Is 2021 the year you’re going to become a first-time homebuyer? With interest rates sitting at record lows, now may be the right time for you to put your hard-earned savings to use and invest in homeownership – growing your own equity as opposed to paying rent to offset someone else’s mortgage costs.
The homebuying and mortgage processes involve a lot of information, which can often seem overwhelming. That’s why it’s important to build your homebuying team, including your trusted mortgage agent and Realtor so all your questions can be addressed along the way. This will help alleviate stress and make this milestone event much more enjoyable.
As a first-time homebuyer, it’s important to be aware of the various programs available to offset homebuying costs as well as help fund your down payment, which is often one of the toughest hurdles to homebuying. I’d be happy to review all of these with you.
Once you decide that it’s time to buy a home, your next step involves figuring out how much mortgage you can afford. By getting preapproved for a mortgage before you begin home shopping, you’ll understand how much you can afford to spend and ensure you only look at properties within your comfort range.
As part of the affordability assessment process, mortgage lenders take a close look at your overall housing costs as well as any outstanding debt you may have.
Lenders are required to use calculations known as debt service ratios to determine how much you can comfortably afford to spend:
- Gross Debt Service (GDS) ratio. This determines the percentage of your gross annual household income required to own your home. Lenders estimate your annual mortgage payments (principal and interest), property taxes, heating costs and a percentage of condo fees, if applicable
- Total Debt Service (TDS) ratio. This is the percentage of your gross annual household income required to own your home, plus all other debts and loans. The calculation uses your GDS percentage and adds any other monthly payments you have including loans, car payments or outstanding credit card debt
If you require mortgage default insurance (mandatory when your down payment is less than 20%), lenders adhere to specific GDS/TDS ratios. To be eligible for Canada Mortgage and Housing Corporation (CMHC) mortgage default insurance coverage, borrows are required to have GDS less than 35 and TDS less than 42. As well, one borrower must have a credit score of at least 680 and the down payment must not be borrowed.
If, however, your lender is using private mortgage insurers Genworth Financial or Canada Guaranty, it’s important to note that these two providers didn’t follow suit with CMHC changes in 2020. As such, it’s easier to quality for their mortgage default insurance offerings. Borrowers must have a minimum GDS of 39 and a minimum TDS of 44. The minimum credit score threshold is 600.
Thanks to mortgage default insurance, the minimum down payment when buying a home in Canada is 5% of the purchase price for a home valued at $500,000 or less and 10% for the portion of the purchase price above $500,000.
Closing costs represent another large sum of money due leading up to or on your closing date. These include various fees and charges associated with the completion of your mortgage deal, including all your legal and administrative expenses. It’s important to include these costs in your budget because, in most cases, they can’t be rolled into your mortgage payments.
Closing costs range depending on the specific property you plan to purchase but, as a safe estimate, set aside 5% of the purchase price as a buffer to cover these expenses. They typically amount to anywhere from 3-5% of the home’s price, but it’s always in your best interest to save more money than you need.
Have questions about buying your first home in 2021? Answers are a call or email away.