By Anna Vozza, The Windsor Star
Many people are often surprised to learn that the costs of owning a home can be substantially lower or comparable to those of renting. There are also many financing options and a wide variety of choices that can make owning a home more affordable for first-time buyers.
Before you start searching, it’s important to determine how much you can afford to pay. You may learn the modest home you can afford is a far stretch from your “dream home,” but it will be a start and will require a lower down payment.
To determine how much you can afford, enlist the services of a Realtor. A Realtor will help you identify what you want and take you to homes and neighbourhoods that reflect your lifestyle, needs and price range. They will also help you understand property financing, taxes, insurance and the steps you will have to take as a first-time buyer to complete a real estate transaction.
The vast majority of homebuyers lack the funds required to buy a home without assistance from a bank or other lender. Most people will need to arrange a mortgage. Before a lender will give you one, they will need to determine the amount you can afford. A lender will look at how much you will need for the initial purchase of your home, including your down payment and other costs such as legal fees, inspection fees and taxes. They will also look at the ongoing costs of paying back the mortgage, along with monthly costs for utilities, maintenance, insurance and annual property taxes.
Most lenders will not permit a borrower to take on a debt load the borrower can’t carry. That’s why reputable lenders “qualify” potential borrowers. Usually, lenders say your monthly housing expenses (mortgage payment and taxes), plus condominium fee, if applicable, should not exceed 30 per cent of your monthly gross family income. This is called your gross debt service ratio. Lenders also use a second calculation called total debt service ratio.
Generally speaking, no more than 40 per cent of your gross family income can be used when calculating the amount you can afford to pay for mortgage payments and taxes, plus other fixed monthly expenses. These other fixed costs are your ongoing commitments and can include auto, student or personal loans, as well as credit card payments.
The hardest part about buying a home for most first-time buyers is getting that down payment. You may have the ability to keep up with the monthly financial obligation (mortgage payment, insurance, utilities, property taxes, maintenance), but finding the down payment may be a problem. Once you decide what you can afford and find the home you want in the right neighbourhood at the right price, here are some of the sources you can tap into for a down payment.
– Savings and investments: If you have a Registered Retirement Savings Plan, you can withdraw $25,000 per individual ($40,000 per couple) without any tax penalty as long as you pay the amount back within 15 years.
– Mortgage insurance: Until recently, to qualify for a conventional mortgage, a buyer needed to put down in cash at least 25 per cent of the purchase price. But a new law that came into effect last year lowered the level to 20 per cent. To put down less than 20 per cent, a buyer has to qualify for a high-ratio mortgage. By law, this type of mortgage must be insured against default in payment. The cost of this mortgage insurance depends on the value of the house and the size of the loan. Most mortgage insurance companies offer a five per cent down option. This program insures the mortgage on your home against default in payments for up to 95 per cent of the lending value.
Contacting a Realtor is step No. 1. They will help you understand how all the programs work and ensure that you get the maximum benefit possible. He or she will guide you through the entire home-buying process and explore all your options to get you into your very first home.
Ann Vozza is president of the Windsor-Essex County Real Estate Board. Phone 519-966-6432.
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Finding a Mortgage broker is step No. 2. They will work with you to get you pre-approved for a mortgage.With the pre-approval you should understand what price range you really fit into. He or she will walk through what paperwork you need to have and the whole process of getting a mortgage for the first time.