Buying a home is a really exciting time! But it can be stressful too because of the uncertainty of costs and financing, moving, or maybe relocating to a new city. This article will help you prepare for those costs in advance. When you’re ready to buy, you can focus more on what’s really important- your first home purchase!
How Much Money Will You Need?
Before you buy, make a list of all potential expenses. Most people think about their down payment, renovation costs, and perhaps some moving costs. But there are legal fees, appraisal fees, a property inspection, property insurance, and possibly tax adjustments as well. And don’t forget things like appliances and window coverings; they don’t always come with the home!
The CMHC Site has an excellent, detailed worksheet for homebuyers.
The largest cash outlay when you’re purchasing a home is going to be your down payment. If you’re buying a home that you will occupy, not rent, then you will require a minimum down payment of 5% for amounts up to $500,000. For amounts over $500,000 you’ll need a 10% down payment, $1,000,000 or more requires 20%.
Example for a house valued at $550,000: $500,000 X 5% = 25,000, plus $50,000 X 10% = $5,000.00. Your total down payment required is $30,000.
Your down payment can come from your savings or investments, RRSP’s under the First Time Homebuyers plan, or it can be gifted. You can also borrow your down payment in some cases, but there are specific rules around this option that will need to be discussed with your lender.
When do you need to have your down payment in place?
Your mortgage lender will need proof of your down payment as a condition for approving the mortgage. This means you need to provide a statement of investments or bank statements for any funds that are not held with your mortgage lender. You also need proof that this money is coming from your own resources (unless gifted). Typically, a 3 month history of your bank account or investment statements is required.
All of your down payment money must be accessible the day you go to your appointment with the lawyer to sign your mortgage documents.
Gifted Down Payment
A Gift letter is required if your down payment is going to be a gift from family. Lucky you! A gift letter must state that the gifted down payment does not require repayment. Whomever is providing you the funds must sign it. Your lender requires that the gifted money is in your bank account 15 days prior to the closing date of your mortgage.
TIP✅ Make sure you know when your down payment funds are required and take steps to redeem any investments or make withdrawals from the RRSP home buyers plan in advance. Mutual funds require 24 hours to redeem and some self directed investments can take 4-5 business days before you get your money.
Property Appraisals are required by the lender that approves your mortgage. An appraisal report is not a full property inspection. It is a determination of the value of your property, taking into account the size, age, condition, and comparable sales in the area. The lender will order the appraisal for you, advise you of the cost, and collect the appraisal fee from you. The average cost for an appraisal is $350.00. It will be higher if the property is outside of an urban center because the appraiser will add on mileage costs.
If the property appraisal confirms that the value of the home you are buying is the same as, or higher than your purchase price, that’s good. But what if the property appraisal determines that the value of the property is less than what you are buying it for? Now you need to decide whether you still want to go through with the purchase. If you do, the lender may need more of a down payment. Generally speaking, appraisal values and purchase prices line up pretty closely during “buyers” markets or stable markets. But when demand is high as in a “sellers market” housing prices can get bid up and the purchase price ends up being higher than the property value.
Appraised Value Example
Let’s say you buy a home and the purchase price is $375,000. Your minimum required 5% down payment is $18,750. As long as the home appraised at $375,000 or higher the bank can approve your basic mortgage amount for 95% of the price which would be $356,250. But what if the property appraisal is $360,000? The bank can only lend you a maximum of 95% of the lesser of the purchase price or appraised value. So if the house is appraised at $360,000,your mortgage will only be approved for $342,000. This means you need a down payment amount of $33,000 if you still want to buy the home for $375,000.
TIP✅ Always make sure your offer to purchase has a clause in it that says the the offer is Subject to Financing. This gives you an out if there are any issues with your mortgage approval, including a lower appraised value. If your mortgage is declined after you have already paid an appraisal fee ask for your money back. You should not pay for a property appraisal unless the bank has approved your mortgage.
A Home inspection is usually not a requirement by the bank. Most buyers have home inspections completed for peace of mind. Take the advice of a realtor as to whether to get a home inspection, or if you have any concerns about the condition of the house you are buying. It’s a good idea when you’re buying an older home or if you notice anything that leads you to believe there could be issues with water damage, mold etc. New homes will have a New Home Warranty which may eliminate the need for a property inspection. Property inspection costs run around $500 and are at your expense. My advice on this is to make sure you have an experienced, reputable realtor and talk to them about the need for a property inspection.
Here’s an external link if you would like more information on Home Inspections.
Closing costs are the additional fees you pay for finalizing your mortgage with a lawyer. This includes title search and transfer, legal fees, and property tax adjustments. The costs and requirements vary from province to province. Title fees and taxes will be the same no matter which lawyer you deal with, but the legal fees can vary. Shop around a bit and get a referral for a good law office.
It is recommended that you have 3-4% of the purchase price of your home to cover all the closing costs. Your lender will require proof of 1.5% of the purchase price cash on hand to make sure you can cover the costs to finalize your mortgage. If you are purchasing an acreage there may be additional fees required for well/water certificates.
Property tax adjustments may be required. The adjustment amount depends on the purchase date, when the taxes are due, and how much of the taxes have been paid by the current owner. For example, if the city collects property taxes each year in January and the owner of the property has paid the taxes in full, the taxes have been prepaid for the year. Let’s say you buy the house in June. You will need to pay the owner for the 6 months of taxes they have prepaid. Your lawyer will calculate and take care of the tax adjustment transaction. Every location is different, in some locations taxes are paid monthly and no adjustments are required. Ask your lawyer in advance so that you are prepared for this expense.
A home insurance policy covers costs due to damage from fires, floods, vandalism etc.. It’s not only a smart idea, it’s required for any mortgage financing. The cost of the policy varies among the provinces. The prices also depends on the replacement cost of the home and insurance features you choose. On average, the cost is about $1200 per year and you can pay monthly so plan for an initial cash outlay of $100.00.
Mortgage Default Insurance Fees
Mortgage insurance premiums are not an out of pocket cash expense when you are buying a home. The fee is added into your mortgage. You’ll want to understand how insurance premiums will impact the size of your mortgage and therefore the amount of your payments. Mortgage insurance is usually only required if you have less than 20% down payment when you buy your home. The amount of the insurance premium is calculated based on the percentage of your down payment and the amount of your mortgage – called loan to value ratio. The loan to value ratio is calculated as the percentage of your mortgage amount to the value of your home.
Loan to Value Example
If you buy a $400,000 home with a 5% down payment your down payment = $20,000. Your basic mortgage amount = $380,000. Your loan to value ratio is calculated as $380,000/$400,000 = 95%.
The insurance premium will be calculated by your mortgage lender and is added to the mortgage. The higher your down payment, the less your insurance premium.
Here’s an external link for information on Mortgage Default Insurance Premiums.
Figuring out the initial costs is one big step before you start house shopping. Another step is to have your mortgage Pre-Approved. If you’re a first time homebuyer I’d recommend reading this post, 6 Reasons to get a Pre-Approved Mortgage, and Steps to Getting a Mortgage.
Comments and questions are welcome!