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Are you financially ready to be a home-owner?

Are you financially ready to be a home-owner?

January 27, 2017

How can you know if you are financially ready to become a homeowner? This step guides you through some simple calculations to figure out your current financial situation.

How Much are You Spending Now?
1- Calculate Your Household Expenses
Start figuring out your financial readiness by evaluating your present householdbudget. How much are you spending each month? Knowing exactly how much, will give you a better idea about whether you can afford to become a homeowner.
2- Calculate Your Monthly Debt Payments
Do you know how much debt you are carrying? You need this information to figure out whether you are financially ready for home ownership. If you decide to buy a home, mortgage lenders will ask for this information.
3- Calculate Your Total Monthly Expenses
Your total monthly expenses are your household expenses plus your debt payments. To calculate your monthly expenses, add the total from the Current Household Budget as Homeowner to the total from Monthly Debt Payments form, using the form below.
How Much Can You Afford?
Before you begin shopping for a home, it’s important to know how much you can afford to spend on home ownership. You will want to plan ahead for the various expenses related to home ownership. In addition to purchasing the home, other significant expenses will include heating, property taxes, home maintenance and renovation as required. Two simple rules can help you figure out how much you can realistically pay for a home. You must understand these rules to understand if you will be able to get a mortgage.
1- Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.
2-Affordability Rule 2
The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.
Your Maximum House Price
The maximum home price that you can realistically afford depends on a number of factors. The most important factors are your household gross monthly income, your down payment and the mortgage interest rate. For many people, the hardest part of buying a home — especially their first one — is saving the necessary down payment.Calculate Your Maximum House Price
Mortgage Loan Insurance
Mortgage loan insurance helps protect lenders against mortgage default, and enables consumers to purchase homes with a minimum down payment starting at 5% — with interest rates comparable to those with a 20% down payment.
The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. For CMHC-insured mortgage loans, the maximum purchase price or as-improved property value must be below $1,000,000.
The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on a number of factors including the size and source of your down payment. The higher the percentage of the total house price/value that you borrow, the higher percentage you will pay in insurance premiums. The cost for mortgage loan insurance premiums is usually offset by the savings you get from lower interest rates.
Financing Required
Premium % of Loan
Up to and including 65%
0.60
Up to and including 75%
0.75
Up to and including 80%
1.25
Up to and including 85%
1.80
Up to and including 90%
2.40
Up to and including 95%
Traditional Down Payment
Non-traditional Down Payment
3.60
3.85
* Premiums in Manitoba, Ontario and Quebec are subject to provincial sales tax. The provincial sales tax cannot be added to the loan amount.
Get a Copy of Your Credit Report
Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this, they consider your credit history (credit report) from a credit bureau. This tells them about your financial past and how you have used credit.
Before looking for a mortgage lender, get a copy of your own credit history. There are two main credit-reporting agencies: Equifax Canada Inc. and TransUnion of Canada. You can contact either one of them to get a copy of your credit report. There is often a fee for this service.
Once you receive your credit report, examine it to make sure the information is complete and accurate.
If you have no credit history
If you have no credit history, it is important to start building one by, for example, applying for a standard credit card with good interest rates and terms, making small purchases and paying them as soon as the bill comes in.
If you have a poor credit history
If you have poor credit, lenders might not be able to give you a mortgage loan. You will need to re-establish a good credit history by making debt payments regularly and on time. Most unfavourable credit information (including bankruptcy) drops off your credit file after seven years.
Consider getting some credit counselling if you have a history of poor credit or talk to your lender to discuss options.
Get a Mortgage Pre-Approval
