Thinking about Buying a Home?

Purchasing a home can be both exciting and frightening! You’ll not only have to live with your decision, but also live in it, so you don’t want to make any costly mistakes.

Before you start looking for your “dream” home, organize yourself by considering a few basic questions:

• What are my housing needs?
• What are the choices?
• What can I afford to spend?

Time spent answering these questions in advance may save you from frustration and disappointment during your search.

What’s out There?

To meet the many kinds of needs that people have, a number of different housing styles and types of ownership have developed over the years.

Your individual requirements and your income level will govern the housing type which is most suitable for you at the present time.

Single Family, Detached Home – A detached home is one which has no common walls with any other residential structure, resting on its own land with front, rear, and side yards. It may be any size from a small, one-storey bungalow to a huge mansion.

Semi-Detached Home – A semi-detached home is two single family dwellings joined together by a common middle wall. It is sometimes called a “side-by-side” duplex.

Duplex – A duplex is two separate dwellings which are attached either side-by-side (a semi-detached home) or one unit above the other. It is important to note that this type of structure may be a strata titled property and therefore subject to the Strata Property Act.

Townhouse – In British Columbia, the term “townhouse” is usually used to describe one of a group of dwellings (most often two-storey) joined together by common walls, each with its own entrance from the outside.

Apartment – An apartment is one of several dwellings (most often single storey dwellings built one above the other) joined together by common walls, each having its entrance from a common hall. The overall building containing the apartments may be from three to 33 or more storeys.

Mobile or Manufactured Home – A manufactured home is a factory-built residential structure designed to be moved from one place to another, although wheels are not necessary. It is often placed on a rented space (called a “pad”) in a manufactured home park.

Types of Ownership

While there are a variety of housing ownership interests, the most common include the following:

Freehold – A freehold interest (also known as a fee simple) is the more precise term for what we ordinarily refer to as “ownership” of a home. The owner of the freehold interest has full use and control of the land and the buildings on it, subject to any rights of the Crown, local land-use bylaws, and any other restrictions in place at the time of purchase.

Strata Title – The strata title form of ownership is designed to provide exclusive use and ownership of a specific housing unit (the strata lot) which is contained in a larger property (the strata project), plus shared use and ownership of the common areas such as halls, grounds, garages, elevators, etc.

This type of ownership is used for duplexes, apartment blocks, townhouse complexes, warehouses, and many other types of buildings. In addition, some single family home developments may be part of a bare-land strata development. Because ownership of the common space is shared, the owners also share financial responsibility for its maintenance.

Leasehold – In some cases, you might purchase the right to use a residential property for a long, but limited, period of time. The owner of this right of use has a type of ownership called a leasehold interest.

This type of ownership is used most often for townhouses or apartments built on city-owned land. It is also used occasionally for single detached homes on farm land, on First Nation reserves, and for apartments where the owner of the freehold interest of an entire apartment block sells leasehold interests in individual apartment units to other “owners.”

Leasehold interests are frequently set for periods of 99 years, but regardless of the length of the original term, you will only be able to purchase the remaining portion. Of course, the shorter the remaining portion, the less you, or the person who eventually purchases from you, will be willing to pay for the leasehold interest.

Cooperative – In the cooperative form of ownership, each owner owns a share in a company or cooperative association which, in turn, owns a property containing a number of housing units. Each shareholder is assigned one particular unit in which to reside.

What Can You Afford?

Before you start looking for a new home, it is important that you become aware of how much you can afford to pay.

This will allow you to spend your valuable time looking productively at homes which are within your predetermined price range. You can calculate a relatively accurate figure for yourself if you assemble the following information:

$ _____ The cash you have saved to be used for this home purchase is called the down-payment.
$ _____ Plus: The amount of borrowed money you are able to arrange.
$ _____ Less: Closing costs and other “last minute” costs associate with the real estate purchase.
$ _____ Equals: Maximum Price

The Down-Payment

Lending institutions will usually require you to make a down-payment of at least 5% to 10% of the purchase price of the home. Lending institution policies may vary from time to time.

As a general rule, you should make your cash down-payment as large as possible. Your deposit for the real estate transaction may form part of your down-payment.

Borrowed Money

Almost everyone who purchases a home borrows some of the money needed to pay for it.

The easiest way to determine how much money you will be able to borrow as a mortgage loan is to consult with one or more lending institutions. These lenders will apply standard tests, based on your family’s current income and debts, in order to decide the amount of money they will lend to you.

They will ask for information about your finances and make a thorough credit check, in order to be sure you are able to repay a loan.

A Mortgage

Obtaining a loan to finance the purchase of your new home will probably require you to sign a document called a mortgage. This document will set out the terms and conditions for the loan and its repayment.

If you fail to meet your debt obligations, the lender may have the right to claim your home to pay off what you still owe.

Types of Mortgage Loans

There are two basic types of mortgage loans:

• A conventional mortgage loan allows you to borrow up to 75% of the purchase price or the appraised value of the home, whichever is less.
• A high-ratio mortgage loan allows you to borrow more than 75% of the purchase price or the appraised value of the home, whichever is less. But the borrower must pay a mortgage default insurance premium to protect the lender if payments are not made.Check with your lender to find out the amount of the insurance premium.

Amortization Period

Typically, the size of a mortgage loan payment is calculated as if the loan payments were going to be paid over 20 or 25 years. This is called the amortization period.

