Taking that first step on the property ladder is one of life's biggest decisions. Sounds ominous, doesn't it? It doesn't have to be; you'll have plenty of help along the way and the Kanetix.ca first time home buyer's guide will help you break it all down into easy bite-sized pieces.
Saving Up For A Down Payment
A down payment is the amount of money you personally contribute at the time of purchase toward the price of a home. The rest of the purchase price is paid through the mortgage you've obtained. The bigger the down payment, the smaller the mortgage.
How much of a down payment do you need? You'll need to have at least 5 per cent of a home's purchase price, but studies have shown that Canadians save more than this typically, between 13 and 16 per cent.
Did you know?
The ideal down payment is at least 20 per cent. Why? Because it means you won't need to get mortgage default insurance, which can save you thousands of dollars. Mortgage default insurance is required by lenders if you have less than 20 per cent saved up for your down payment. It is offered either through the Canada Mortgage and Housing Corporation, which is a Crown corporation and backed by tax payers, or through one of Canada's two private insurers, Genworth and Canada Guaranty.
Make Sure Your Credit Report Is In Tip Top Shape
In order to get a mortgage, you will have to pass a credit check. A lender will pull your credit report to see what your credit score is as well as your credit history including details about how many credit cards and loans you have, how much you owe, and whether you make timely payments. In Canada, credit scores range from 300 to 900, and the higher the credit score the better.
Don't get caught off guard about what's on your credit report. You can get copies of your credit report from Equifax and TransUnion. It's usually advised that you go to both. Make sure you fix any inaccuracies that may be on your report, and protect your score going forward by paying your bills and debts on time and in full.
How Much Of A Mortgage Will You Be Able To Get?
How much you'll be permitted to borrow will be determined by a variety of factors including your household income, your down payment, and anticipated monthly home and debt expenses. For the latter two, lenders will look at two key percentages (called ratios) when determining how much they'll loan you.
Gross Debt Service Ratio (GDS)
This amount is calculated by adding up all housing-related costs and dividing it by your income. The GDS includes things like expected mortgage payments, property taxes, condo fees (if applicable), and heating costs.
Your GDS ratio should not exceed 39 per cent, however lenders may require a lower ratio-this is simply the max. If your down payment is less than 20%, to qualify for mortgage default insurance typically your GDS should not exceed 32 per cent.
Total Debt Service Ratio (TDS)
This amount is calculated by adding up all your housing expenses (including those used to tally your GDS) as well as other regular payments or debt obligations you have and dividing it by your income. The TDS includes all of the expenses included in your GDS as well as car payments, credit cards, student loans, line of credit payments, and any personal loans you may have.
Your TDS ratio should not exceed 44 per cent, however lenders may require a lower ratio-this is, again, simply the max. Typically lenders like to see a TDS that does not exceed 40 per cent.
- The Financial Consumer Agency of Canada has a tool that helps you calculate your GDS and TDS to see if you could qualify for a home mortgage based on your income and expected expenses.
If your GDS or TDS ratios are too high, you may have to:
- Look at homes in a lower price range
- Save up more for your down payment
- Pay off debts
However, if your debt ratios look promising the next step is getting pre-approved for a mortgage.
Getting Pre-Approved For A Mortgage
Getting pre-approved for a mortgage usually makes house hunting easier. You know exactly what you can afford so you can focus on homes that are within your budget. Additionally, getting pre-approved means:
- You know you've met the lender's initial requirements for the loan (although remember, you still have to get final approval for the mortgage when you're ready to buy.)
- You can lock in an interest rate, which is great if you expect rates to increase. Usually you can lock in a rate for 90 or 120 days.
- Your pre-approved status often gives you more negotiating power with a seller.
Of course, at Kanetix.ca you can compare mortgage rates, lock in a rate and get pre-approved online. Every percent counts, so make sure you shop around for the best rate.
Once you've got a pre-approved mortgage, you're ready to hit the open houses. But remember, the pre-approved mortgage is the maximum you can afford. Typically, it's recommended that you avoid stretching yourself that thin, and buy something that's comfortably within your budget. There are many first time home buyer expenses that you may not know about that can add up quickly.
- Related Read: Insurance Tips To Help You Save When Buying A House