For those of you contemplating buying your first home, the dream is both exciting and daunting at the same time. Homeownership can be very satisfying but comes with costs and responsibilities and the process can be intimidating. This article will help break down the process and give you confidence in tackling this dream!
Do I Qualify to be a First Time Home Buyer?
For most programs in Ontario, you are considered a first time homebuyer only if you have never owned (or partially owned) a home anywhere in the world. If you are purchasing with another person, you may qualify for a portion of some of the programs if one of you has not owned property previously.
Establish a Budget
First, you need to come up with an idea of how much home you can afford. To help narrow this down, you can look at your current income before deductions from all sources, and from both partners if you are a couple.
A good rule of thumb is that you shouldn't budget more than 32% of your gross monthly income on housing costs (including mortgage payments, taxes, insurance, heating, and half of condo fees). So, if your gross income is $5,000, then you can budget $1,600 on housing. Some lenders will allow up to 40%, however. With a $250,000 mortgage at 3% over 25 years, for example, the payment would be $1,183 per month.
Also, you need to consider other debt payments, including car, credit card, installment loans and personal loans. Added to housing costs, the total should be less than 40%, but some lenders can go up to and over 50%.
Additionally, lenders will look at your credit history to determine what interest rate you will qualify for. Late payments and credit cards pushed to their limits will make things more difficult and costly when it comes to mortgage financing. Next, you need to come up with a down payment for your home. Savings, gifts from family and loans can be good sources.
Borrow Down Payment Money from your RRSP
The Home Buyers’ Plan - Canada
The government of Canada offers The Home Buyers’ Plan to first-time home buyers.
Did you know that it’s possible to borrow money from your RRSP to cover your down payment when buying a home? This can be a useful option if you’re struggling to come up with the money on your own. First time buyers may be able to borrow (tax-free) from their RRSP savings up to $35,000 per person toward their down payment. This plan is available for people who have not owned a home in roughly the last five years.
If you borrow from your RRSP using the plan, you are required to pay back your RRSP over a period of 15 years, in order to avoid being taxed on the money withdrawn.
First-Time Home Buyers' Tax Credit - Canada
This program was introduced to help Canadians in purchasing their first home. It is intended to help cover closing costs, such as inspections, legal fees and land transfer taxes, so you can dedicate more of your resources for a down payment. The credit works out to a rebate of $750 for most people. When more than one person purchases the property, the combined amount cannot exceed $750. The claim is found on line 369 of the general tax return.
Ontario Land Transfer Tax Refund
First time home buyers in Ontario are eligible to receive a refund of up to $4,000 in Provincial Land Transfer Tax (LTT). This is a benefit available to first time buyers, and is typically processed through your real estate lawyer when completing the paperwork for closing your transaction.
Get in Touch!
Contact me to explore the possibilities. If you are currently renting, you could be able to own a home already! My goal is to make your home-buying process enjoyable and stress-free.
First-time Home Purchase Rebate - Toronto
You may qualify for a rebate of up to $4,475 if you are purchasing either a resale or new construction home in Toronto. If you qualify for the Ontario Land Transfer Tax Refund, you should also qualify for this program.
Some lenders may also be able to offer mortgages with flexible down payment options - including as low as 5% down, and sometimes with rebates to help with closing costs.
Mortgage insurance allows for a down payment of less than 20%, which is the minimum down payment on most non-insured mortgages. Homes priced under one million dollars can qualify for insured mortgages. The minimum down payment for homes under 500,000 is 5%. For those priced higher, it is 5% for the amount under 500,000 then 10% on the amount above that.
With all of these variables to consider, it pays to have professional help. Working with a mortgage broker allows different lenders to compete for your business, giving you much greater options to choose from, and the potential to save thousands of dollars over the course of your mortgage and lower your monthly payments. All this typically costs nothing extra to the homebuyer.