHC or GE.
What is mortgage loan insurance?
Mortgage loan insurance is insurance provided by Canada Mortgage and Housing
Corporation (CMHC), a crown corporation, and GE Capital Mortgage Insurance
Company, an approved private corporation. This insurance is required by
law to insure lenders against default on mortgages with a loan to value
ratio greater than 75%. The insurance premiums, ranging from .50% to 3.75%,
are paid by the borrower and can be added directly onto the mortgage amount.
This is not the same as mortgage life insurance.
How does bankruptcy affect qualification
for a mortgage?
Depending on the circumstances surrounding your bankruptcy, generally
some lenders would consider providing mortgage financing.
Can I use gift funds as a down payment?
Most lenders will accept down payment funds that are a gift from family
as an acceptable down payment. A gift letter signed by the donor is usually
required to confirm that the funds are a true gift and not a loan. where
the mortgage requires mortgage loan insurance, Canada mortgage and housing
corporation requires the gift money to be in the purchaser's possession
before the application is sent in to them for approval. where mortgage
loan
insurance is provided by GE Capital this is not a requirement. See 'what
is mortgage loan insurance?' for further information.
What is a pre-approved mortgage?
A pre-approved mortgage provides an interest rate guarantee from a lender
for a specified period of time (usually 60 to 90 days) and for a set amount
of money. The pre-approval is calculated based on information provided
by you and is generally subject to certain conditions being met before
the mortgage is finalized. Conditions would usually be things like 'written
employment and income confirmation' and 'down payment from your own
resources', for example.
Most successful real estate professionals will want to ensure you have a pre-approved mortgage in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range.
In summary, a pre-approved mortgage is one of the first steps a home buyer should take before beginning the buying process.
What is a down payment?
Very few home buyers have the cash available to buy a home outright. Most
of us will turn to a financial institution for a mortgage the first step
in a potentially long-standing relationship. But even with a mortgage,
you will need to raise the money for a down payment.
The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting.
The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
How can you use your RRSP to help you
buy your first home?
Today, about 50% of first-time home buyers use their RRSP savings to help
finance a down payment. With the federal government's Home Buyers' Plan,
you can use up to $20,000 in RRSP savings ($40,000 for a couple) to help
pay for your down payment on your first home. You then have 15 years to
repay your RRSP.
To qualify, the RRSP funds you're using must be on deposit for at least 90 days. You'll also need a signed agreement to buy a qualifying home.
Even if you have already saved for your down payment, it may make good financial sense to access your savings through the Home Buyers' Plan. For example, if you had already saved $20,000 for a down payment - and assuming you still had enough "contribution room" in your RRSP for a contribution of that amount you could move your savings into a registered investment at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan.
The advantage? Your $20,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.
While using your RRSP for a down payment may help you buy a home sooner, it can also mean missing out on some tax-sheltered growth. So be sure to ask your financial planner whether this strategy makes sense for you, given your personal financial situation.
What are the costs associated with
buying a home?
First and foremost, you have to make sure you have enough money for a
down payment - the portion of the purchase price that you furnish yourself.
To qualify for a conventional mortgage you will need a down payment of 25% or more. However, you can qualify for a low down payment insured mortgage with a down payment as low as 5%.
Secondly, you will require money for closing costs (up to 2.5% of the basic purchase price).
If you want to have the home inspected by a professional building inspector - which we highly recommend - you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the house is structurally sound. Usually the inspector will provide you with a written report. If they don't, then ask for one.
You will be responsible for paying the fees and disbursements for the lawyer or notary acting for you in the purchase of your home. We suggest you shop around before making your decision on who you are going to use, because fees for these services may vary significantly.
There are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax - a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.
Finally, you will be required to have property insurance in place by the closing date. And you will be responsible for the cost of moving.
Remember, there will be all kinds of things you'll have to purchase early on - appliances, garden tools, cleaning materials etc. So factor these expenses into your initial costs.