Buying Your First Home? Money Isn’t Everything!

With a little legwork and some innovative financing you may be able to buy your first home with very little or NO Cash. 

Nobody likes flushing money down the drain but that’s what you’re doing when you hand over your rent money every month. The moment it leaves your hand your money is working for someone else and not building equity for you and your family. If you feel it’s time to own your own home here are some things you need to know before you make your first move. 

So you have NO CASH? –If you have good income and good credit but lack the cash for a down payment & closing costs you may be able to borrow that money from one lender and the mortgage from another. Some banks offer a no down payment option for professionals by way of a loan. Banks also offer a cash back option to help with your closing costs. You may be fortunate enough to receive a gift letter from a relative stating the money is a gift that does not have to be repaid.

THE SELLER may be willing to help finance the deal! – There are sellers out there who are willing to help you by “taking back” or holding mortgage financing for you. You pay the seller monthly on a mortgage with minimal down payment, sometimes-favourable interest rates and lower closing costs. They might be hard to find, but if you can find a seller willing to help you out it may be the key to getting into your own home.

Have you thought about EQUITY SHARING with family members or investors? – An equity sharing arrangement gets YOU the cash for the down payment while your partner gets a share in your home. You make the monthly payments, pay the taxes and live in the house. In time you will either buy out your partner or sell the property and split the profits accordingly.

Have you been contributing to a REGISTERED RETIREMENT SAVINGS PLAN (RRSP)? - Don’t forget you may be able to get a loan for your down payment by borrowing against your retirement savings plan, or you may be able to withdraw enough money from your plan to use for a down payment without penalties or taxes. Under the federal government’s Home Buyers’ Plan, you can withdraw up to $20,000 tax-free from your RRSPs to help buy or build your first home. If you or your spouse have not owned a home in the last five years you qualify as a first time home buyer under the program.

What about the ONTARIO HOME OWNERSHIP SAVINGS PLAN (OHOSP)? This program helps Ontario residents save money to buy or to build their first home, while earning tax credits. You and your spouse can claim a tax credit of $2,000 each per year and contribute to your OHOSP for five years in a row.

What if you have SOME CASH? – If you have enough cash for a small down payment then look for an insured mortgage that requires a down payment as low as 5% for a single family home. Obtaining Mortgage Loan Insurance may enable you to obtain financing from a primary or secondary lender. The premium for your Mortgage Loan Insurance is calculated as a percentage of the loan and can be added to your mortgage and included in your monthly payments. Premiums range from .5% to 3.75% of the mortgage loan, depending on your down payment.

If buying a NEW HOME you may be able to obtain a low down payment financing plan. Once again, you can purchase a new single family home with as little as 5% down payment. Depending on market conditions and mortgage rates, new-home builders may offer special financing arrangements--mortgage rate buy downs or discounts to encourage sales. They may also offer appliances, other extras and even savings on closing costs to entice you to invest in their home.

IN ONTARIO, a first time buyer buying a New Home is eligible for a LAND TRANSFER TAX REBATE of up to $2,000.

GST REBATE ON NEW HOMES! --A 2.5% rebate applies to new homes with sale prices up to $350,000. Most builders reduce the advertised sale price of their homes by the amount of the rebate, letting you have your rebate money immediately. The agreement of purchase and sale will include an assignment of the rebate to the builder.

Credit history a problem? “LEASING WITH AN OPTION TO BUY” may be an option for you! – If your credit history needs some work (if you’ve had a bankruptcy and have been discharged, if you have less than 2 years continuous employment in the same field, etc.) and you know you will have difficulty securing a mortgage, you may find a seller that will “rent” you the home for a specified period of time (enough time for you to improve your credit rating). The rent may include an “Option Fee” that will go towards your down payment when you are ready to buy.

What do you do if you are lucky enough to have ALL THE CASH you need? – Having cash puts you in a strong negotiating position; you may be able to buy at bargain prices because you represent a simple transaction and a “sure thing” for the seller. Use this to your advantage when you negotiate.

How do you know WHAT SIZE MORTGAGE you qualify for? – Lenders usually use a formula based on approximately 32% of your gross monthly income (before taxes) to calculate the maximum amount you can borrow for a mortgage, as well as the monthly housing cost of taxes and heating.

What affects the mortgage amount you can borrow? – The size of your down payment and your total debt picture including your revolving debts (credit cards, car and other loans, etc.). Lenders will usually use a formula based on approximately 40% of your gross monthly income (before taxes) to calculate your total debt picture.