It’s a very good idea to get a pre-approved mortgage before you start shopping. Many realtors will ask if you’ve been approved. A lender will look at your finances and figure the amount of mortgage you can afford. Then the lender will give you a written confirmation, or certificate, for a fixed interest rate. This confirmation will be good for a specific period of time. A pre-approved mortgage is not a guarantee of being approved for the mortgage loan.
Even if you haven’t found the home you want to buy, having a pre-approved mortgage amount will help keep a good price range in mind.
Bring these with you the first time you meet with a lender:
Your personal information, including identification such as your driver’s license
Details on your job, including confirmation of salary in the form of a letter from your employer
All your sources of income
Information and details on all bank accounts, loans and other debts
Proof of financial assets
Source and amount of down payment and deposit
Proof of source of funds to cover the closing costs (these are usually between 1.5% and 4% of the purchase price)
Make Your Mortgage Work for You
Your lender or broker will offer you several choices to help find you the mortgage that best matches your needs. Here are some of the most common.
1- Amortization Period
Amortization refers to the length of time you choose to pay off your mortgage. Mortgages typically come in 25 amortization periods but they can be as short as 15 years. Usually, the longer the amortization, the smaller the monthly payments. However, the longer the amortization, the higher the interest costs. Total interest costs can be reduced by making additional (lump sum) payments when possible.
2- Payment Schedule
You have the option of repaying your mortgage every month, twice a month, every two weeks or every week. You can also choose to accelerate your payments. For example, for a $250,000 mortgage (5% interest rate and 25 year amortization) choosing an accelerated bi-weekly payment over a bi-weekly regular payment ($727 vs. $670) allows you to pay down your mortgage more quickly. You could pay off the mortgage in just over 21 years and reduce your interest costs by almost $30,000. This usually means one extra monthly payment per year.
3- Interest Rate Type
You will have to choose between “fixed”, “variable” or “protected (or capped) variable”. A fixed rate will not change for the term of the mortgage. This type carries a slightly higher rate but provides the peace of mind associated with knowing that interest costs will remain the same.
With a variable rate, the interest rate you pay will fluctuate with the rate of the market. Usually, this will not modify the overall amount of your mortgage payment, but rather change the portion of your monthly payment that goes towards interest costs or paying your mortgage (principal repayment). If interest rates go down, you end up repaying your mortgage faster. If they go up, more of the payment will go towards the interest and less towards repaying the mortgage. This option means you may have to be prepared to accept some risk and uncertainty.
A protected (or capped) variable rate is a mortgage with a variable interest rate that has a maximum rate determined in advance. Even if the market rate goes above the determined maximum rate, you will only have to pay up to that maximum.
Use the Mortgage Payment Calculator to find how much and how often your payment will be. Compare options and find one that’s right for you.
CMHC Mortgage Calculator is for general illustrative purposes only. The amounts it projects are based upon assumptions and estimates made according to generally accepted principles for mortgages in Canada. CMHC cannot guarantee the projections. Actual payment amount must be obtained from your lender. Neither CMHC nor any of its advisors shall have any liability for the accuracy of this information.
4- Mortgage Term
The term of a mortgage is the length of time for which options are chosen and agreed upon, such as the interest rate. It can be as little as six months or as long as five years or more. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options.
5- “Open” or “Closed” Mortgage
An open mortgage allows you to pay off your mortgage in part or in full at any time without any penalties. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility but comes with a higher interest rate. An open mortgage can be a good choice if you plan to sell your home in the near future or to make large additional payments.
A closed mortgage usually carries a lower interest rate but doesn’t offer the flexibility of an open mortgage. However, most lenders allow homeowners to make additional payments of a determined maximum amount without penalty. Typically, most people will select a closed mortgage.
Up-front Costs
There are many up-front costs when you buy a home. Early planning will help make sure things go smoothly.

