Money Isn’t Everything! With a little legwork and some innovative financing you may be able to buy your first home with very little or NO Cash.
Nobody likes flushing money down the drain but that’s what you’re doing when you hand over your rent money every month. The moment it leaves your hand your money is working for someone else and not building equity for you and your family. If you feel it’s time to own your own home here are some things you need to know before you make your first move.
So you have NO CASH?
If you have a good income and credit but lack the cash required for a down payment and closing costs (closing costs are: legal fees, disbursements, Land Transfer Tax) contact your mortgage broker/lender to review your options.
THE SELLER may be willing to help finance the deal!
There are sellers out there who are willing to help you with the financing and sellers who are willing to “take back” financing (let you pay monthly on a mortgage with no down payment and low closing costs). They might be hard to find, but if you can find a seller willing to help you out it may be the key to getting into your own home.
Have you thought about EQUITY SHARING with family members or investors?
An equity sharing arrangement gets YOU the cash for the down payment while your partner gets a share in your home. You make the monthly payments, pay the taxes and live in the house. In time you will either buy out your partner or sell the property and split the profits accordingly.
Have you been contributing to a RETIREMENT or PENSION PLAN?
Don’t forget you may be able to get a loan for your down payment by borrowing against your retirement plan, or you may be able to withdraw enough cash from your plan to use for a down payment without penalties or taxes.
What if you have SOME CASH?
If you have sufficient funds for the minimal down payment (5%) plus closing costs (approximately 2% of the value of the property you are purchasing) you might qualify for an insured mortgage. Your mortgage broker or bank will be able to assist you and provide you with the informatin you require to move forward with the purchase of a house/condo.
If you’re buying a NEW HOME you may be able to obtain a low down payment financing plan from the builder!
The builder might have an arrangement with a lender (usually a bank) for mortgages. you will still need to qualify and have a down payment and closing costs.
LEASING WITH AN OPTION TO BUY
If your credit history isn't where it should be, you might have difficulty in securing a mortgage. You might find a seller that is willing to rent a property to you and then a portion of the rent is used as a down payment or future ownership. Not highly recommended.
What do you do if you are lucky enough to have ALL THE CASH you need?
Having cash puts you in a strong negotiating position; you may be able to negotiate a better price because you represent a simple transaction and a “sure thing” for the seller. Your real estate salesperson will be able to assist you with the proper clauses when you are ready to make an offer.
How do you know WHAT SIZE MORTGAGE you qualify for?
Lenders usually use a formula based on a percentage of your gross monthly income (before taxes) to calculate the maximum amount you can borrow for a mortgage.
What affects this amount?
The size of your down payment and your total debt picture including your revolving debt (credit cards, other loans etc.).
What can you do to INCREASE THE MAXIMUM AMOUNT you can borrow?
Reduce your debt (pay off credit cards and other loans) to improve your income-to-debt ratio. This small step can qualify you for a larger mortgage... and a better home!
What exactly is considered INCOME?
Income can be more than just wages, don’t forget to include bonuses, commissions, overtime, seasonal, part-time, social security and pension income, dividends, interest, alimony and child care payments, rental income.
What if you want to BORROW MORE than “they” say you can afford?
You may be able to qualify for a higher mortgage if you can prove that you have been making regular, on-time rent payments that are higher than the maximum allowed. Its important that you review your needs with your lender.
Smart financing can INCREASE THE AMOUNT you can borrow!
Flexible (variable) mortgage (as opposed to fixed rate) can lower your monthly payments - speak with your lender to determine whether variable or fixed mortgage payments are best for you.
Don’t forget TAXES & INSURANCE!
You should estimate about 2% of the purchase price for property taxes and 1% for insurance, then divide by 12 to get the amount you need to add onto your monthly mortgage payment. Example: $100,000 house would cost approx. $250/month for taxes & insurance. Your lender will take this into account when determining your maximum monthly payments, so should you.
What is PRE-APPROVAL?
This is not a full mortgage approval from your lender but it's the first step to qualify for a mortgage and the process includes involving a credit check and employment verification to determine how much you can afford.
What good is being pre-approved?
Pre-approval demonstrates to brokers and sellers that you are serious (not just a lookyloo) and have a good idea of what you can afford. Your offer will usually be preferred over one from someone who has never met with a lender.
Beauty versus Convenience - Don’t lose sight of the BIG picture when looking for a home!
Are big trees in a fenced backyard with a white picket fence enough? No! You should be realistic about what it will be like to live in a prospective home.
Create a mental picture of each room in the house and ask yourself how you and your family will live in it:
It is possible for you to own your own home and make your money work for you! Do your homework and be sure you have a clear picture of your financial situation before you start.
Ottawa Living is Ottawa's premier online resource for home buying and selling. We provide comprehensive Ottawa real estate listings for home buyers, home owners.
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