Monday, June 26, 2017 15:24

The Buying Process

Buying Process

Are You Ready For Home Ownership?

So you have decided to become a homeowner!

Buying a home is one of the biggest emotional and financial decisions you will make in your lifetime.  Putting in the time to educate yourself on the home buying process will put you at an advantage and will hopefully help you save time and money, not to mention a lot of stress.

There are vast differences between renting and owning a home. The MyNewMortgage.ca home buyer guide will help you determine if you are financially ready to become a home owner. By using our budgeting tools you will be able to get an understanding for what you can afford.

Know What You Can Afford

The first step in deciding whether you are ready to become a home owner is to do a simple budget. Determine what you are spending every month compared to the income that you are bringing in. For this purpose CMHC have a budgeting tool that can aid you in this process.

Besides getting a pre-approval, the best way to understand how much you can afford to purchase is to understand the two main ratios that are used to calculate home affordability. Having a grasp on these concepts will help you understand what is affordable for you.

Besides the mortgage payment you need to keep in mind that property taxes, utility costs, home insurance and maintenance costs all need to be prepared for and included in any budgeting you do when purchasing a home.

Affordability Rule #1

The first rule you should know is that your monthly housing costs should not exceed 32% of your Gross Monthly Income. Housing costs are considered to include your mortgage payment (principle and interest) Property Tax and Heating costs. Note that if you are planning to buy a condominium then 50% of these monthly costs are added as well.

Lenders will add up your housing costs to determine what percentage of your Gross Monthly Income they are. This is called the Gross Debt Service Ratio or GDS, and it should not exceed 32%

Affordability Rule #2

The first rule was the GDS Ratio that is used to determine housing affordability. The second rule Lenders will use is called the Total Debt Service or TDS Ratio.

This rule states that your entire monthly debt load should not exceed 40% of your Gross Monthly Income.

Your entire monthly debt load’ includes things like credit cards, lines of credit, car payments etc.
For the TDS ratio lenders will use the numbers provided for your GDS Ratio and add all other debts to this to determine your total debt load you are able to carry in a month.

Your GDS ratio might have been low but if you have a lot of credit card debt it may push your TDS number too high.

Credit

If you have ever owned a credit card, taken out a loan or used and sort of “buy now pay later” plan then you will most certainly have a credit history.

Whenever an institution like a bank or credit card company extends credit to you they will also report whether or not you make your payments on time and your general characteristics as a borrower to the credit reporting agencies. These credit reporting agencies, known as credit bureaus, collect information about you and how you pay your debts.  When you want to borrow money in the future lenders will look at your “credit history” to determine if you are a good borrower and if they can trust you with a new loan.

Having a good credit history is VERY IMPORTANT. If you have a poor credit history a lender will likely refuse to give you the loan you are applying for regardless of other factors that would make you a good borrower.

Sometimes poor credit while not disqualifying you from getting the loan may result in you having to pay a higher interest rate or other fees to get the same product.

Your  Credit Report

Just like millions of other Canadians, your credit history is recorded in files maintained by two of Canada’s main credit agencies: Equifax and TransUnion.

Your credit report is a snapshot of your financial history. It contains your personal and financial information from past and present.

What is in a Credit Report?

Personal Information:

– This section outlines your name, birth date, any addresses past and present and current and former employers

Credit Information

– This is information related to any credit you may already have, such as credit cards, bank loans or lines of credit

Banking Information

– This is information about the accounts you have and with which Financial Institution

Public Records

– This is information on the public record such as a bankruptcy or credit related judgement against you. Secured loans also appear in this section

Collection Information

– This shows whether you have ever had a debt which you could not pay, which was referred to a collection agency

Credit Report Inquiries

– This is a list of all the companies who have inquired about your credit. This includes yourself, lenders and any authorized organizations

Beacon Basics


The end result of the credit report we have just discussed is the Credit Score or Beacon Score. Your Credit Score is a judgement about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers.

Your Score will fall someone on a scale from 300 to 900. The higher your score, the lower the risk that you pose for a lender.

The good news is that you do not need a score in the 800s to get a good mortgage. Typically if your Credit Score is between 680-700 then you will qualify for any mortgage on the market.

CMHC currently use a credit score minimum of 600 for deals that they will insure. That being the case, as long as you are above 600 you should be able to find a lender who will extend financing to you.

Keep in mind that the credit score you require for a mortgage will also depend on the type of mortgage you need. If you are self-employed having a higher credit score is more important and often required.

There are five categories that are used to calculate your Beacon Score . Knowing these can help you improve and maintain your credit.

Payment History: 35%

– Have you had any late payments? If so, how many payments have you missed, how recent have you missed them and how many times have you missed payments.

– A single missed payment can have a significant negative impact on your score
Current Debts: 30%

– How much do you owe. How much do you owe in comparison to your credit limits.  How much would you owe if you utilized all of your available credit.

Age of Accounts: 15%

– You should have some duration that you have had credit for to show your borrowing habits. Try to have 2-4 accounts at least a year old

Type of Credit:  10%

– Bank Loans, Credit Cards, Collateral loans, Lines of Credit – These all affect you differently

Number of Inquiries: 10%

– Having numerous inquiries in a short period of time is a sign that you have been seeking credit which is frowned upon in the scoring process for your credit score. The benefit of using a mortgage broker is that your credit report is only accessed once.

 

How To Check Your Credit

By law you are entitled to check your credit once a year. However the process of mailing in the request is not very convenient. The easiest way to figure out what your credit score is and if there are any problems is to visit the Equifax website and follow the steps to download your credit report online. The cost of checking your credit online is about $25  but is invaluable to proper financial health.

 

Your Real Estate Transaction

If you have decided that you are ready to enter into home ownership and have been pre-approved for a mortgage (Make sure you view our Mortgage Process for information on Pre-Approvals) it is time to find your dream home.

Once you find the home that is right for you, you will make an offer to purchase from the Vendor – or current owner.  During this process you are hopefully accompanied by a qualified Realtor to help you through the process.

Often once your offer has been presented you will begin negotiations until a purchase price is agreed upon. At this point both you and the Vendor will enter into an Agreement of Purchase and sale or ‘Offer to Purchase’.

These Agreements can be either Firm or Conditional.

A Conditional Purchase Agreement affords the Buyer the ability to secure  such things as Home Inspections and Conditions of Financing.

Even though you may have been pre-approved for a mortgage it is still recommended you put in a financing condition as the pre approval is completely dependent on the property you are intending to buy qualifying for the mortgage.

For more information on this see our Legal Expert Andrew Brown explain why it is not advisable to waive your Purchase Agreement conditions.

If you are purchasing a resale home then it is often advisable to obtain a home inspection as part of your financing conditions. See What a  Home Inspector has to say about the importance of a proper home inspection.

On the other hand, if you agree to a purchase with a Firm Agreement then you are not subjecting your offer to any conditions to safeguard you in the purchase.

Deposit

Accompanying the Purchase Agreement is the deposit.  The deposit ranges in amount and is often arrived at in discussions with your Realtor. If you have conditions in your Purchase Agreement then any conditions that fail to meet the standards set out in the Agreement will nullify the contract and you will get your deposit back.

However, if you enter into a Purchase Agreement without conditions then your deposit is not refundable should, for example, you not be able to obtain a mortgage for the purchase.

To learn a lot more about your purchase agreement view our Ask The Experts page under the Lawyer category and see what a lawyer has to say about Purchase Agreements.