Marian Ferguson

Personal Economics for Buyers

Before you begin serious searching for a home, you need to make sure that your finances are in order. Will you be able to get the mortgage for the house you purchase? Will you be able to come up with the downpayment? How much can you actually afford?

There are a few things you can do to ensure that your finances are in order when it comes time to pay for your house:

1. Check Your Credit Rating

If you have ever borrowed money or applied for a credit card or personal loan, you will have a credit file. You could be denied a mortgage based on the contents of your credit file. It is advisable to periodically check your credit file for mistakes. Obtaining your credit file is fairly simple, and it’s free.

Your credit report has a surprising amount of detail and it contains a long history. For each loan you’ve obtained over the past 6 years, there are details such as whether you pay on time, how much you owe, credit limits, and anybody whose has accessed your file.

You can ask for a free copy of your credit history 1 time per year. There are two main credit bureaus: Equifax Canada and TransUnion Canada. The free copy comes by mail (you will be required to pay a fee for instant online access of your report).

2. Get a Mortgage Preapproval Letter

It’s a good idea to talk to your mortgage lender or mortgage broker well before making an offer to purchase. Being pre-approved for a mortgage is beneficial for several reasons:

You’ll know how much you can borrow. For most prospective Purchasers, obtaining a mortgage is a necessity. You might have a rough idea of how much you would be comfortable paying each month on the mortgage, however, you might not be qualified to borrow as much as you think. Lenders take into consideration your income, debts and credit history. Knowing how much you can borrow will allow you to calculate your price range and search for homes that you can afford.

You’ll increase your leverage during negotiations with a seller. Your offer will have more weight if the Seller knows you are financially qualified to obtain the required funds. Preapproval may give you the advantage during a ‘bidding war’ where the seller must decide between similar competing offers. You may also choose to present an offer without making it conditional on obtaining financing for an extra advantage.

You’ll reduce some of your anxiety when putting in an offer. With a preapproved mortgage, you’ll be confident that you can obtain a mortgage.

You’ll secure an interest rate Another benefit of using a pre-approved mortgage is you secure an interest rate for 90-120 days and, should interest rates rise, you will be able to keep your pre-approved rate. Should rates fall, you can take a lower rate.

There is some confusion between a Pre-Qualification letter and a Pre-Approval letter. A pre-qualification letter is very easy to obtain. You just need to provide some basic financial information to a lender by phone or via a website. No verification of your information is performed. On the other hand, a pre-approval letter does require verification of your financial information. For instance, the lender will require written proof of your employment, the source of your downpayment, and other financial information. Accordingly, a pre-approval letter carries a lot more weight than a pre-qualification letter. Do not confuse the two.

Please be aware that there are a few caveats concerning Pre-Approval letters:

Pre-approval letters are not binding on the lender. The lending institution may decide not to honour the contents of the pre-approval letter if your financial situation changes from the time the preapproval was granted. Such changes include losing your job and incurring new debt such as leasing a car or large credit card bills.

Pre-approval letters are subject to an appraisal of the home. The lending institution will appraise the home you want to purchase to make sure that you have not over-paid for it.

Pre-approval letters are time-sensitive. Preapproval letters have an expiration date to protect the lending institution against unfavourable changes in interest rates.

A Pre-Approval letter does not guarantee approval for mortgage loan insurance. The mortgage loan insurer (e.g. CMHC) will have its own set of criteria to determine if you qualify.

3. First Time Buyers – Plan to use your RRSP for the downpayment

The Home Buyer Plan (HBP) is a program that allows you to withdraw up to $25000 from your RRSPs to buy a home. RRSP withdrawals used as part of the HBP will not count as income and your RRSP issuer will not withhold tax. If you buy a home together with a spouse or common-law partner, each can withdraw $25000 for a total of $50000.

HBP is only for first time home buyers and the home must be used as the principal residence. You are not considered a first-time home buyer if you or your spouse owned a home that you occupied as your principal place of residence in the past 5-years.

To get the the tax break for a contribution to the RRSP and to use those funds under the HBP, the money must be in your RRSP for at least 90 days before a withdrawal is made. If you (and/or your spouse) have remaining contribution room, top up your RRSP to $25,000 so you can use the full amount of the HPB. Pre-planning is necessary – contributions to the RRSP must be made at least 90 days before you plan to withdrawn the money for the downpayment.

Also, if you don’t have the money to top-up the RRSP to the $25,000 limit, you can borrow the money, repay the loan after 90 days, and then use the resulting tax refund for a downpayment. Please be advised that this strategy can be detrimental if your debt load hinders your ability to obtain a mortgage. Please talk to a financial advisor for more information.

You can read the Canada Revenue Agency’s Home Buyer Plan publication for a complete set of conditions and rules.