How to buy your first house in Canada

how to buy your first house in Canada

In addition to many things, owning a home can be one of the biggest decisions of one’s life. This is why a lot of work and research is put into the process of making this decision. So many questions also cross your mind like, what type of house do I buy, which location, how do I get mortgage financing, how much money do I need to buy my first house in Canada, and also how do I know if I am even ready to buy a house. In this post, we will share answers to these questions and share steps on how to buy your first home in Canada.

Step 1: Deciding on your readiness to buy a home

There’s a sense of accomplishment that comes with owning your home. However, you must consider your readiness before taking this leap. I read a story of someone who bought a house and had to spend the next 2-3 years scraping by as she could not keep up with the various fees and bills that comes with owning a house. Here are few factors to consider

  • Maintenance Costs: When you have your own home, you will be responsible for maintaining & fixing any issues in there, including blocked pipes, broken dishwashers, etc. As a tenant, you might not have these responsibilities. Hence, before you buy a home, you must factor in the costs of these types of expenses.
  • Your life’s goals: Are you prepared to stay in that home for at least a few years before you sell it? Are you planning to make some career changes that might impact some type of relocation? These and more are some of the questions that you should also ask yourself before buying a house

Step 2: Evaluate your finances

While it’s good to think about the downpayment for your home, this is not the only thing to consider. Here are a few things to keep in mind when evaluating your finances:

1. Steady income stream:

This might be in the form of regular paid employment, a portfolio career, freelancing, etc. When applying for a mortgage, your income is one of those things that your lender considers.

Your income might be used to determine how much will be lent to you. Usually, additional paperwork is required from those that are self-employed versus those with steady employment. A lender might ask for more paperwork like notices of assessments and tax returns. 

2. Consider the needed down payment: 

In Canada, there’s a minimum amount that you would be required to pay when buying a house. For houses with a purchase price of $500,000 or less, the required downpayment is 5%.

Houses between $500,000 and $999,999 require 5% down payment on the first $500,000 and 10% on the remainder. Finally, homes that cost $1,000,000 or more require a minimum downpayment of 20%.

Here’s a simple breakdown below:

Purchase PriceMinimum Down Payment (% of Purchase Price)
Under $500,0005%
$500,000 – $999,9995% of the first $500,000, then 10% of the remainder
$1 Million and up20%

Note: In any of the above cases, a downpayment of at least 20% can help you to save on interest payments and not need mortgage insurance. Mortgage insurance tends to add up to your overall cost.

What is Mortgage Insurance? According to the Canada Mortgage and Housing Corporation (CMHC), Mortgage loan insurance is required by lenders when homebuyers make a down payment of less than 20% of the purchase price. You can try their Mortgage Calculator to get an idea of the price of mortgage insurance.

3. Look out for government incentives and programs:

The government of Canada has a few incentives and programs to help with your home purchase plans. They include:

  • The Home Buyer’s Plan (HBP): With this plan, you can withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP). If you are buying a home with your partner, each of you can use this program to access up to $70,000 combined. It is important to note you will be required to pay back these funds within a period of 15 years.
  • First-Time Home Buyer Incentive (FTHBI): Here, the government can offer up to 10% of the purchase price for first time home buyers. This is a shared equity program. This means that the government shares in both the upside and downside of the property value. So, when you sell your home within a 25-year period, you will be required to pay back the same percentage of the value of your home. For example, let’s assume that you received an incentive of  5% on a home purchase price of $500,000 which is $25,000. If the value of your home increases to $600,000, your payback of this incentive to the government will be $30,000
4. Build your Credit Score:

A good credit score is important in obtaining a mortgage for your home purchase. According to Borrowell, one of Canada’s online lenders, “A credit score of 680 or above is required to qualify for the best mortgage rates in Canada in 2021. Some mortgage providers allow you to qualify with credit scores between 600 and 680, but these providers may charge higher interest rates.”

The following are a few tips that can help you to improve your credit score:

  • Always pay your bills on time
  • Keep your credit card balances low 
  • Reduce your number of credit applications

Read more on Credit Score for Newcomers

5. Calculate how much you can afford: 

Lenders usually use the following to determine affordability:

  • Your Gross Debt Service ratio (GDS): This is calculated as your annual housing-related expenses divided by your gross income, and current monthly expenses not exceeding after-tax income. It covers things like your mortgage, taxes, heating costs, and condo maintenance fees (if applicable). It is expected that this ratio shouldn’t exceed 32% of your before-tax income.

  • Your Total Debt Service (TDS) Ratio: This calculates all the expenses in the GDS ratio, plus your debt service payments on any personal loans, credit cards and lines of credit. It is expected that this figure should be within 40% of your before-tax income.

Aside from these points mentioned above, it is important for you to also factor in your other expenses like your retirement savings, furniture, vacations, etc. 

To help calculate this, I would recommend you use the Canada Mortgage and Housing Corporation workbook

Step 3: Consider your Closing Costs

These costs are additional expenses you will incur when buying your home. They include the following:

  • Land Transfer Tax: This varies from province to province. It is usually a percentage of the purchase price of your home 

  • Lawyer and Legal Fees: You’ll require a lawyer to help you with the paperwork and other legal details needed when buying a house. You might want to ask your lawyer if title search and title insurance will also be a part of their legal fees. 

