Becoming a homeowner is one of the most exciting and rewarding moments in life! While people don’t always dream of the perfect mortgage, we do grow up dreaming of a white picket fence and our dream home. Even if you imagined your dream home as a 6-bedroom mansion, we all have to start somewhere!
This post will take you through the important steps and considerations for your first home.
1. Are You Ready to Become a Homeowner?
Before you jump on in, there are some things you should ask yourself. As amazing as it is to be a first-time home buyer, it is important to remember that this is likely the largest financial decision you will ever make. There are a few questions you can ask yourself to make sure you’re ready to take this leap!
- Are you financially stable?
- Do you have the financial management skills and discipline to handle this large of a purchase?
- Are you ready to devote the time to regular home maintenance?
- Are you aware of all the costs and responsibilities that come with being a homeowner? Let’s find out!
2. Do You Know the Costs?
There are two major costs associated with being a new homeowner:
Upfront Costs: The initial amount of money you need to buy a home, including down payment, closing costs and any applicable taxes.
Ongoing Costs: The continued cost of living in a home you own, including mortgage payments, property taxes, insurance, utility bills, condominium fees (if applicable) and routine repairs and maintenance. It is also important to keep in mind potential major repairs, such as roof replacement or foundation repair, that may be needed now or in the future. In addition, if you choose a property that is not hooked up to municipal services (such as water or sewer) there may be additional maintenance costs to consider.
3. The Down Payment
The minimum down payment on any mortgage in Canada is 5% but putting down more is beneficial whenever possible, as it will lower the amount being borrowed. However, if you can only afford the minimum that is perfectly okay! Just remember, if you are putting down less than 20%, default insurance will be mandatory to protect the investment (also known as CMHC).
RRSPs can be a great resource for first-time home buyers and can be cashed in up to $35,000 individually towards a down payment. In fact, most mortgage professionals will tell you nearly half of all first-time buyers use their RRSPs to help with the payment. Those first-time buyers who choose this option will have 15 years to pay it back and can defer these payments for up to two years if necessary. Always remember though, deferring a payment can increase the time to pay off the loan and you will still owe the full amount!
Another option for securing your down payment is a gift from an immediate family member, typically a parent. All that is required for this is a signed Gift Letter from the parent (or family member) providing the funds, which states that the money does not have to be repaid and a snapshot showing that the gifted funds have been transferred.
4. Mortgage Pre-Qualification
This process provides you with an estimate of how much you can afford based on your own report of your financial situation. The benefit of this is that it sets the baseline for a realistic price range and allows you to start looking for that perfect home within your means! Now, it’s important to note that this process is not a mortgage approval, or even a pre-approval, it just helps to establish your budget.
5. Mortgage Pre-Approval
While this may seem similar to pre-qualification, the pre-approval process requires submission and verification of your financial history to ensure the most accurate budget to fit your needs.
As a result, getting pre-approved can help determine:
- The maximum amount you can afford to spend
- The monthly mortgage payment associated with your purchase price range
- The mortgage rate for your first term
Getting pre-approved doesn’t commit you to a single lender, but it does guarantee that the rate offered to you will be locked in from 90 to 120 days which helps if interest rates rise while you are still shopping.
After You Have Been Pre-Approved:
- Refrain from having additional credit reports pulled
- Refrain from applying for new credit, closing off credit accounts or making large purchases
- Be prepared to show a paper trail – any unusual deposits in your bank account may require an explanation
6. Financial Approval
You’re almost there! Financial approval is the last step to getting your mortgage and buying your first home! You will need to keep in mind that just because you are pre-approved, it doesn’t guarantee that the final mortgage application is approved. Being entirely candid with your home-buying team throughout the process will be vital as hidden debt or large purchases during your 90-120-day pre-approval can change the amount you are able to borrow. It is best to refrain from any major purchases (such as a new car) or life changes (such as changing jobs) until after closing and you have the keys to your new home.
7. Closing Day For the New Homeowner
Phew, you made it. Closing day is one of the most exciting moments where all the house hunting and paperwork really pays off! It is on this day that you will want to make use of your lawyer or a notary.
To complete the process of closing the sale, your lender gives your lawyer the mortgage money. You would then pay out the down payment (minus the deposit) and the closing costs (typically 1 to 4% of the purchase price). Typically, this payment is done through a bank draft, which will require a bank run ideally 10 days before closing. This is then brought to the lawyer on your closing date. From there, the lawyer or notary then pays the seller, registers the home in your name, and gives you the keys!
Congratulations, you are now a homeowner!