First Time Home Buyer Guide

First Time Home Buyer Guide

Getting a mortgage and buying a home can seem like overwhelming tasks, especially if you are a first-time home buyer. We understand completely because, after all, we have been in your shoes before. That is why we have put together this guide that introduces and links to the information we wish we had known before we first purchased real estate. It is offered here as part of our commitment to providing the best and most comprehensive Canadian mortgage resource online. Use this guide as a brief overview of the most important things you need to know about mortgages in Canada, and click on the links for a more detailed guide to each topic.

Mortgage Documents

Applying for a mortgage is a paperwork-intensive process even in this digital age. You must prove your income and assets in order to get a loan, and the lender will also take your debts into consideration before approving your mortgage. In turn, you will receive many documents that you must keep if you want to take advantage of tax benefits later on. When you know the documents that are required to qualify you for a mortgage and how you can keep them organized, you can speed up the entire loan process.
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Fixed vs. Variable Mortgage Rates

Brokers and lenders will present to you a wide variety of different mortgages. The kind of mortgage rate that each mortgage offers is perhaps the main factor that sets one mortgage apart from another. With a fixed-rate mortgage, your interest rate never changes during your loan term. The rate on your variable-rate mortgage, on the other hand, may change monthly. Which rate is better for you? Which rate will save you more money? The answer all depends on your present situation and future plans.
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Mortgage Term vs. Amortization

When talking with your lender or broker and reading loan documents, you will hear about your mortgage term and amortization period very often. Your amortization period is the contracted length of time it will take to pay off your loan. The mortgage term is the contracted period of time that you are bound to an interest rate and other loan terms. You will probably have several mortgage terms over the course of your loan amortization, but you can pay off your loan early by making the right decision about your loan terms and paying your lender just a little bit over and above your minimum mortgage payment each month.
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CMHC Mortgage Insurance

Many people still believe that they must have a 20 percent down payment to buy a home. However, while a 20 percent down payment is still the ideal that most people will want to aim for, it is possible to get a mortgage in Canada with as little as 5 percent down. If you have a down payment that is between 5 and 20 percent, you can qualify for a loan, but you will have to pay for CMHC mortgage insurance that protects your lender in the case you default on your loan. The amount you pay for this insurance depends on the size of your down payment, and it is usually added to your total loan amount.
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Mortgage Broker vs. Bank

Traditionally, Canadians have worked directly with lenders to secure the mortgage of their choice. In recent years, however, an increasing number of Canadians have chosen to work with mortgage brokers, who act as middlemen between you and the banks. Essentially, mortgage brokers take your information and shop it around to several different lenders, and these lenders compete for your business, often giving you a better interest rate than you could otherwise obtain by working directly with a lender. Is it better to work with a lender directly or to choose a mortgage broker? You will have to read our guide on this subject to find out the answer.
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Mortgage Pre-Approval

Getting pre-approved for a mortgage before you go shopping for a home can save you a lot of time when you make an offer to purchase and seek the finalization of your loan. Sellers will take your offer more seriously if you are pre-approved than if you are not, which can give you a competitive advantage when several buyers are making an offer on the home that has caught your eye. Pre-approval is not a difficult process, but it does require some forethought and planning.
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Mortgage Down Payment

Most lenders will be unwilling to extend you a loan unless you can put a down payment of at least 5 percent on your home. The down payment is a sum equivalent to a certain percentage of the home purchase price, and you pay this down payment at the closing of your loan. The more you put down, the better off you will be in terms of loan length and your minimum required mortgage payments.
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Mortgage Prepayment

By paying extra toward your mortgage principal, especially at the beginning of your loan repayment period, you can drastically reduce your amortization period and pay your loan off well before the contracted period ends. As a first-time homeowner, however, there are sometimes limits on how much extra you can pay each year during your loan term. If you exceed this amount and your loan has prepayment restrictions, you will be charged extra fees. If you follow the rules of a more limited prepayment plan, however, you can still shave years off of your amortization period by following a prepayment plan.
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Mortgage Closing Costs

When you close your loan, you will sign many documents to have your mortgage funds dispersed to the seller and to take possession of your new home. You will also be required to pay closing costs that cover such things as legal fees, home inspection fees, the land transfer tax, and more. It is important to understand these costs and to be prepared to pay them at closing. If you are lucky, you might even get the seller to pay them for you.
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Land Transfer Tax

Your provincial, territorial, or municipal government requires funds to provide public services such as police protection and the fire department. In Canada, the provinces and a few municipalities such as Toronto acquire these funds through the Land Transfer Tax levied on home buyers. Also known as the Real Property Transfer Tax, Deed Transfer Tax, Land Transfer Title Fee or the Registration of Deeds Title Fee, the Land Transfer Tax you are charged varies according to your locality. Fortunately, many provinces and municipalities offer at least a partial refund of the Land Transfer Tax to first-time homebuyers.
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RRSP Home Buyers’ Plan

As a new home buyer, you should know that there are several sources from which you can draw funds for your down payment. One of the most frequently overlooked sources is the RRSP Home Buyers’ Plan. If you qualify as a first-time home buyer, you can borrow a certain amount from your Registered Retirement Savings Plan to fund your down payment. By law, you must pay back the funds you borrow from your RRSP within a designated time frame. Essentially, you are lending money to yourself, and some people even use the plan to create a guaranteed return on their money.
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First-Time Home Buyers’ Tax Credit

Since January 2009, the Canadian government has offered a tax credit to those who qualify as first-time home buyers. Even if you have owned a home in the past, you may qualify as a first-time home buyer according to the rules for the tax credit, which reduces your income tax in the tax year that you buy your home. Persons with disabilities qualify for the tax credit at any time. What are the rules for the first-time home buyers’ tax credit, and how do you take advantage of it? This section of our first-time home buyer guide will answer these questions for you.
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Self-Employed Mortgage

If you are self-employed, the rules and standards for mortgages apply a little bit differently to you than they do to those who work for other people beside themselves. Because your income can be unpredictable, lenders have stricter standards by which they evaluate your creditworthiness as a self-employed individual. Nevertheless, there are many programs and tips that can help you get the mortgage you want at a price that is affordable.
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Co-Signer for Your Mortgage

Even if your credit is less than stellar, you can often be approved for a mortgage if you have a mortgage co-signer. A mortgage co-signer stands alongside you and guarantees the lender that he or she will pay your mortgage if you somehow become unable to do so yourself. Not everyone, however, qualifies to be a co-signer, and there are special steps that you and the co-signer must follow to gain final loan approval.
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Offer to Purchase

Once you have found the home that you have been looking for, you have to make an offer to buy it from the seller and negotiate the terms of the sale. You do this with the offer to purchase, a legal document that outlines the conditions and requirements for the property sale to go through and binds both parties to an agreement once the buyer and the seller sign the offer.
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