I am often asked, what are the most important things to know when you are a first time home buyer. As each client’s finances and home needs are different the list of must know items can vary from client to client however here are 8 things that you should know as a first time home buyer in Ottawa.
By interviewing a few realtors, that will help you in finding one that works with your timelines and personality. Also, different neighbourhoods can have different price growth or declines, can be more or less competitive in terms of multiple offers, can have different by-laws and so. With that, its important to have an agent that is familiar with the market in the area you are looking in. A downtown agent may not know the surrounding areas as well and visa versa. Sometimes having a realtor that is a friend or family member can be a great asset but on the other hand, if the process does not go according to plan, it could put a strain on your relationship.
This will not only help you put money aside for down payment, closing costs, furnishing the new home and more, but it will allow you to learn to have less cash on hand each month. When you purchase a house, the property taxes, home insurance, life insurance, the mortgage payment and other costs can be more funds out of your net monthly income then you are used to. The savings account with automatic deposits from your bank account, will be good training for this. Lenders will want to see that you have your down payment saved as well as 1.5% of the purchase price for closing costs.
A lender would like to see that you have an extra 1.5% of the purchase price saved for closing costs, regardless of if you are getting a first time buyer rebate. On a $300,000 mortgage, this would be an extra $4500 that needs to be saved. If your down payment is coming from a gift, the lender will want to see that you at least have the closing costs personally saved. They cannot be gifted.
Learn more: Closing costs
Many first time buyers take a 5 year fixed rate mortgage however many first time buyers also do not stay in their first home for 5 years. With that, you will want a mortgage that is portable if you think you may sell and move to another house during the term. Also if the mortgage you need on the next house is larger, such as with a bigger house purchase, some lenders have restrictions on adding funds to the mortgage when porting. If you feel you may be relocating to another province for work, its important that your mortgage is portable to that province. Not all lenders lend in all provinces. If you think you may not need the mortgage for 5 years, there are also shorter terms with usually lower interest rates and less of a chance of having a penalty if cancelling the mortgage.
Learn more: Porting a mortgage
It’s important to find a house that suits your needs and your budget. Many people dream of a big house but it can quickly become a nightmare if you are living pay cheque to pay cheque to make the mortgage payments. A person can generally qualify for a house about 5 times their annual income. This is a good house price to start with if wanting a very general number for what you qualify for. Therefore, a person that make $50,000 a year would qualify for a home up to about $250,000.
If buying a house that just meets your current size needs may mean you need to upgrades homes sooner then later. This can come with costs such as realtor fees to sell, legal costs, land transfer tax on the next house and so on. It’s important to plan ahead and think about where you see yourself in the next few years, ie having kids and see if the houses you are looking at meet these goals.
Much like with the realtor, finding a mortgage broker in Ottawa that you can relate to is important. Also its important to be sure they have the experience to guide you in the right direction. For example, are they renting themselves or have not bought a house yet. If that is the case, it may be hard for them to share first hand experience on buying your first home. How many years have they been in the business? Do they specialize with first time buyers or are they focused more on investment property or commercial property lending. Also, the bigger the mortgage company or the better volume producing the mortgage broker, the more lenders, faster lender turnaround time or better rate discounts they may be able to offer. Once you find a broker you connect with, its time to get pre approved and have a rate held.
Make sure you are paying all the minimum payments or more on credit items and on time. Also, internet, phone bills, etc show on a credit bureau now so missing those can lower your score dramatically. Also, if you have large credit card debt, loans, including a vehicle loan, this can affect your debt to income ratio. Each $10,000 of debt payments you are carrying, can take away from upwards of $10,000 house price. Therefore a car loan of $600 a month could mean a house price $60,000 less.
Learn more: How to build your credit score
A mortgage is a loan for a home with a commitment between you and the lender. Real estate is used as the collateral for securing the loan.
The mortgage commitment is a written contract between you and the lender. It outlines details such as the terms of your mortgage. This includes, the options of the mortgage and the penalties if not paid on time or broken. Also, your prepayment privileges, what fees are associated with your mortgage and other important details. Plus, the contract highlights the property that will be secured as collateral. As a first time home buyer in Ottawa, knowing your options on the mortgage will be important and the more options, the more flexility you will have over time.
If you do not have enough money to purchase a house, a mortgage can help. It is typically risky for lenders to lend hundreds of thousands of dollars to people. However by using the property as collateral for the mortgage, this helps to minimize their risk and offer lower rates.
A lien is put on your house by the lender on the closing date. Your closing date is the date you take possession of the house. There are two main types of liens, a conventional and a collateral lien.
By having the mortgage secured against real estate, this reduces the risk to the lender. This means the lender can lend to you at a lower interest rate. This is why mortgage rates are lower than personal loan and credit card rates.
Learn more: Find the lowest mortgage rates in Ottawa
There are two main types of mortgages, fixed and variable, and each one comes with strengths and weaknesses.
The choice of which is better for you is a personal decision based on your outlook of the economy and interest rates. Also, your tolerance level with fluctuations in interest rates.
Fixed rate mortgages are the most popular and this is where you lock in a rate for a certain term. Typically these terms are from six months to ten years. The longer you lock in the rate, the more protected you will be against rate increases.
For this extra protection, fixed rates are higher than variable rates. Also, the longer you secure a rate, such as ten years over five years, the higher the interest rate.
Variable rate mortgages are also sometimes called adjustable rate mortgages. The main difference between a variable and a fixed rate is that the interest rate can change during the term with a variable rate. Lenders offer a variable interest rate based on the lender’s mortgage prime rate. The benchmark for this rate the Bank of Canada overnight rate.
As the Bank of Canada overnight rate goes up and down, the bank’s mortgage prime rate will go up and down and therefore your variable mortgage interest rate will go up and down. During these changes one of two things can happen, your payment will increase or decrease or your amortization will increase or decrease, if the bank or you do not change the payment amount.
Some people prefer that their payment stay the same in order to assist with budgeting. However a caution, a small change in prime can have a large impact on your amortization. It may be more challenging in the future to get back on track in a rising rate environment if you are not adjusting your payment with each rate change.
You need to apply and be approved for a mortgage.
An application is done to review your current financing situation. A lender will be reviewing the five Cs of credit. In this review, they will look at your documents, debt to income ratio and credit history.
Learn more: The 5 Cs of credit
There is a variety of documents needed when obtaining a mortgage including down payment verification, income verification, void cheque and lawyer’s contact information. Contact me anytime for an example checklist of documents that a lender requires for a purchase.
Learn more: Down payment verification
There are two ratios that a lender typically looks at for a first time home buyer in Ottawa. They are your gross debt ratio (GDS) and your total debt ratio (TDR). Lenders will compare your current debt obligations in relation to the new home purchase obligations. For the home purchase these obligations include payments such as heating, property taxes, condo fees if applicable and the mortgage payment.
Banks and lenders typically need to see a credit score of medium to strong strength. Having a credit score above 700 is ideal. The credit score is out of 900 points in total.
It’s a good idea to obtain a pre approval before you begin your search for a home. The pre-approval will help a first time home buyer in Ottawa uncover any challenges in your finances. Ones you may be aware of and ones you may not. Also it will help guide you with what documents will be needed once you have made an offer on a home. Plus, provide you with extra confidence that you can make an offer on a home of a certain price.