You want to own your own home, you think you've saved enough money and you've watched the market shift in favour of you - the buyer. Now is the time to buy, right? First, you must make sure you really are ready - financially - to take the plunge into homeownership. Christine Otsuka reports
With market conditions across Canada shifting to more balanced positions or, indeed, in favour of buyers, if you're looking for that perfect first house, now could well be the right time. Listings are up and prices in some areas are down, which means greater selection - and more time and less pressure to make your ultimate decision. The prospect of a lower mortgage and lower interest is also appealing.
"When real estate markets correct, inventory levels rise, providing buyers with choices instead of frustrating bidding wars," says Phil Soper, president and chief executive of Royal LePage Real Estate Services.
But before you begin searching, you need to determine how much you can realistically afford - and how much 'house' you can buy.
"At the end of the day, you have to be able to get a mortgage for the amount you need to buy the home you've selected," says Don Lawby, president of Century 21 Canada Ltd. Partnership. "The worst thing that can happen is shopping in a bracket you can't afford."
So, your first stop should be a financial representative, but there are some simple preliminary steps you can take to reveal your own financial health before you seek professional advice or pre-approval.
Your net worth
To work out how much you can afford, just do some simple calculations to get an accurate picture of your current financial state. A lender will want to know your net worth - the amount left over once you've subtracted your total liabilities from our assets.
"Really, net worth is a 'balance sheet' way of saying, 'Do I have a down payment? Do I have any equity to put down toward the purchase of a house'?" says John Turner, director of mortgage sales at Bank of Montreal.
How much can you afford?
To determine what type of house you can afford, simply tally your annual household income, your monthly housing costs and your debt.
A potential lender wants to know how much you earn, to determine the size of the loan you qualify for - and you need to provide written documentation of this figure.
There are two affordability rules, or simple calculations, the industry uses to work out how much you can afford.
The first is that your monthly housing costs shouldn't be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses.
Lenders then add up the housing costs to determine what percentage they are of your gross monthly income. This figure is known as your Gross Debt Service ratio.
The second affordability rule is that your entire monthly debt load shouldn't be more than 40% of your gross monthly income. This includes housing costs and other debts such as car loans and credit card payments. Lenders add these up to determine the percentage they represent of your gross household monthly income. This figure is called your Total Debt Service ratio.
"We want to work with them as a partner to help them find the house of their dreams, but that isn't one that's too costly for them," says Turner.
The down payment
"For first-time homebuyers, saving for a down payment - which must be at least 5% of the purchase price - can be difficult. The higher your down payment, the less money you have to borrow and the smaller your monthly mortgage payments will be.
The money for the down payment can come from a variety of sources such as savings, RRSPs, family, assets and so on. Turner suggests starting a continuing savings plan, if you're not already on one. "Every time you get paid, put some money aside for the down payment."
If you can afford a down payment of 20%, you qualify for a conventional mortgage. If your down payment is less, however, you'll need mortgage loan insurance. The insurance premium is usually added to your mortgage and it will increase your monthly payments - or you can pay it upfront
Credit rating
"It's hard to imagine, but if you've never owned a credit card or carried a loan, and never owed a cent in your life, you could have a problem," says Michael Polzler, executive vice-president and regional director, Re/Max Ontario- Atlantic Canada.
That's because before you can get approval for a mortgage, lenders want to know whether you have a good history of borrowing and repaying your financial obligations.
So, if you have no credit history, it's important to start building one. Turner suggests applying for a standard credit card, making small purchases, paying the bills on time and not running it up to the limit.
Getting a copy of your credit history - from one of the two main credit-reporting agencies (Equifax Canada Inc. or TransUnion of Canada) - is important. And make sure it's an accurate picture of it.
If you have bad credit, don't worry, there are things you can do to rebuild it, beginning with speaking to a financial advisor. However, you can start by making debt payments regularly and on time. If you have multiple credit cards, Turner suggests consolidating them into one loan payment, so you are able to pay them off and put the total debt under one arrangement - which will likely improve your capacity to borrow. Most unfavourable credit information, including bankruptcy, is dropped from your credit file after seven years.
Despite your poor credit history, you might still be able to get a mortgage if a friend of relative is willing to be a guarantor or co-signer on the loan, according to CMHC. This person must meet the lender's borrowing criteria, including a good credit history, and is obligated to make the mortgage payments if you do not.
The next step
After you have a clear picture of your financial situation and what you can afford, the next step is visiting a representative of a financial institution, who then verifies the numbers you used to make the preliminary calculations. They also help you understand what you can realistically afford.
For this step, you can visit your own bank or a mortgage broker. Both have their advantages, and you can learn more about these in the Mortgages 101 section in the following pages.
While pre-qualifying for a mortgage is something both financial institutions and realtors agree is of great benefit for any buyer, it's especially important for those looking to purchase their very first home.
Pre-qualifying for a mortgage lets you know upfront what you can afford and where you should be looking, says Turner. It also gives you confidence when you're negotiating the purchase price.
But don't be discouraged if the maximum house price you can afford is lower than you originally anticipated.
"As you build equity in a smaller home than the one you dreamed of and your income builds, you can then go for the bigger and better house," says Turner.
"You need to find a house that you love - that's really important," he states. "But at the same time it needs to be one that you can afford."
Examples of assets and liabilities
ASSETS
value of property you own
value of vehicles you own
amount in savings and chequing accounts
savings certificates, bonds, etc
amount in other bank accounts
RRSP funds that you can use for your down payment
other RRSP funds
investments, stocks, mutual funds
other assets
LIABILITIES
any loans for property you own
car loans
personal loans or lines of credit
credit cards
student loans
other loans
How to maintain a good credit history
Dos
Pay your bills on time.
Try to pay your bills in full by the due date. If you aren't able to do this, pay at least the required minimum amount shown on your monthly credit card statement.
Contact your creditors if you are having trouble making payments.
Make sure that your monthly account statement is correct.
Read the statements and other material you receive from your credit card company carefully. Keep up to date on any fee increases or changes in your card's terms and conditions.
Deal with companies you know and trust.
Get a copy of your credit report from all three credit-reporting agencies at least once a year and make sure they are accurate.
Don'ts
Don't accept or use any form of credit until you understand its terms and conditions and are comfortable with them, to avoid any misunderstandings between you and the credit issuer.
Don't wait to report any unauthorized transactions on your account. Contact your credit issuer immediately if your bill includes items you did not buy.
Don't go over the credit limit on your credit card.
Source: Financial Consumer Agency of Canada
Aid from Ottawa
The federal government's 2009 operating budget contained a number of provisions designed to make homeownership easier for Canadians:
the temporary Home Renovation Tax Credit of up to $1,350 for eligible home renovations and alterations
an increase to the Home Buyers' Plan withdrawal limit to $25,000 from $20,000 to help Canadians buy a first home
a new First-Time Home Buyers' Tax Credit that will provide up to $750 in tax relief when purchasing a first home
$300 million over two years to the ecoENERGY Retrofit program