First home and financing: A quick starter guide
by Denis Doucet
What you’ll learn
- Should I get a pre-authorized mortgage?
- How much do I have to provide as a down payment?
- Do you have a good credit score?
Before jumping into buying a house, you should analyze certain aspects of your project, particularly regarding how much funds you have readily available. However, the idea time and conditions to buy a house go way beyond “just” the financial aspect. Here are some important factors to consider when buying your first home.
Verify your credit rating
Do you have a good credit rating? This is the number one condition to be able to get a good mortgage. In fact, unless you won the lottery or recently inherited a large sum of money, your financing is probably at the core of buying your first house.
Find out your credit score so that you can facilitate your home buying process and avoid any unpleasant surprises. It will also help you to get preapproved for your mortgage.
It is strongly recommended to get preapproved for a mortgage when you decided to buy your first home. It will help set the parameters of what you can afford and simplify your search for a house within a specific price bracket. You might as well know right away what you can afford and the leeway you have; you don’t want to fall in love with a house—only to find out that you can’t afford it!
Furthermore, a preauthorized mortgage reassures the real estate agent or seller; it helps to accelerate the transaction as the qualification process can take a few days. Therefore, you can finalize the purchase more quickly and sleep better at night knowing everything is in order.
Determine your down payment
Your mortgage is normally calculated the following way: the price of the house minus the down payment you will make. It stands to reason that the higher the down payment, the less interest you’ll have to pay when you reimburse your loan. What’s more: your monthly payments will probably be lower (if the amortization remains the same); this will allow you to maintain a healthy budget.
To save enough money for a down payment on a house (normally a minimum of 5% of the total price of the house, based on your credit score and the house’s value), there are a variety of different options. You can use personal savings or cash in on some investments. But make sure the money is readily available! Some investments only come to term at certain periods, which may not coincide with when you want to purchase your home.
You can also withdraw your RRSP with a Home Buyers’ Plan (HBP). This basically means you are lending yourself money in the short term to reinvest in your RRSP over the course of the next 15 years without interest.
Do you have the necessary funds to put a 20% down payment on your first home? This is a great way to save because the CMHC Mortgage Loan Insurance is not required here. Otherwise, this insurance premium is mandatory and can cost several thousand dollars.
- Make sure you check your credit rating to get the best mortgage possible.
- Obtain a preapproved mortgage; it will help you remain within your price bracket when looking for a house.
- Determine your down payment by considering what funds you have readily available (HBP, investments, etc.).