Each payment will repay the interest due up to the payment date along with some of the principal owed. The longer the amortization period you choose, the lower the regular payment will be.

Keep in mind that the faster you repay any money borrowed by choosing a shorter amortization period, the more you reduce the total cost of borrowing.

What Is a Term?

Most mortgage loan contracts only permit the regular payments to continue for a specified term which is shorter than the amortization period. The term can be as short as six months or it can be five years or more.

At the end of the term, you are required to repay the full unpaid balance. If you don’t have the cash required to pay the balance, it may be necessary to refinance the loan.

Deciding on the length of term you want will depend partly on whether you think interest rates will go up or down. Keep in mind that the longer the term you choose, the longer your monthly payment remains stable.

CAUTION: The lender is not obligated to renew your mortgage loan at the end of the term.

How Much Can You Afford to Pay in Mortgage Payments?

Based on your Income:

A general guideline is to allow no more than 30% of your gross monthly income (before deductions) to make your monthly housing payments. This test of your ability to repay a mortgage loan is generally referred to as the Gross Debt Service Ratio.

Complete the following calculation to determine the approximate amount you may be able to afford for the mortgage payment, the property taxes and, where applicable, 50% of the strata maintenance fees.

Some lenders will require that this total maximum monthly payment also covers heating costs.

• Your gross monthly income $____
• Co-signor’s gross monthly income (if applicable) $____
• Other income (monthly) $____
• Total monthly income $____
• Multiply the Total line above by 30% to calculate your: Total monthly maximum housing payment $____

Based on Your Other Financial Obligations:

If you have other monthly financial obligations, such as car or credit card payments, the lending institution will also apply the Total Debt Service Ratio test to determine the maximum mortgage loan for which you can qualify.

$ ____ Your monthly housing payment
$ ____ Your calculated monthly debt payments (car, credit card, etc.)
$ ____ Total monthly payment

A general guideline should be that the total of your monthly housing payment added to your other monthly debt payments should not exceed 40% of your monthly gross income.

The Gross Debt Service Ratio and the Total Debt Service Ratio tests protect both you and the lender by ensuring that you do not take on more debt that you can reasonably afford to repay.

Many lending institutions will prequalify you for a specific size and type of mortgage loan before you begin searching for your new home. Taking the time to apply for a pre-approved mortgage will give you the security of knowing how much you can afford to spend.

Before concluding the loan agreement, most lending institutions will require an appraisal of your selected home.

The appraised value is a professional opinion of the value of the home and may differ from the purchase price you are willing to pay. The appraised value may affect the approved value of the loan.

Closing Costs

It’s easy to count your available cash, but remember that all of these cash savings cannot be used as your down-payment. There are last-minute costs, such as taxes, legal fees, appraisal fees, moving expenses, and home insurance to pay before you are finally in your new home. The time to budget for those “end” expenses is now.

You must be prepared to pay most, and perhaps all, of the following closing costs.

Property Transfer Tax – The British Columbia Provincial Government imposes a property transfer tax, which must be paid before any home can be legally transferred to a new owner. Some buyers may be exempt from this tax. For further information, please view the Property Transfer Tax office website.

Goods & Services Tax – If you purchase a newly constructed home, you may be subject to GST on the purchase price. There may be some rebates available depending on the value of the home. For further information, contact the Canada Revenue Agency at www.cra-arc.gc.ca.

Property Tax – If the current owners have already paid the full year’s property taxes to the municipality, you will have to reimburse them for your share of the year’s taxes.

Appraisal Fee – When the lending institution requires an appraisal of the home before approving your loan, it may be your responsibility to pay the appraiser’s fee.

Survey Fee – The lending institution may also require that a survey certificate be presented to them. The purpose of the survey is to formally establish the boundaries of the property and to ensure that all buildings are within those boundaries.

Lending institutions may ask for either a building location survey, which establishes where a building is located on a property, or a monumental survey, which establishes the actual boundaries of a property. If the current owner cannot provide a recent survey certificate, it will be your responsibility to pay the surveyor’s fee.

Mortgage Application Fee – Lending institutions may charge a mortgage application fee. This application fee may vary between lending institutions.

Mortgage Default Insurance – This type of insurance is required on most mortgage loans in excess of 75% of the appraised home value. Its purpose is to ensure that the lender will not lose any money if you cannot make your mortgage payments and the value of your home is not sufficient to repay your mortgage debt.

The insurance premium is paid to the lender and, in most cases, is added to the loan amount and paid for over the term of the loan.

Life & Disability Mortgage Insurance – At your option, you may purchase insurance which will ensure that your outstanding mortgage balance is paid if you die or become disabled.

Fire & Liability Insurance – The mortgage lender will insist that you purchase an insurance policy which guarantees that, in the event of fire, the lender will receive the balance owing on the mortgage loan before you receive any insurance proceeds.

Legal Fees – The transfer of home ownership from the seller to the buyer must be recorded in the Land Title and Survey Authority Office in order to protect the new owner’s interests.

You will probably want to engage a lawyer or notary public to act on your behalf during the completion of your purchase. The lawyer or notary public will charge a fee for this service, plus disbursements, including the Land Title Registration fee.

If you are financing your purchase with a new mortgage loan, there will be a further fee and disbursements to prepare and register the mortgage documents.

Other last-minute costs you shouldn’t forget to set some money aside for:

• Home inspection fees;
• Moving expenses;
• Deposits required by utility companies;
• Household goods, like appliances, and other equipment; and
• Redecorating or renovations.