My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
And so the search begins…..
It goes without saying that home ownership is an enormous financial responsibility, and like many other individuals, I agonized over how my husband and I would be able to afford it. What eased our anxiety was coming up with a manageable monthly amount that we would be able to pay towards a mortgage. We created a realistic budget listing all our expenses to evaluate how much we could afford to spend on our first house without stressing out about the big number. The rough amount that we arrived at is one with which we are comfortable based on our lifestyle. I would suggest that this budget take into account unexpected emergencies or financial difficulties. Lenders advise that the ratio of your debt (including housing payments, car payments, credit cards and utilities) to your income should not exceed 40 per cent of your monthly income.
Online mortgage calculators are a useful tool found on the web pages of CHMC, major banks and lending institutions. What was frustrating though was that they work on the premise that you have a house in mind and know what the mortgage, property taxes and heating will cost. To plug in the numbers, I looked at the feature sheets of recently available homes in my desired neighbourhoods that I was able to obtain from the MLS, on the websites of local real estate agents and of course from open house visits. While the results of your qualifying mortgage will not be precise, at least they will be a reasonable estimate of what you can afford.
My next step in arriving at our financial big picture was to get a pre-approved mortgage (PAM) by talking to a couple of banks and mortgage brokers to determine how large a mortgage we could carry and what lending rate we could obtain. A PAM is a financial lender’s guarantee of a particular lending rate for a specified period of time, usually 90 days, based on your income, down payment and existing debts. A note of caution though with pre-approvals. We learned from a realtor that multiple credit checks can be detrimental to your credit rating. If several banks or brokers will be conducting a credit bureau check, do advise each organization about the multiple reference checks. Some lending institutions can also evaluate your mortgage circumstances based on the information you provide without doing a hard credit check.
The standard mortgage discount seems to be 0.9% below prime to 5.35% on a variable mortgage and a 1.5% discount to 5.74% on a fixed rate mortgage. Do shop around though as your assets and liabilities may impact your ability to negotiate a better deal. Incidentally, ING offers the same rates I found upfront without any haggling; they seem to have a very competitive mortgage product.
Rather than approach banks individually, you may consider using a mortgage broker. These are companies which have the ability to negotiate with a large number of different lenders and are often able to offer a lower rate at a bank than the average person. There is no cost for the services of a mortgage broker as it is the lender whose deal you accept which pays the broker. The Financial Services Commission of Ontario has a list of registered mortgage brokers on their website.
My husband and I have decided not to go the mortgage broker route yet as we have a PAM with a reasonable rate. We will be checking with other banks as we also want to determine what rates we can negotiate as we are also thinking of moving over our line of credit and bank accounts. The other thing that we learned is that you may be obliged to use a mortgage broker that does a full PAM and rate comparison for you even if you do eventually find a better rate elsewhere. Not sure about the veracity of this information; however it is something to verify upfront with a mortgage broker. As it could be months before we find a house, we are taking our time about finding a better rate since our PAM is reasonable and will help us be competitive in the case of a bidding war.
Read the next post in this series “Down Payments and Financing“.