Mortgage Basics

How To Buy A Home In Canada

How To Buy A Home In Canada
Written by
  • Ashley Howard
| 16 May 2023
Reviewed, 12 June 2023

Table of contents

    You finally think you might be ready to buy a home. You’ve been looking at listings and comparing your possible mortgage payments versus your current rent. You feel like it’s time, but you just don’t know how to get started beyond dreaming about living in one of those homes you’ve bookmarked.

    Buying a home can be an exciting experience, but it’s easy to get caught up in this excitement and miss some steps along the way. If you feel ready to take on homeownership, this simple guide will help you prepare everything you need to feel confident about your decisions.

    Key Takeaways

    • Before you start, determine if you are financially stable and ready for homeownership by assessing your downpayment, income, and credit score.
    • Once ready, familiarize yourself with the mortgage process and check your eligibility for first-time homebuyer incentives. 
    • Ensuring you have a budget and a professional lined up to help you stay on top of changes to the current housing market.

    Here’s How To Determine When You’re Ready To Buy A Home

    First, you should assess your financial situation. This will help you understand whether you are ready to dive into homeownership. 

    Is Your Downpayment Ready?

    First, you should assess how much savings you have on hand. Typically you will need 5-20% of the purchase price ready to go as a downpayment. Knowing what you have available as a downpayment now or what you can save in the time it takes to find the perfect home will give you a better idea of where you stand financially. Sometimes, the home’s purchase price may dictate how much you must put down.

    Additionally, you will need to budget for closing costs. Typically you should expect to budget 3-5% of the purchase price and set that aside as a buffer to cover closing costs. Closing costs can range from anything to do with legal fees, land transfer tax, and administrative expenses – all of which can’t be rolled into the mortgage.

    Do You Meet The Income Requirements?

    Income is an essential qualifying factor when assessing your mortgage eligibility. If you have a steady income, it will be easier to qualify. Suppose you already have proof of employment and payslips to prove you can sustain monthly and unexpected expenses. In that case, you’re one step closer to being qualified for a mortgage and becoming a homeowner. 

    There are also two ratios you may have heard of gross debt service (GDS) and total debt service (TDS). These ratios help to determine your ability to repay the mortgage and ensure that your total debts from homeownership won’t exceed a percentage of your before-tax income. These ratios will also determine how much money a lender will lend you for the mortgage. You will want to keep your GDS at or below 32% for uninsured mortgages and at or below 39% for insured mortgages and the TDS at or below 40% for uninsured mortgages and 44% for insured mortgages. 

    Is Your Credit Score Good?

    Your credit score indicates your ability to pay all your bills and debt obligations consistently. Lenders will use your credit score to assess the amount of risk they may face by giving you a mortgage. Typically, the better your credit score, the better your chances of being approved for a mortgage. Now is the time to check your credit score, and if it’s not where you would like it to be, make some changes to boost it

    How To Buy A Home In Canada, Step By Step

    Save For A Downpayment 

    So you’ve assessed your financial situation and realized you might not be exactly where you need to be to get your dream home. The first step in saving up for a downpayment is to assess your current expenses and see if there are any areas that you can cut back on or set up a budget for discretionary items to free up additional cash. 

    Now that you’ve freed up some additional cash, saving for a downpayment can be made easier by starting with a monthly pre-authorized contribution (automatic transfer) into a savings account or a tax-free savings account (TFSA) on your payday. This way, you are saving without making an effort, and besides, it’s always harder to spend something when it’s not in your chequing account. 

    The home buyers plan (HBP) allows you to borrow up to $35,000 from your Registered Retirement Savings Plan (RRSP) accounts to make your downpayment if you’re a first-time homebuyer (FTHB). Even better, if your employer offers an RRSP matching program, taking part early on could be another great way to save for a downpayment more quickly.

    Pay Down Your Debts

    Assessing and prioritizing paying down or paying off your debts will help provide better financial security and make you more favourable to lenders. Determine what you owe on things like credit cards, car loans, and other debt instruments like lines of credit and aim to pay down the debts with the highest interest rates first, then look at your other current low-interest debts. 

    Reducing the amount of debt you currently carry will help improve your TDS ratio, which you will need to pay attention to because a lower TDS makes it more likely that you will qualify for a mortgage. Additionally, your debts are netted against your savings to confirm your total downpayment. This means your debts will reduce the amount the lender will consider as savings you can use towards your downpayment.

