Common First Time Buyer Questions Answered By Mortgage Specialist
If you’re a first-time buyer and you’ve got some questions about mortgages, then stay tuned for this. Hi, I’m Brad Wylde from the GoWylde Team, and I’ve got Ann-Marie here from TD. She’s one of our mortgage specialists. Today we’re just going to be going over some questions that a lot of first-time buyers have about mortgages.
Q1. What is the quickest & best way for someone to find out what they can afford?
Ann: Best way, Brad, would be for them to reach out to their financial institutions, mortgage brokers, to get a preapproval in place. Questions will be asked of them regarding their income & employment, to come up with a figure.
Q2. Are there specific ratios that you guys use to determine how much someone can afford?
Ann: For sure. The banks and mortgage brokers look for what we call debt servicing ratios. TDS is, in other words, total debt servicing ratio which includes is principal, interest, taxes, and heat. GDS, gross debt servicing ratio includes principal, interest, taxes, heat, and all your outside debt whether you utilize it or not.
Q3: Do they have to qualify for both of those ratios or does one overrule the other?
Ann: Correct in the sense that they have to qualify under a certain percentage in order to obtain financing. 33.3% is the maximum total debt servicing ratio. 44.4% is the total gross debt servicing ratio.
Brad: So basically like 44% of all of your income.
Q4: What’s the difference between an online automatic approval versus going and actually meeting with a broker and sitting down with them.
Ann: For sure. We’re seeing more and more in the digital world online approvals being available for clients. They are helpful. They aren’t as accurate as meeting face to face with somebody to get qualified. The biggest thing I find with those pre-approvals, they’re not taking into account your credit rating. They’re not taking into account what debts you think you don’t have, but are appearing under the bureau
Brad: Yeah, seen that before with other people.
Ann: It’s not taking into account what your true actual income is. Meeting face to face, someone may think they make $40,000 a year, but actually they could be not including benefits that they’re getting through work, all of that can be added back.
Brad: Oh, you can add benefits onto your income?
Ann: Correct, you can add back your car allowances and things like that. You may get bonuses throughout the year, all of that.
Brad: So you may actually be able to qualify for more by actually going in and meeting with a good broker?
Q5: When buying a house what type of down payment does someone need? What’s the minimum? What would you say is normal?
Ann: There are two mortgages available for consumers in the housing market, conventional mortgage. This means you have 20% down payment available to put down on a home. Most first time home buyers, unless you’re very fortunate, don’t have a 20% down payment. The other type is a high ratio mortgage in which you qualify for anywhere between 5% and 15%.
Brad: And then you have to get the insurance premium on the high ratio mortgage?
Ann: Correct, through the Canadian Mortgage and Housing Corporation.
Brad: Okay, and how does that premium work, then? Do they pay it upfront?
Ann: How the CMHC premium works is you quality for 5% down, up to a minimum 5%. The CMHC premium is then added to your mortgage on funding, so essentially you’re putting 5% down but adding 4.5% down at closing.
Brad: Oh, okay so you’re not paying it upfront, it just gets tacked onto your mortgage, so it’ll be an extra $15 or so dollars a month.
Ann: That’s correct.
Q6: Is there any difference between the different mortgage lending companies, or insurance companies? There’s CMHC & Genworth.
Ann: Those are the two, yeah. Virtually they are the same. Depending on who you go to for your mortgage will depend on who you pick
Q7: Are there any incentives for first-time buyers or different things they can take advantage of when they’re buying their first home?
Ann:- March of 2019 with the new budget, there was a couple of announcements made. What we do know at this time is in regards to the first-time homebuyer RRSP withdraw. The limit has now increased from $25,000 to $35,000. Which this essentially means is prior to that, a first-time homebuyer could withdraw up to $25,000 from their RRSPs. That now has increased to $35,000, repayable over 15 years.
Brad: Okay, so they have 15 years to pay it back before they have to worry about taxes.
Ann: Another incentive is your land transfer rebate. Any first time home buyer can qualify up to $4,000. It’s huge.
Brad: That’s a substantial cost, land transfer, it’s amazing a lot of buyers don’t realize about that before foreclosing. And it could be a nasty surprise for some people.
Ann: For sure. Usually, I tell my clients, factor about 1.5% of the purchase price for your closing costs, of course, part of that is your land transfer which will be rebated from the lawyer.
Brad: Yeah, and a lot of buyers, don’t know about that rebate. If you don’t ask for it, you don’t get it. I know that I didn’t get it on my first one.
Ann: Another incentive that has recently been announced in March of 2019 is the loan that is going to be available for first-time home buyers. 5% for resale homes and 10% for new builds. My advice along that line would be to speak to your mortgage professional to get more details on that one.
Brad: Yeah, I understand that one’s pretty complicated.
Q8: With first-time buyers, we’re seeing it’s getting harder and harder for them to qualify with the new mortgage rules. Are there any creative things that people can do to help them qualify for a home right now?
Ann: Yes, you’re absolutely correct. It’s a very challenging time for first-time homebuyers. There are creative ways. We’re finding in the industry a lot of first-time homebuyers are needing to have a cosigner, like a parent.
Brad: Does it have to be a family member for a cosigner, or how does that work?
Ann: It doesn’t.