  • Property Survey: A survey certificate might be required by your mortgage provider or lawyer. A survey shows the land area including major structures and other relevant details on the property. 

  • Home Inspection Fees: As a first time home buyer, you will want to have a professional look at the home before you buy it. The professional will inspect the house including things like the heating, ventilation, plumbing, etc.

  • Property Appraisal Fee: This might be required by a mortgage lender to determine the worth of the property you are buying. 

  • Title Insurance: This is needed as it covers any issues that may arise after buying the house such as title defects, encroachment issues, etc. 

  • Estoppel Certificate Fee: This is also known as a status certificate and it’s applicable when buying a condominium. It shows your fees, penalties for infractions and other details relating to a specific condo unit and the condominium corporation. 

  • Other Costs: Aside from the costs listed above, you might want to factor in the costs of new furnishings, house cleaning, repairs, etc into your budget.

So far, you can see that in addition to your downpayment, you also need to plan for these costs too. 

Step 4: Determine where you want to live

Now that we’ve looked at finances, let’s consider some other things you might want to look at when choosing the location of your new home. 

  • Travel distance between your home and your workplace
  • Distance from your home to a bus stop (You may not don’t want to walk for too long in the cold winter before catching a bus)
  • Closeness to high ranking schools (There might be high costs of living in areas with these types of schools)
  • Availability of public amenities like a library, park, etc in your neighbourhood
  • Safety of the neighbourhood

Step 5 : Mortgage Pre-Approval

This pre-approval means that a lender has qualified you for a loan amount based on your financial situation that they accessed. This does not guarantee that you will get the funds, you will still be required to go through a final approval process. This process may allow you to:

  • Get an estimate of your mortgage payments
  • Lock in an interest rate for 60 to 130 days, depending on the lender
  • Get to know the maximum amount of mortgage you might qualify for

The mortgage pre-approval process has various steps including mortgage prequalification and mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer. During this process, the lender will examine your finances to determine the maximum amount they might lend to you as well as the interest rate. 

How to get a Mortgage Pre-approval 

You can get a mortgage pre-approval from mortgage lenders and mortgage brokers. 

  1. Mortgage Lenders: These lend money directly to you. They include banks, credit unions, mortgage companies, loan companies, insurance companies, trust companies, caisses populaires. 
  2. Mortgage Brokers: They don’t lend money directly to you, but they arrange transactions by finding a lender for you. They usually have access to a lot of lenders and a wide range of mortgage products to choose from. 

Whether you decide to go with a mortgage broker or lender, below are the following documentation that will be requested:

  • Your personal information and identification: Photo ID,  Social Insurance Number.
  • Proof of your income: Pay stubs, T4 slip or Notice of Assessment (NOA).
  • Employment Letter: It should state your current position, salary, type of employment (temporary or permanent) and length of employment. If self-employed, you may be required to provide additional documents that will show the financial statements for your business
  • Debts: Including your credit card balances, lines of credit, car loans/payments, student loans, liens, spousal or child support, current monthly mortgage or rent payments.
  • Proof of down payment: Recent bank and investment account statements.
  • Proof of other assets: Vehicles, property, jewellery, etc.

The mortgage lender or mortgage broker will also run a credit on you with your consent to determine your creditworthiness. If you are buying a house with your partner, your partner will also be required to provide the documentation listed above. 

Note: Make sure you understand the terms and conditions of your mortgage contract. Ask your mortgage lender or broker questions on rates, terms, penalties, prepayment options, appraisal fees, mortgage portability, etc. 

Step 6: Start looking for the home you want to buy

Now that we’ve examined finances and other costs associated with buying a home, it’s time to start looking. Before you start, it is helpful to make a list of the features you want in a house. You can rank them in an order of importance to see your must-haves and nice-to-haves. 

Many real estate listings are online on popular websites like Realtor, Property Guys, Purple Brick. However, many new home buyers choose to work with a real estate agent when buying a house. Real estate agents usually have a good understanding of the market you are trying to buy a house in. 

Step 7: Closing the deal

When you find the house that you want to buy after a careful search, then it’s time to submit an official offer for it. It’s not uncommon for your first offer to be rejected as a home purchase in Canada is highly competitive. However, if your offer is accepted and the Offer To Purchase (OTP) document is signed by both parties, this document becomes legally binding. You’ll then have to formalize your mortgage with a lender. Your lawyer will guide you in signing all required documentation and will act as the intermediary between you, the lender, and either the seller or the seller’s agent or lawyer. 

Step 8: The Closing Date

Once all is finalised, your lawyer will hand you your keys. Congratulations! You are now a homeowner. As you plan to move into your new home, consider the following:

  1. Inform your current landlord of your move date
  2. Cleaning of your new house
  3. Changing your locks
  4. Inform your service providers 

Phew! We’ve covered a lot on the various steps to buying your first home in Canada. From getting your downpayment to mortgage pre-approvals, we hope that you’ve learnt a lot on this journey. While buying your own house might seem like a herculean task, you have your real estate agent, mortgage brokers/lenders and your family to support you. 

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