    Prepare Your Docs

    Now is when you will want to ensure you have all your documents in order so you’re not scrambling last minute or caught off guard when the lender asks you for them to support your mortgage pre-approval or approval. 

    These documents are used to support the application by showing your financial stability. The documents you might be asked to provide include a statement of remuneration paid (T4s), recent paystubs, letters of employment, notices of assessments (NOA), and any other proof of income you may have from sources such as investments, freelance work, or other business income. 

    If you are receiving money as a gift from family, you must also have a letter stating who the funds are from and that the gift is a gift, not a loan. The lender may provide you with their form instead of a personalized gift letter. You may also be asked for bank statements proving that all funds in your accounts you wish to use as a downpayment has been in your account for 90 days to satisfy anti-money laundering (AML) requirements. 

    Check For First-Time Homebuyer Incentives 

    Various programs and grants are available to first-time homebuyers to help offset some of the initial costs of becoming a homeowner. These programs and grants sometimes vary by province and city, so it’s vital to ensure you are aware of all the options available to leverage. 

    Additionally, the federal government announced a new tax-free savings account for first-time homebuyers called the First Home Savings Account (FHSA) that has recently launched across many banks that allows you to contribute up to $8,000 a year for a maximum amount of $40,000 that can be used to purchase your first home. 

    Shop For The Best Mortgage Rates 

    Shopping around for the best mortgage rates and comparing each lender’s rates and terms will help you choose the one that fits your financial situation and budget the best. It’s important to keep in mind that the best rate may not always be the one that works best for you, so you should also keep an eye out for other features that lenders offer beyond just the rate.

     Ensure you compare lenders’ restrictions for refinancing and porting and prepayment penalties if you ever need to break the mortgage or, say, you come into some extra cash and want to make a prepayment. Even if you aren’t looking at the most competitive rate available, having more favourable terms could add significant cost savings and provide much-needed flexibility if your financial situation changes. 

    Find A Home Within Your Budget

    Setting and sticking to a budget is important when looking for a home. It’s easy to get emotionally attached to a home and find yourself caught up in bidding wars that could overleverage you – or worse, have you lose your deposit because you can’t qualify for the mortgage amount. 

    Establishing a budget that you can stick to will help you more easily get approved for the mortgage and allow you to maintain a buffer for any unexpected costs that might come up in the future. Figure out exactly how much you are willing and able to spend and set a maximum limit to avoid any potential for going over budget. 

    Make An Offer

    You’ve found the perfect home that checks off all your boxes. Now it’s time to make an offer. This can be one of the most stressful parts of buying a home. Multiple people may be interested in the same home and putting in offers. Here is where you will need to put your negotiating skills to the test. 

    Before jumping into an offer, make sure you have assessed the local real estate market and know what similar homes in the neighbourhood have recently sold for. Your real estate agent should be able to provide you with comparables to help you decide on the amount you want to offer.

    Get A Home Inspection

    Home inspections are essential to buying a home. Home inspections will ensure that your dream home is structurally sound and has no potential surprises. These inspections check for things like cracked or shifted foundations, plumbing issues, faulty wiring, mould, and any other potential issues in the home. All these issues could add up to some hefty repair bills if not identified and repaired before purchase.

    Close The Deal!

    Your offer has been accepted, and you’re now a proud homeowner. On closing day, you will take possession of your new home, but before that happens, you must remember a few things you will need to prepare beforehand. Most importantly, be sure to call your insurance broker and set up homeowners insurance to come into place for the day that you take possession of your home. Be sure you set up mail forwarding to your new address and transfer or set up utilities in your name. You’ll also want to ensure you have changed your address with your banks and government department.  

    In preparation for moving day, you will also want to sort out how you plan to get your possessions to the new home. Do you need to book movers? This will need to be done in advance to make sure they have availability on your move-in date. You’ll also need to start gathering boxes and packing materials and begin packing to avoid any last-minute stress.

    Final Thoughts

    Becoming a homeowner is an exciting milestone many aspire to achieve. However, assessing your financial situation and familiarizing yourself with the mortgage process is crucial before embarking on this journey. Doing so will help you avoid any surprises that could put your dreams on hold. 

    Once you understand your financial situation and the home-buying process, finding a trusted realtor and mortgage broker who can guide you becomes much easier. With their help, you can navigate the complexities of the mortgage process and find the home of your dreams with confidence and ease.