Are You Fit To Buy A Home?

General Lynda Thai-Baird 28 Jun

The better shape you’re in financially, the more likely you are to succeed at homeownership. That’s because a strong credit history, lean debt-service ratios and a robust down payment work together to promote affordability. For the best mortgage terms and rates, it pays to be fit! Here’s how to assess and improve your financial fitness.

CREDIT SCORE
Your credit score indicates how reliable you are as a borrower. Canada’s two credit reporting agencies, TransUnion and Equifax, assign a credit score that’s between 300 and 900. Order your credit report and check your score. Is it…

680 OR ABOVE?
Good: You’re considered a lower-risk borrower and will receive better interest terms.

BELOW 600?
Room for improvement: As a higher-risk borrower, you’ll be offered less favourable terms and interest rates.

You can boost your credit score by following these good credit habits:
1. Never using more than 75 per cent of your available credit. Ideally, aim to keep it under 50 per cent (better) or even 30 per cent (best!).
2. Paying your monthly bills on time. Late payments can lower your score.
3. Opening a credit card or line of credit – and using it responsibly by paying at least the minimum payment on time – if you wish to build credit history.

DEBT-SERVICE RATIOS
Your debt-service ratios help lenders determine how much mortgage you can afford, given your debt payments, monthly expenses and income. This is assessed through two different ratios: the gross debt service ratio (GDS, or the percentage of your income that goes toward paying your housing costs) and the total debt service ratio (TDS, or the percentage of your income that goes toward housing costs (GDS) plus your other monthly obligations, such as debt repayment).

GDS: Calculate your GDS ratio by adding up your monthly housing costs (anticipated monthly mortgage principal and interest payments based on the Bank of Canada’s five-year fixed term rate, taxes, heating costs and, if applicable, 50% of your condo fees), and then dividing that amount by your gross monthly income. Multiply the sum by 100.

TDS: Calculate your TDS ratio by adding up all of your monthly debt payments (housing costs plus car payments, credit card payments, student loans and, if applicable, child support and alimony), and then dividing that amount by your gross monthly income. Multiply the sum by 100.

To qualify for mortgage insurance, you’ll need a GDS ratio of 39% or less, and a TDS ratio of 44% or less.

You can lower your debt-service ratios by:
1. Paying down your consumer debt.
2. Increasing your verifiable income with a reliable part-time job.
3. Lowering the amount of your prospective mortgage with a larger down payment.

DOWN PAYMENT
A significant down payment will make a big difference in your overall fitness to buy your first home. Although mortgage insurance allows you to buy with as little as five per cent down, under Canada’s new mortgage rules introduced last fall, you’ll need to bulk up that nest egg for anything beyond a very modest starter home.

If you have any questions about your financial fitness, please don’t hesitate to contact me. 

How You Can Save Money When Buying A Home

General Lynda Thai-Baird 22 Jun

Saving money to buy your first home will likely be one of the most significant purchases you’ll make in your life. But with all the details and parties involved, it’s easy to get confused or blindsided by hidden costs and fees. Here are some tips to ensure you get the most for your money.  

1. Resolve credit issues before applying for a mortgage

Your mortgage rate is partially determined by your consumer credit score, so fix what you can before you apply. Even little things like late payments or errors on your record (it happens!) can increase your mortgage payments.

2. Budget wisely and save for a down payment…even if it means waiting a little longer to buy

It’s hard to be patient, but a decent down payment means more reasonable payments, saving you thousands of dollars over the duration of the mortgage.

3. Shop around for mortgage rates

Don’t assume the offer made to you by your bank is the best rate you have access to. It will vary from client-to-client, which makes it important and extremely beneficial for you to get a second opinion.

4. Don’t take listing prices at face value

Found something you like? Research house values in the neighbourhood to be sure you’re dealing with a fair price. Your real estate agent can help, but you can also search for nearby listings online or attend open houses in the area.

5. Use your RRSPs

In Canada, first-time homebuyers can take advantage of a federal government program called the Home Buyers Plan (HBP) which allows you to take up to $25,000 from your RRSPs, tax-free.

6. Don’t be scared to low-ball your offer

New buyers can be timid when it’s time to buy, but unless you know you’re headed for a bidding war, low offers can be countered. So you may as well give it a shot!

7. Make your offer contingent on closing dates

It’s easy to overlook small details like closing dates in the rush of making an offer. But don’t risk the cost of paying for temporary accommodation and putting items in storage if you run into last minute changes.

8. Get a list of fixtures and fittings included in the sale

Check the details to avoid opening the door to your new home and finding it stripped of light fittings, cables and appliances. Also, pay attention to what you’re paying for: the seller may list the price they paid for an appliance, but from how long ago? Would it be more cost-effective for you to exclude it from the offer and buy a new one?

9. Review your closing statement carefully

With all the details that go into buying a home, it’s not unusual to find mistakes in the fine print. Be sure you check the math prior to closing, so you don’t overpay based on a simple clerical error.

10. Opt for bi-weekly mortgage payments

Paying monthly means that you make 12 payments per year. But if you pay half that amount every two weeks, you’ll make 26 payments, which means you’re paying down your mortgage faster.

If you are looking to buy a home and would like more information about the process, please don’t hesitate to give me a call for a free consultation.