What can you do to INCREASE THE MAXIMUM AMOUNT you can borrow? - Reduce your debt (pay off credit cards and other loans) to improve your income-to-debt ratio. This small step can qualify you for a larger mortgage… and a better home!

What exactly is considered INCOME? – Income can be more than just wages; don’t forget to count bonuses, commissions, overtime, seasonal, part-time, social security and pension income, dividends, and interest, even rental income if you have any.

What if you want to BORROW MORE than “they” say you can afford? - You may be able to qualify for a higher mortgage if you can prove that you have been making regular, on-time rent payments that are higher than the maximum allowed.

Smart financing can INCREASE THE AMOUNT you can borrow! - Adjustable rate mortgages (as opposed to fixed rate) can temporarily lower your monthly payments and enable you to afford “more house”. You can probably count on a rate change every year, usually resulting in higher payments.

Don’t forget TAXES & INSURANCE! – You should estimate about 2% of the purchase price for property taxes and 1% for insurance, then divide by 12 to get the amount you need to add onto your monthly mortgage payment. Example: $100,000 house would cost approx. $250/month for taxes & insurance. Your lender will take this into account when determining your maximum monthly payments and so should you.

What is PRE-APPROVAL? – This is not a full loan commitment from your lender but it is a formal process usually involving a credit check and employment verification. Your lender approves the amount of your mortgage and gives you written confirmation for a fixed time period (typically 90 days) before you start looking for a home. The mortgage rate offered to you is locked in for the 90-day period in case rates go up. If rates go down, lenders usually offer you the new lower rate. Final approval depends on the appraised value of the home and a credit review of your finances.

What is PRE-QUALIFICATION? – Less formal that pre-approval, this is more an estimate of your borrowing power. This is also not a loan commitment from your lender.

What good is being pre-approved and pre-qualified? – Pre-approval and Pre-qualification demonstrates to brokers and sellers that you are serious (not just a looky loo) and have a good idea of what you can afford. Your offer will usually be preferred over one from someone who has never met with a lender.

Beauty versus Convenience - Don’t lose sight of the BIG picture when looking for a home! Are big trees in a fenced backyard with a white picket fence enough? No! You should be realistic about what it will be like to live in a prospective home. Create a mental picture of each room in the house and ask yourself how you and your family will live in it:

Kitchen – Compact kitchens can be convenient, but do they suit your lifestyle? If you have, or are planning, a family, does the kitchen have enough room for a high chair? Is it carpeted (will it show food stains)? Is there a counter right next to the refrigerator for unloading groceries? Is the kitchen easily accessible to the porch or patio for summer barbeques? Can the kids get to and from the kitchen easily from the yard? Will they have to troop through the living room to get a drink on a hot summer’s day?

Bathrooms – Are there enough? If you entertain, is there a convenient powder room for company? If you have children, is there a “mud room” and bathroom close to the back door for those “emergency” trips in from the yard?

Front Entrance – Is it conveniently located for visitors? Is it screened from the rest of the house to deflect hot or cold blasts of air, and nosy glances. Is there a handy coat closet?

Living Room – Is it centrally located where it will be used by the whole family or is it separate and out of the regular traffic pattern of the house, where it can offer a quiet and tidy space to relax or entertain?

Family Room – Is it adjoining the kitchen so you can keep an eye on younger children while you make meals? If your children are teenagers you may prefer the family room in the basement, where the drum set, loud music or multitude of noisy friends won’t disrupt the whole family.

Master Bedroom – Is it large enough? Is it private, are there built in buffers like closets, stairwells, halls or bathrooms between the rooms? Is it fully self-contained, does it have its own ensuite and adequate closet space?

Garage – Does it have enough room for all your vehicles (or stuff)? An outside door to the garage can be a convenient access point from the yard.

Basement – Do you need one for storage, or expansion? Make sure it’s suitable for your use. Does the basement have an exterior entrance handy to the yard or driveway?

In Conclusion:

It is possible for you to own your own home and make your money work for you! Do your homework and be sure you have a clear picture of your financial situation before you start. Your Professionals Real Estate Agent can help you. As well, most have an in-house mortgage representative that can pre-qualify you, explain the various options available and shop for the best rate possible for you.

This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province to province. All articles, text and photographic material presented here is for the use and pleasure of the recipient only.