First Time Home Buyers Guide
As a first time home buyer there are lots of things to consider when purchasing your first home. This guide will help to cover some of the most important parts of purchasing your first home and how the process works so that you are prepared when the right property comes on the market. Having worked with more buyers and sellers than anyone in the Nanaimo real estate market, we are here to help!
Financing Your First Home
A great place to start is getting a clear picture of your financing. While this includes getting a mortgage pre-approval, there is still more to it than that. We suggest doing a full budget so that you are aware of any potential lifestyle changes that you may need to make to make your dream of buying a home a reality. When you get a mortgage pre-approval, mortgage lenders are looking at some different criteria.
Gross Debt Service Ratio (GDSR) – These are home related expenses such as the mortgage principal and interest, heat, property taxes, and 50% of strata fees if applicable.
Total Debt Service Ratio (TDSR) – All of your monthly debt payments including home related expenses, car payments, credit cards, student loans etc.
These ratios are shown as a percentage of your income with the maximum GDSR being 39% and TDSR being 44%. It’s also important to remember that when you are qualifying for a mortgage in Canada, you must be qualified at a qualifying rate of 5.25% or your interest rate plus 2%, whichever is greater. As an example, if your mortgage lender is giving you a rate of 4% on your mortgage, you have to qualify at 6% interest (4% + 2%). Check out our blog post that goes into more detail on qualifying rates.
Building Your Detailed Budget
When you are getting approved for your mortgage, they aren’t taking into account your other expenses such as car insurance, fuel, groceries, entertainment and anything else that you spend monthly. Because of this it’s important to create an up to date budget that includes your lifestyle expenses. This will help you to have a clear understanding of what you can afford and keep your same lifestyle or what changes you may need to make to be able to afford the type of property you are looking for. Without this budget you aren’t looking at the whole equation. Being in the Nanaimo real estate market for almost 30 years has given us extensive knowledge in what kind of considerations to keep in mind when you get started in your home search and we guide you every step of the way to make sure that you have clear expectations of what you are in for.
First Time Home Buyer Down Payments
There are different options for down payments so you don’t necessarily need to have $100,000 in savings to be able to start looking for a home. Down payments can be as little as 5% of the purchase price. For any down payment less than 20% you are required to have default insurance. This is an insurance premium that is a percentage of the purchase price of the property. This premium can be added to your mortgage, so you don’t need to have money saved to pay for these premiums. These premiums are also structured that a higher down payment gives you a lower premium. If your down payment is 20% or higher, you do not need to have default insurance. Check out this link to the Canada Mortgage and Housing Commission (CMHC) website where they show the premiums based on the down payment amount.
Now that you have gone through and created your budget, spoken with a mortgage lender and gotten a pre-approval for a mortgage, we’re ready to hunt for your new home!
Time to Find Your Home
You have likely been searching for homes based on the rough numbers from your budget and this is where we start to get more specific. We start to narrow what we are looking for so that the listings that we suggest to you are tailored to your preferences and what we think you would be most interested in. A combination of narrowing this search and knowing all the financing details allows us to find the perfect property for your family and be able to write competitive offers that we are confident with.
Once we have found the right property, we put our offer strategy into practice and put our best offer forward to get an accepted offer. As part of the offer process, it is likely that we will have subjects that need to be satisfied before we can proceed. Most commonly these will include a subject to financing and subject to inspection, but depending on the property, there may be other subjects to include. These subjects are in place to make sure that we have the time for due diligence and that we are eliminating any surprises that could come up throughout the completion process or after you move in. Here is what these subjects look like:
Finance: Subject to the Buyer receiving suitable financing on or before (INSERT DATE HERE).
- A subject to finance provides you time to make sure that your pre-approval is still valid and that the lender approves of the property and will attach a mortgage to it. If you write an offer without the subject to financing and the mortgage lender says that they won’t be able to provide financing, you need to come up with the cash for your purchase, which is not ideal!
Inspection: Subject to the Buyer, at the Buyer's expense, obtaining and approving a property inspection report, on or before (INSERT DATE HERE). The Seller will allow access to the property for this purpose on reasonable notice.
- A subject to inspection gives you the opportunity to have a licensed home inspector look at things in the home that you simply can’t see during a showing. This includes checking electrical components, looking for any moisture or water leaks throughout the home as well as the overall condition of things throughout the home. This allows you to make an informed decision so that if there is any work to be done to the home you are able to have an idea of how much needs to be done and if you are willing to purchase the home knowing about these issues. It also provides you with a good, prioritized check list of what you may need to do when you move into the home.
At the time that we write an offer on a property, we also need to consider costs associated with your home purchase. Sometimes when you get a mortgage, the lender will want to do an appraisal of the property to make sure that the price you pay for the home matches the market. This is to ensure that you aren’t overpaying for a property and that it is a good investment. If you are getting an inspection of the property, there is also a cost associated with the inspection. After you have removed subjects you also have to work with a lawyer or notary to sign all of the documents to have the property transferred to you. The lawyer or notary also deals with disbursing payments including the down payment. Other costs to consider are property transfer tax (as a first time home buyer you may be eligible for government incentives) and, if you are purchasing a newly built home, 5% GST would also be applicable. Here is a list to summarize some potential closing costs
- Mortgage appraisal
- Lawyer or notary costs
- Property Transfer Tax (keep reading for how this relates to first time home buyers)
- 5% GST (if applicable)
- Property taxes (if applicable)
Government Initiatives for First Time Home Buyers
Both the provincial and federal government have introduced initiatives for first time home buyers to help them to enter into the real estate market. It’s important to know what programs are available and how to qualify and apply for them.
First Time Home Buyers Program
- This is a BC government program to eliminate, or reduce property transfer tax for first time homebuyers
- To be eligible for this program you must have either
- Lived in BC for at least a year before the property is registered
- Filed 2 income tax returns within the last 6 years as a BC resident
- The fair market value of the property has to be under $500,000 for a full exemption. A partial exemption is given if the fair market value is less than $525,00
For full details on this program you can check out the BC government website
Home Buyers’ Plan
- Federal government program that allows you to remove money from RRSPs tax free to form part of your down payment
- The maximum tax free withrdrawal from your RRSP is $35,000
- Available only to first time home buyers
- Funds withdrawn from the RRSP must be in the account for over 90 days
- The amount taken from your RRSP must be paid back within 15 years
This is a great option if you have RRSP savings available to you to increase your down payment amount. Our recommendation is to speak with a tax expert to determine if a withdrawal from your RRSP makes sense. More details on how this program works can be found on the federal government website
First-Time Home Buyer Incentive
- Federal government program where the government has a 5 or 10% stake in your home
- This provides you with a higher down payment and a lower monthly mortgage payment
- $ amount the government holds in your home moves up and down with market value
- This amount is paid back within a 25 year period, or when you sell the home
- Qualification under this program is further limited than the mortgage qualifications mentioned above
In Nanaimo the first-time home buyer incentive is limited to the purchase of a property within 4 times your annual household income. This means if your household income is $100,000, your maximum purchase price to qualify for this program would be $400,000. More examples and details of this program are available here.