1- Down Payment
A down payment is the part of the home price that does not come from the mortgage loan. The down payment comes from your own money. You can buy your home with a minimum down payment starting at 5%, if you have mortgage loan insurance from CMHC. You need a down payment of at least 20% for a conventional mortgage.
2- Deposit
The deposit is paid when you make an Offer to Purchase to show that you are a serious buyer. The deposit will form part of your down payment with the remainder owing at time of closing. If for some reason you back out of the deal without having covered yourself with purchase conditions, such as financing, home inspection, etc., your deposit may not be refundable and you may be sued for damages. The size of the deposit varies. Your realtor or lawyer/notary can help you decide on the amount.
3- Appraisal Fee
Your mortgage lender may ask you to pay for a recognized appraisal in order to complete a mortgage loan. An appraisal is an estimate of the value of the home. The cost is usually between $250 and $350 and must be paid when you contract for those services.
Having an independent appraisal done on a property before you make an offer is a good idea. It will tell you what the property is worth and help ensure that you are not paying too much.
The appraisal should include:
Assessment of the property’s physical and functional characteristics
Analysis of recent comparable sales
Assessment of current market conditions affecting the property
Ask your realtor or other member of your team to help you find an appraiser.
4- Mortgage Loan Insurance Premium
If you make less than a 20% down payment, you have a high-ratio mortgage. With a high-ratio mortgage your lender will need mortgage loan insurance. Mortgage loan insurance lets you buy a home with a minimum down payment starting at 5%.
The minimum down payment requirement for mortgage loan insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is 5%. When the purchase price is above $500,000, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. For CMHC-insured mortgage loans, the maximum purchase price or as-improved property value must be below $1,000,000.
Most Canadian lending institutions require mortgage loan insurance because it protects the lender. If the borrower defaults (fails to pay) on the mortgage, the lender is paid back by the insurer. You pay a premium for mortgage loan insurance. Your lender will add the mortgage loan insurance premium to your monthly payments, or ask you to pay it in full upon closing.
5-Mortgage Broker’s Fee
You may have decided to use a mortgage broker. The job of the mortgage broker is to find you a lender with the terms and rates that will best suit you.
6- Home Inspection Fee
CMHC recommends that you make a home inspection a condition of your Offer to Purchase. A home inspection is done by a qualified home inspector to provide you with information on the condition of the home. Costs range depending on the age, size and complexity of the house and the condition that it is in. For example, it may be more costly to inspect a large, older, home, or one in relatively poor condition or that has many pre-existing problems or concerns.
7- Survey or Certificate of Location Cost
The mortgage lender may ask for an up-to-date survey or certificate of location. If the seller has a survey, but it is more than five years old, it will probably need to be updated. You should ask the seller to provide an updated survey, especially if there has been a new addition, deck or fence built close to the property line. If the seller does not have one, or does not agree to get one, you may have to pay for it yourself.
Remember, you must have permission from the property owner before hiring a surveyor to go onto the property. Ask your realtor to help co-ordinate this with the owner. A survey or certificate of location can cost $1,000 to $2,000.
8- Title Insurance
Your lender, lawyer, or notary may suggest that you get title insurance. This will cover loss caused by defects of title to the property.
9-Land Registration Fees
Land Registration fees are sometimes called Land Transfer Tax, Deed Registration Fee, Tariff or Property Purchases Tax. In some provinces and territories, you may have to pay this provincial or municipal charge when you close the sale. The cost is a percentage of the property’s purchase price. Check on the internet or with your lawyer (or notary) or other team member to find out about the current rates. These fees can cost a few thousand dollars.
10- Water Tests
If the home has a well, you will want to have the quality of the water tested to ensure that the water supply is adequate and the water is drinkable. You can negotiate these costs with the vendor and list them in your Offer to Purchase.
11- Septic Tank
If the house has a septic tank, it should be professionally checked to make sure it is in good working order. You can negotiate the cost with the vendor and list it in your Offer to Purchase.
Estoppel Certificate Fee (does not apply in Quebec)
This applies if you are buying a condominium, or strata unit, and could cost up to $100. Also called a Status Certificate it outlines a condominium corporation’s financial and legal state.
12- Prepaid Property Taxes and/or Utility Bills
Property taxes are charged by the municipality where the home is located. They are based on the value of the home. The seller may have already paid property tax or other expenses that apply to the time after the house passes into your hands. You need to pay back the seller for taxes and other costs (including items like filling the oil tank).
13- Property Insurance
The mortgage lender requires you to have property insurance because your home is security for the mortgage. Property insurance covers the cost of replacing your home and its contents in case of loss. Property insurance must be in place on closing day.
14- Legal Fees
Legal fees and related costs must be paid on closing day. The minimum cost is $500 (plus GST/HST). In addition, your lawyer or notary will charge you direct costs to check on the legal status of the property.
15- Other Costs
Depending on your situation, you may have some other initial expenses to consider:
Moving expenses
Whether you’ll be hiring a moving company or renting a truck and asking friends for help, there are likely to be moving expenses.
Renovations or repairs
Can renovations or repairs be delayed, or are some necessary to do immediately?
Condominium Fees
Do you have to make the initial payment for these monthly fees?
Service connection fees
Telephone, gas, electricity, cable TV, satellite TV, Internet, and so on, may charge service connection fees. Some utilities may ask you to pay a deposit.
Appliances
Does your new home come with appliances? Do you already have your own?
Gardening equipment
Will you need to buy gardening equipment the first summer in your new home?
Snow-clearing equipment
Will you need to buy snow-clearing equipment the first winter in your new home?
Window treatments
Do blinds or curtains come with the house?
Decorating materials
Do you want to re-paint or apply wallpaper? Do the floors need to be refinished or re-carpeted? Do you have all the tools you need for decorating?
Hand tools
Do you have the basic hand tools you’ll need for your new home?
Dehumidifier
Will you need a dehumidifier to control moisture levels?
Contact eHomz Realty team to buy with peace of mind.

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