Buying your first home will be one of those rare times that you’ll probably feel excited and nervous in equal measures. Securing a mortgage can be a big part of those nerves, and first-time homebuyers can follow some top mortgage tips to help alleviate the pressure.
After all, this may be one of the biggest investments you have ever made, so you don’t want to get it wrong. There are a few potential obstacles out there, so these steps can ensure it goes as smoothly as possible for first-time homebuyers.
1. Work out how much you can afford before you start house hunting
When shopping for your first home, the last thing you want to do is fall in love with a place and then find out you can’t afford it. Most realtors prefer to work with a buyer that has already been pre-approved for a mortgage. Fortunately, there are steps you can take to lead to a pre-approval.
First, work with an advisor to determine how much of a mortgage you would qualify for before you even start the physical house-hunting process. They will ask for information such as your earnings, current monthly obligations, and the amount and source of your down payment. With this information, your advisor can determine your ‘debt service ratios.’
Consider how much money you actually want to spend, and make sure you stick to a comfortable budget. It can be tempting to stretch your house-hunting to the next level, but never set yourself up to be cash-strapped and unable to enjoy that new house to its fullest.
2. Don’t just fixate on the rate
While getting a good interest rate is important, there are other variables you will want to watch out for. Prepayment penalties (where your lender charges you for paying your mortgage off early) can vary immensely. If for some reason you have to sell your house before the mortgage term is up, the penalty could be in the thousands of dollars.
Good prepayment privileges are also important. They allow you to pay your mortgage off quicker and vary from lender to lender.
Other considerations may also factor into your decision. With credit unions, for example, your money can directly contribute to improving your local community. You may also want to find an advisor that aligns with your own values, including being socially, environmentally and ethically responsible.
At ACU, this is part of our mandate and offering. We always remember that members are also the owners. This allows everyone to be part of something bigger, which is a financial co-operative that’s dedicated to the “triple bottom line” of improving the lives of people, bettering the planet and creating prosperity.
3. Be prepared as first-time homebuyers
Your financial institution will need to receive quite a lot of paperwork from you. This could include pay stubs, identification, letters of employment, T4s, Notices of Assessment, plus the amount and source of your down payment.
The sooner you provide your advisor with this paperwork, the quicker and less stressful the approval process will be.
4. Less than a 20% down payment? Consider the insurance option
The dramatic increase in house prices over recent years has seen a similar increase in the down payment required to buy a home. In a conventional mortgage scenario, if you were to purchase a $300,000 home, you would need $60,000 to make a 20 per cent down payment.
For many first-time homebuyers, a 20 per cent down payment may seem impossible, but don’t worry — if you haven’t saved that much, there are some options.
With the insurance option, if your down payment is under 20 per cent (and as low as 5 per cent), you can still qualify for the mortgage, but you will have to take out mortgage loan insurance. The premium increases as your down payment decreases, so your mortgage advisor can help you with the calculations.
In this case, if you buy that same $300,000 home with a 5 per cent down payment of $15,000, you would have to pay an insurance premium of $11,400. Luckily, this insurance premium can be added to your mortgage rather than paid up-front, which can make this a resourceful option.
5. The RRSP or gift options
Under the Home Buyers’ Plan you can take up to $25,000 out of your RRSPs to put towards your down payment. Be aware that you will have to pay it all back to your RRSP, with annual payments over 15 years. This could give you a much-needed boost and provide sufficient time to make the repayment.
You can also use money from a gift for your down payment, but there are some stipulations. The donor has to be a close relative and they will need to provide a letter stating that it is a gift and not a loan.
6. Make sure you have enough money to cover closing costs
Closing costs normally add thousands of dollars to your final costs, and some first-time homebuyers aren’t ready for these additional fees. These can include:
- A home inspection: Worth its weight in gold if it uncovers a major problem in your potential new home.
- An appraisal: A necessary requirement for most conventional mortgages.
- Legal fees
- Land transfer tax
In Manitoba, for a $300,000 home you would have to pay $3,720 in land transfer fees. It is estimated that closing costs would be 1.5 to 2 per cent of the purchase price of a home.
Be sure to have enough to cover all closing costs along with your down payment, as most advisors won’t offer you a mortgage without it.