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Are You a First Time Home Buyer?
January 21, 2015 @ 1:49 PM by: Don Blair

If you are preparing to buy your first home, you are probably wondering about a lot of things. How much can I afford? Which bank should I borrow from? Do I need to get a guarantor? What is my credit like? Can I use my RRSP to buy my home? And on and on.

If this describes you, you have come to the right place. The trained mortgage professionals at MortgageTech enjoy spending an hour or two with you, and answering all of your questions. And the best part is, this service is free!

Given the importance of your decision about buying a home, you owe it to yourself to obtain some guidance from someone who has been trained to help you understand the complexities of the home-buying process.

We normally meet you at either your apartment or a local coffee shop—and the coffee is on us!

If you have not already done so, click on the “Frequently Asked Questions…” button on the top right hand side of this page. We have answered over 100 mortgage related questions. We may not have answered all of your questions, but you will learn quite a bit from the questions that some of our other clients have asked.

As a first time home buyer, we expect you to have questions that are specific to your situation. And we expect you to want to discuss those questions on the phone or in a face-to-face meeting. By the way, feel free to bring Mom & Dad to the meeting. A lot has changed since your parents bought their house, so this is a good chance to make sure that everyone is on the same page.

Learn what you can from our site, then call one of our friendly mortgage specialists. If you are anything like our past clients, you will be glad you called.

1st mortgages

Most of us, when we buy a home, do not have enough money to pay cash for our new home. So, we borrow money from someone, to allow us to purchase the house of our dreams. The piece of paper that outlines how much we borrowed, what interest rate we will pay, how much our monthly payments will be, etc, is referred to as the mortgage.

A 1st mortgage is simply the first mortgage that the lawyer registers against our house in the Land Registry system.

We, at MortgageTech, have working relationships with a large number of lenders who will agree to lend money as 1st mortgages: ING, TD Canada Trust, Scotia Bank, First National Financial Corp, Alterna, Maple Trust, Home Trust…and the list goes on and on.

With the recent changes in the lending guidelines here in Ontario, you may qualify to buy a home with as little as no money down. In order to buy a house with no money down, the banks normally impose at least the following three rules:
i) You must have very good credit. This normally means a credit score of 680 or higher. If you do not know what your credit score is, you can call us and, with your permission, we will run your credit report and let you know if you meet this rule.
ii) You must have a steady full-time job, and have held it, or one similar to it, for at least 2 years. A steady full-time job is one where you can count on receiving a steady pay cheque, year round. For example, most roofers and lawn care technicians are not considered to have steady full-time jobs.
iii) You must have enough cash in your bank account to equal at least 1.5% of your purchase price. This money will be used to cover your closing costs. By the way, even though the banks require 1.5%, we strongly suggest that you have 2% available. You do not want to get to closing day and find yourself short of money.

Despite having the option of being able to buy with no money down, most of us still buy with at least a 5% down payment. This down payment can be from either you saving up the money, or a relative (no, it can’t be from a friend) giving you the money to allow you to buy your home. If the down payment is coming from a relative, they will need to sign a ‘gift letter’. In that gift letter, they will have to confirm that they are giving the money to you, with no expectation of it being paid back. In other words, the bank wants to know that you are not borrowing your down payment.

By law, if you borrow more than 80% of the value of the house as a mortgage, you must buy mortgage default insurance. This insurance has normally been available from either CMHC (Canada Mortgage & Housing Corp) or Genworth, both of whom charge the same premiums. The insurance premium increases as your mortgage increases as a percentage of the purchase price. For example, if your mortgage is between 80% & 85% of the value of the house, you will pay an insurance premium of 1.80% of the purchase price. However, if your mortgage is between 90% & 95%, you will pay an insurance premium of 3.15%.

When you are ready to obtain a 1st mortgage or a Pre-Approval for one, or simply want to ask questions about them, contact us.

2nd mortgages

A second mortgage is simply a mortgage that is registered on the title of your house after you have already registered a first mortgage. Because it is registered second, the lender is taking on more risk than the bank that loaned you your first mortgage. Consequently, the interest rate of the second mortgage is normally considerably higher than the interest rate of your first mortgage.

In general terms, there are two types of people who need a 2nd mortgage:
1. Someone who does not qualify (usually due to undeclared income) with the banks for enough money to be able to buy the house they are considering, or,
2. Someone who already owns a house but has run up some debt on credit cards or unsecured loans, and who now wants to consolidate all of their non-mortgage debt into a 2nd mortgage. For more comment on this, see the section “Debt Consolidation” on our Home page.

A large portion, but not all, of 2nd mortgages are funded by private individuals. These individuals are generally local business people who know their local real estate market, and are comfortable lending money to qualified applicants. Since these lenders are individuals, there is some variation in the terms and conditions that they will offer. It is not uncommon for these lenders to charge 12% - 15% for second mortgages.

It should be noted that most people who obtain a second mortgage will have to pay the mortgage broker for his work to put the mortgage in place. This is because, unlike banks, the private lenders do not pay the mortgage broker to lend out their money. There can be a significant variation in the mortgage brokerage fees to put a second mortgage in place. Be sure to ask your broker how much you will be charged.

You should also note that, if you are borrowing more than $50,000 as a second mortgage, the Law Society of Upper Canada (i.e. Ontario) requires that two lawyers must be used: one to protect your interests and one to protect the interests of the lender. And yes, you get to pay for both lawyers. Some lawyers will require two lawyers, even if the amount you are borrowing is less than $50,000.

At MortgageTech, over the years, we have developed a large number of private lenders who will lend 2nd mortgages on the ‘right’ house. If you find yourself in a position where you need a 2nd mortgage, give us a call or send us an email. You might be pleasantly surprised at what we can do to finance your purchase or to help reduce your monthly payments.

Closing Costs
“Closing costs” are those costs that you incur, in addition to the purchase price, which you have to pay in order to finalize your purchase. Normally, the largest closing cost is your Land Transfer Tax. This tax is approximately 1% of the purchase price (unless you live in Toronto, where, with some exceptions, your Land Transfer Tax is doubled). Other significant items in your ‘closing costs’ calculations would include paying your lawyer, paying the provincial sales tax on your mortgage default insurance, and, 3 or 4 months deposit on your property taxes.

Down payments can be hard to come by. If you have some money sitting in your RRSPs, you may be able to use it towards the purchase of your home. As always, there are conditions that you have to satisfy, in order to be allowed to access this money. The key points are:
1. you must not have owned a home within the past 5 years.
2. you may use up to $25,000 from your RRSP (per spouse) toward the purchase
3. your last RRSP contribution must have been sitting in your RRSP for a minimum of 90 days.
4. you must either repay the borrowed amount back into your RRSP or else claim it as income. This money must begin to be repaid in the second year after you purchase your home, and completely repaid by the end of year 15.

For a more thorough outline of the government’s guidelines, see http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/hbp/menu-e.html

If you need a first mortgage, or a second mortgage, or you aren’t sure what you need, pick up the phone and give us a call. We’ll do our best to help you to understand your options.