First Time Home Buyer Mortgage

“First Time Home Buyer Mortgage Financing Considerations”

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As a first time home buyer seeking a mortgage to purchase a home, the whole home financing process can be a bit intimidating largely due to the fact that you’ve likely never had to deal with it before.

But like everything else, there is a basic level of knowledge to obtain to understand what amount and type of residential mortgage program makes sense for you and your family and a basic process to follow to get the best possible results.

There’s more to mortgage financing than posted interest rates. And having a good understanding of the key lender requirements will go along way in achieving your buying objective.

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Here are some home buyer mortgage tips or considerations for those that fall into the first home buyer category.

Determine How Much You Can Afford

The first step in securing a loan from a mortgage lender is to determine what amount of financing you can afford.

This exercise needs to take into account all the money coming in during the months minus all the expenses and payments you need to make. This will also need to include cost estimates that relate to home ownership such as property taxes, home maintenance, insurance, etc.

From a mortgage lender perspective, only a portion of your gross income can be used to make monthly mortgage payments as well as service other debts.

The current industry standards include the Gross Debt Service (GDS) ratio, which states that no more than 30% to 32% of your gross annual income should go towards paying or servicing the combination of mortgage payments, property taxes, and heating costs (condo fees would be added in as well if you were looking at purchasing a condominium unit), and the Total Debt Service (TDS) ratio, which states that your gross annual income needed for all debt payments should not exceed 37% to 40% of your gross annual income.

If more than one person is applying for the mortgage, like in the case of a husband and wife, the combined incomes of both individuals usually considered when determining these ratios.

The combination of the money you require to live and the debt servicing requirements of the lender will determine the amount of mortgage financing you can afford.

Mortgage Down Payment Options

A mortgage down payment represents the amount of money you are putting against the purchase price and represents your equity in a completed purchase transaction.

The amount of money you have for a down payment will impact the amount of mortgage financing you can receive and the type of mortgage program you can qualify for.

As an example, a conventional bank mortgage requires a minimum cash down payment of 20%.

For down payment amounts under 20%, insured mortgages are available through most mortgage lender programs. An insured mortgage can work with a down payment as low as 5% while keeping in mind that this will also result in higher carrying costs over time compared to the conventional mortgage as the one time mortgage insurance premium is added to the principal of the mortgage.

Mortgage Closing Costs

Along with the purchase price for acquiring a home, there can be a number of closing costs that collectively tend to range between 8% and 10% of the purchase price on average. In order to complete a home purchase, you’re also going to have a source of funds available to cover these mortgage closing costs which can include such items as:

  • Appraisal Fee to be paid to a third party appraiser working on behalf of the bank to verify the fair value of the property.
  • Mortgage Insurance Premium.  If you require mortgage insurance, the mortgage premium can be added to the principal balance at closing.
  • Sales Taxes that result from a new home purchase are due and payable at the time of closing.
  • Bridge Financing.  If you have not sold your existing home before your new home purchase is completed, a bridge financing arrangement may be required.At closing, the interest costs related to the bridge loan will be due and payable.
  • Interest Adjustment Cost.  If you close your mortgage in the middle of a month, the lender may require an interest adjustment be paid a few weeks earlier than when you are expecting to make your full initial mortgage payment.
  • Legal Fees are the responsibility of the borrower as you must retain your own lawyer to close the sale of the property and complete the mortgage.
  • Title Insurance is typically required by the mortgage lender to make sure there are no issues in the future with respect to your ownership in the property and their mortgage registration position.
  • Land Transfer Tax.  Depending on where you live in Canada, you may be required to pay a one time land transfer tax calculated on the total amount of the purchase price.
  • Township/Municipal Levies.  If you are purchasing a new home within a subdivision, you may be charged a levy for such items as school taxes, planting trees, and so on until such time as these costs are taken over by the town or municipality in which you live.
  • Utility Bills, Property Taxes, And Other Monthly Property Related Costs are adjusted at closing to either reimburse the seller for prepaid amounts or for the seller to pay amounts that have accrued during their time in ownership but not yet paid.
  • Certificate of Location. Mortgage providers may require that a lawyer or notary verifies that the current certificate on record accurately reflects an improvement done to the property and if the certificate is deemed to be out of date, then costs will be incurred to obtain the appropriate certificate.

While these are the most common types of closing costs you’re likely to see, also keep in mind the costs you are going to incur to get moved into your new home as well as any repairs or renovations that will be required right away.  As a first time home buyer you may need to purchase lawn and garden tools as well as other items you’re going to need to maintain the property.

With a good handle on the costs that are going to be relevant to most purchases you will consider, you can then construct a basic cash flow to determine what amount of mortgage financing is going to work best with the amount of money you have to work with.

One of the best ways to work through this process is to work with an experienced mortgage broker who can answer all your questions as they occur and help make sure that you’re considering everything that’s relevant to your particular situation.

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