Buying a home for the first time is an exciting - but daunting - task. If this is your first time buying a home, you may not know the best place to start.
You'll probably need a mortgage to make your purchase, and in order to secure a mortgage, you will need to first get approved. But even before you're approved for a mortgage, you should get pre-approved. That way, you know exactly what you can afford and can look at homes realistically in your price range.
Getting a Mortgage Pre-Approval
Pre-approval isn’t solid approval for a mortgage - but you won’t be able to get solid approval before you put an offer in on a house. A pre-approval is the bank or mortgage broker letting you know how much you should be approved for given the details of your finances that you've provided them with.
The first step to obtaining a pre-approval is to visit your bank or mortgage broker. Whether you choose to go through a bank or a mortgage broker is up to you - you may choose to go through your bank if you have a long-standing relationship with them and like the mortgages and rates they are offering. If you don’t think that your bank is offering the best rates, you could seek out a mortgage broker and find out what they have on offer.
A pre-approval will then be determined based on your finances and credit score. This pre-approval will also guarantee you a certain interest rate for a set length of time. If you need more information about the mortgage approval process, take a look at our Mortgage Approval: Do You Know The Laws? guide.
Have a Down Payment Ready
The amount you'll need for a down payment can vary - the minimum you'll need is 5% of the value of the home you want to buy, but 20% is ideal. It may seem like a lot, but buyers who put down 20% or more as a down payment don't need to pay for mortgage insurance, which can lead to lower monthly mortgage payments and significant savings in the long-term. You'll also need funds to cover the closing costs once you buy your new home. As a general rule, aim for around 4% of the sale price.
Getting a down payment together can be one of the most time-consuming parts of buying your first home. Luckily, there are a number of great programs designed to help first-time buyers achieve their goals by either contributing to or offsetting some of the costs. Consider looking at:
The RRSP First-Time Homebuyer's Plan
If you have an RRSP, you may be eligible for the RRSP First-Time Homebuyer's plan which allows you to withdraw up to $25,000 tax-free from your RRSP to put towards a down payment. If you and your spouse or common-law partner both qualify, you can each make a withdrawal for a total of up to $50,000! Just be careful to consider:
- To qualify, you must not have lived in a home that you or your spouse has owned within the last four years
- Starting from two years after you receive the payment, you will be required to repay the full amount to your RRSP within the next fifteen years
The First-Time Homebuyer's Tax Credit
This tax credit is designed to help first-time homebuyers offset some of the costs associated with moving such as inspection fees, legal fees and other closing costs. This is a non-refundable credit that can be worth up to $750.
The GST/HST New Housing Rebate
This rebate is available to anyone purchasing a new or substantially renovated home and allows you to claim back 36% on the GST you'll have to pay when you buy the home, up to a total of $6,300.
Know Your Numbers
Once you set an appointment with your bank or broker, you will need to have some numbers ready for them. Know how much your pay cheques are. Have a solid number for any debts you have. Know how much your assets are worth - cars, stocks, properties, etc. Your mortgage specialist will need to know all aspects of your finances in order to calculate how much you will be approved for. Also be ready for your credit score to be pulled.
Make sure to bring the following with you:
- Your employment information such as T4 slips, salary confirmation, length of employment and income tax returns
- Banking information - statements, proof of any financial assets you own, and details about any debts or liabilities you might have
- Confirmation of the amount of your down payment, as well as the source of these funds
- Proof and source of funds to pay for closing costs
Gross Debt Service Ratio
Your mortgage specialist will do a calculation based on the information you provide. This calculation will determine your Gross Debt Service Ratio. Normally, housing costs shouldn’t take up more than 32% of your gross monthly income and your entire monthly debt load shouldn’t exceed 40% of your gross monthly income.
You’re All Set!
Once your lender lets you know how much you are pre-approved for, you have a maximum housing budget. This does not mean you need to spend everything your lender is willing to give you. Make a monthly budget and ensure that housing costs won’t put stress on the rest of your finances. Next stop, house hunting!
Originally published May 28, 2015, updated December 4, 2018.