When looking to purchase a home, where do you start? Whether first time home buyer, you’re upsizing or downsizing, or adding a property to your portfolio, there are a few things you need to do to make this a more enjoyable experience.
Step 1 – Find out how much you can afford.
Let’s take a look at your finances for a few minutes. You have a car loan, your partner has a truck lease and you both have balances on your credit cards, not to mention your personal line of credit. You might think this won’t really impact how much you can afford. In 2016 you may have been right, but on January 1, 2018, the Office of the Superintendent of Financial Institution (OSFI) introduced new restrictive lending guidelines, often referred to as “B-20 Mortgage Stress Test.”
What is the stress test?
Mortgage interest rates were historically low, and home values in major urban centres were skyrocketing. As a result, Canadian consumers were taking on a record level of mortgage debt.
Consequently, the Canadian Government was concerned about what would happen when interest inevitably went up. Their solution was to restrict how much home buyers would be allowed to borrow. In essence, they wanted home buyers to demonstrate they can handle higher interest rates. You need to be able to handle mortgage payments at either the contract rate +2% or the benchmark rate. They initially set the benchmark rate at 5.34%, but they can change that anytime.
Regardless of how we feel about the stress test, these are the new rules, so we just have to live with them.
How much can I afford?
You should schedule a meeting with a mortgage broker, such as myself, or at your local bank or credit union to speak with the loans officer.
Your buying power is calculated using a formula called the Debt Service Ratio which has two components: the “Gross Debt Service Ratio” (GDS) and “Total Debt Service Ratio” (TDS). GDS is how much of your income you can spend on the cost of the property. This includes the mortgage payment (principal + interest), property taxes, 50% of condo fees and heating expenses.
What you can expect:
You’ll be required to provide documents verifying your income, debt (through a credit bureau pull), and any property you may already have.
The mortgage broker will review your application and let you know what your buying power is under the new B20 rules.
What if you don’t qualify for as much as you thought you would?
There are 3 ways you can increase your buying power:
- Reduce your debt load. Did you know that a monthly car payment of ~$300 eats up about $100K of your buying power? So if you qualify for a mortgage amount of $400K and you wanted $500K, paying off that car loan might do the trick.
- Increase your down payment. Most lenders want to see that you have come up with at least some of the down payment, but there are some lenders who allow this to be gifted or partially gifted to you, by a close family member. The pertinent word here is ‘gifted’. If you have to pay it back, then it’s considered a loan and you will have to debt service for this amount, just like any other debt.
- Increase your income. This can be done by getting a co-signer. Their income is essentially added to yours. So, as long as they don’t have a heavy debt load, or are in the market to shop for a home themselves, this is a good option.
Step 2 – Find a Realtor
Once you have your buying power and you’re ready to start house hunting, the next step is to find a Realtor you feel comfortable with. Your realtor plays an important role when shopping for your home. They will advise you on your best options and negotiate on your behalf. Since you are pre-approved, they will be able to show you homes that match your criteria.
Step 3 – House Hunting
Make a list of everything that is important to you, so you know exactly what you want in a home beforehand. eg; immediate needs, future plans and lifestyle.
Do you want a home near schools, or are you an avid hiker and prefer something closer to nature?
Consider the whole property: lot, neighbourhood, surroundings etc. For instance, I was walking downtown Victoria last week and noticed a business with a large flashing sign right beside a high-rise. For the higher floors, it might be okay, but the units on the lower floors would definitely have a view of this flashing sign at night. If you were to view that property during the day, you might not notice this.
Bring your checklist when you’re viewing properties so you can take notes. You may end up seeing multiple homes in one day, so having a checklist will help you compare and keep track of the features you did or didn’t like.
Step 4 – Get a Lawyer
Get a lawyer that specializes in real estate. They will conduct a title search and check for outstanding taxes and liens on the property. They’ll take care of anything else the lender requires before your mortgage is funded.
Step 5 – Make the Offer
Discuss with your realtor what you’re willing to offer. Your Realtor will then present the offer to the seller (this includes price, conditions, deposit and closing date).The seller will either accept, reject or make a counteroffer.
Step 6 – Home Inspection or New Home Warranty
Hiring an inspector is your choice, but it’s definitely a smart idea. This is one of the biggest investments we make, so you’ll want to get the eyes of a professional on the property before you make a commitment. You can choose to make your purchase offer conditional on the outcome of your inspection.
Sometimes an inspection will reveal major problems. Have your Realtor negotiate for the repairs with the seller before your deal closes, or you can legally withdraw the offer and keep shopping.
New Home Warranty
What is a New Home Warranty? New Home Warranties are used when you buy a brand new home. It is provided by the builder to cover things like deposits, completion dates, along with labour and materials for at least one year after the home is built. It also protects you against structural problems for a minimum of five years.
Step 7 – Submitting your deal to a lender
Your Mortgage Broker will send your application to the lender that they have discussed with you. The lender typically takes two business days to come back with conditional approval of your mortgage. This lists any other items the lender requires in order to remove conditions, along with an appraisal if needed.
Step 8 – Finalizing
Once your conditions with the lender have been met, the lender instructs the solicitor to finish up on their end. When the lawyer has received these instructions, they will call you to schedule a meeting. During the meeting, you will finalize details like insurance, conditions and the results of a title search.
Step 9 – Moving In
Before moving in, make sure you line up utilities and other services like phone, cable and internet. If you currently rent, you must give your landlord notice, the standard is 60 days.
It’s always a good idea to have your mail forwarded to your new address until you get around to changing it. Don’t forget to hire a moving company, if you’re not planning on doing it yourself. Preparing these things well in advance will help you make a smooth transition to your new home.
Step 10 – Closing Day
Finally, possession of your new home! Your lawyer completes the paperwork (so the property is in your name), payments are finalized and you receive the deed and the keys. Congratulations! :)