Brad: No, okay?
Ann: It can be anyone that’s, we recommend family, especially if you’re using the high ratio mortgage through CMHC. Usually, that is a requirement. They have to be, just can’t be your neighbor down the street. Another creative way is of course gift letters. If you’re fortunate enough to have someone in the family who would like to gift funds towards the purchase of your first home, the banks require a signing of a gift letter which verifies the funds on deposit.
Brad: And that’s just proving that it’s actually a gift and not another loan from a family member?
Ann: Correct, it has to be a gift, a true gift in the sense that it is not to be repaid. Another creative way would be to, if you’re self-employed, business for self incorporated, there are ways to increase your income through add backs that you’re declaring on your T1 generals.
Brad: So what would an add back be?
Ann: An add-back would be your vehicle expense, capital cost allowance, and business use of the home office.
Q9: When someone does have a pre-approval, before they actually go and buy a house or before they close on a house, what are some things that they shouldn’t do or they should watch out for?
Ann: We see this time and time again. You certainly need to know the difference between a pre-qualified and a pre-approval. Pre-qualified simply means like we said previously, it’s a quick way to figure out what you can afford. A pre-approval is actually we have obtained your income, we’ve gone through your credit rating. We know what kind of buyer you are.
Brad: Okay, so it’s a lot more solid.
Ann: A pre-approval certainly is more solid than a pre-qualification. But we do see time and time again, a pre-approval does not give you full reign to go out and buy that new car next week, or go out and go on that holiday you’ve always wanted to go on. Because those numbers are certainly going to increase your debt capacity, which will therefore change your ratios when it comes time to purchase that home.
Brad: So the bank can still pull back that pre-approval even though it’s a 90 day or 120 day commitment. They still have the right to withdraw that at any point, then?
Ann: Absolutely. With a pre-approval we always need updated income. You could get a pre-approval today. Six months down the road come back, we’re going to ask for updated income, because in those six months you could’ve lost your job, you could’ve got a raise, you could qualify for more, you could qualify for less.
Brad: Okay, yeah.
Ann: So yes, a pre-approval, it’s certainly peace of mind, it is not a guarantee.
Brad: Okay, and then the difference between pre-approval and an approval, then, is an approval once you finally got that paperwork back and you’ve signed everything off, is that?
Ann: So a pre-approval is confirmation from the bank or financial institutions that you’re dealing with that you could qualify for a home for X amount of dollars. An actual approval is the details of the home. We know when the closing date is, we know the price of that home, and that would be a firm approval.
Brad: And that’s why it’s done. Is there any way that the bank can pull back before closing after you’ve got an approval, or a lender?
Ann: Once the approval is concrete, we now know where your down payment is coming from, that is all verified ahead of time, so not very often do we ever seen a bank pull back on an approval, because we are not going to give you a firm approval until all the conditions are met.
Q10: A lot of first-time buyers are fairly newly employed. What are the rules around income, and for you guys being able to use that income? I know, I think is it three months they have to be working with the company, or how does that work, and with job changes and with all that.
Ann: In order to qualify for a mortgage, we do ask that a candidate be three months employed at the current employer. We will ask for verification of that in the form of a letter of employment stating that you are no longer on probation and that your job is permanent.
Brad: Oh, okay, so even for someone who’s on a temporary contract, like for example with a lot of teachers. So during that period do they have trouble qualifying usually?
Ann: We don’t find with contracts it’s too difficult. We will ask just for a letter from the employer stating that that candidate, and if it makes sense, usually everything has a story, and if that story makes sense.
Brad: So it is kind of on a personal scenario basis?
Q11: What about self-employed people? I know that’s even more difficult being self-employed.
Ann: Self-employed people is a bit more of a challenge. We do need three month job tenure, so you can’t go into a bank, open a business account a month ago, say you’re going to make X amount of dollars. The banks are going to ask for a history. It’s a three-year business for self policy that we have in place. It just involves us being able to verify that you have been business for self for three years.
Brad: Three years and you’ve got X amount of income.
Ann: There’s a history there.
Brad: Yeah, do you just use an average over the three years to qualify income?
Ann: We do, we use your average line 150, and then as mentioned before we can add back if we need to increase that income.
Q12: When someone meets with a broker and they get a pre-approval, do you recommend they still put that financing condition in their offer?
Ann: For sure. The finance condition, it protects you as the buyer, it protects your deposit that you put down on that home. It also gives you an out. If you get cold feet, if you find something in the meantime that’s a little bit more affordable, but the biggest thing is it also allows the institutions to turn that pre-approval into a live deal. There could be issues where you pay too much for the home and CMHC, the Canadian Mortgage and Housing Corporation, won’t insure that home for the amount that you paid.
Brad: Yeah, we saw that a lot in 2017 when the houses were going to bidding wars. You’re seeing people pay $100,000- 150,000 over asking, and then the bank wouldn’t lend them the full amount so they were on the hook.
Ann: Absolutely. As first-time home buyers, it’s important to know you also are at an advantage because you don’t have a home that has to be sold. That is usually the number one condition that we find, sometimes it gives you an advantage.
Brad: Awesome, well thank you so much, Ann-Marie, it was a lot of great information. I hope everybody found this useful.