What eager first-timers need to know before the house hunt

You’ve saved for your down payment, you’ve crunched the numbers and you’ve decided on the neighbourhood where you want to live – but are you really ready to start shopping around?

“Buying your first home is one of life’s most exciting milestones, but there are lots of steps on the way to crossing the threshold as an owner for the first time,” says Brad Gavin, mortgage consultant with Mortgage Intelligence in Calgary. “To make sure this process goes smoothly, you’ll need to get financing advice right from the get-go and do some work in advance.”

Brad breaks the process down with the following tips: 

Get your down payment and deposit ready. A down payment must come from your own resources, and in most cases must have been held in your account for at least 90 days. Using a gift from your parents or other family member for a down payment?  You’ll need a letter stating that it is actually a gift and does not need to be re-paid. These funds will likely need to be deposited in your account two weeks before your purchase closing date.

The Home Buyers’ Plan is another financing option for first-time buyers. It allows you to withdraw up to $25,000 ($50,000 per couple) from your RRSP to buy or build a home. 

Keep in mind that when placing an offer, a deposit is usually required. It can be all, or part, of a down payment.

Figure out what you can afford. The best way to do this is by talking to a mortgage expert and getting pre-approved for a mortgage. A mortgage consultant can provide examples of what monthly payments and home buying costs will be, to eliminate surprises.

“A major benefit of a pre-approval is that most financial institutions will lock-in a rate for up to 120 days,” advises Brad.  “This is very helpful if you’re buying in a rising rate environment.” 

Get in touch with the professionals. Think of home buying as a team sport – a mortgage consultant can help you find a good real estate agent, real estate lawyer, home inspector and home insurance agent. Be sure to get in touch with these professionals early in the buying process to avoid last-minute scrambles.

Come up with an offer strategy. In competitive real estate markets, it is common for vendors to put off accepting offers until a particular date. This means buyers may be bidding for a home along with several other parties. It’s easy to get caught up in the emotion, so it is important to decide on a maximum price before bidding and to stick to it.

Choose your mortgage strategy. Ask yourself: Do I want the stability of a fixed-rate mortgage or am I comfortable with the potential rewards and risks of a variable-rate loan? A mortgage expert can help you decide which one makes the most sense for your financial situation, as well as help you understand your payment options and the other features of various types of mortgages.

Get ready to close. When buying a home, it pays to learn about closing costs, which can represent up to 3 per cent of the purchase price, including land transfer tax, lawyer’s fees, appraisal fees, title insurance and home inspection fees.  A mortgage professional can help estimate how much these will cost and offer ideas for how you can cover these costs.

”A lot of first-time buyers can’t wait to get out there and house hunt, but they need to understand that this is not a decision to enter into lightly,” says Brad. “But with careful planning and expert advice, you can make your first home – and your first mortgage – work well for you in the long term.”

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The credit score, also referred to as a “FICO score,” is a mathematical formulae created by Fair, Issac and Company.

The credit score is used by most companies to decide if the applicant is a good credit risk or not. Equifax and Trans Union will calculate the numbers from the credit report and generate a number between 300 and 900.

A low score indicates a bad risk. A score of 700 or more puts the applicant in the lenders’ good books.

 How scores are calculated:

How Clients Can Improve Their Credit Score

1. Order a copy of the credit report, review it carefully and correct any significant errors.
2. Pay bills on time.
3. If there is a questionable credit history, they could open a few new accounts and use them responsibly, paying them off on time.
4. Avoid opening accounts without intention of using them. Having five or six of the same credit card type (e.g., Visa), is not favourable.
5. Having a credit card or instalment loan can help boost a credit score, as long as the balance is not too high.
6. Keep balance low in relation to available credit. If the credit limit is $10,000, keeping the balance below $2,500 (or 25 per cent of the limit) will improve the score. Balances of more than $7,500 (or 75 per cent of the limit) will decrease the score. Going over the limit has an even more negative effect.
7. Pay off credit card debt instead of moving it around to lower rate cards. Moving balances to other credit cards (i.e., “balance transfer”) and closing an old account can hurt the score.

Roughly four million U.S. homeowners were behind on their mortgage payments or in foreclosure in June, according to data from the Mortgage Bankers Association. 

To qualify, homeowners will have to be at least three months behind on their payments, and owe more than 90 per cent of the value of their house.  Anyone who does not occupy their home would not qualify for the aid, nor would borrowers who have gone into bankruptcy.

The government’s plan would see interest rates cut so that borrowers would wind up not spending more than 38 per cent of their income on house payments. Another option is for loans to be extended from 30 years to 40 years, or for some of the loan principal to be deferred.

“Foreclosures hurt families, their neighbours, whole communities and the overall housing market,” said James Lockhart, director of the U.S. Federal Housing Finance Agency. “We need to stop this downward spiral.”

Lockhart’s agency seized control of two mortgage finance companies, Fannie Mae and Freddie Mac, in September. Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million U.S. mortgages, or about 60 per cent of all outstanding mortgages.  The new plan is hoped to be in place by Dec. 15.

So How does the US Mortgage Market compare with the Canadian Market?

Despite this past month’s financial sector turbulence and the heightened concerns over the US economy, Harper said the Canadian Financial Institution remains in “very good shape.”  All information provided to Harper’s government has indicated that while there are banks that have had significant write-downs, none near the extremity of AIG, the balance sheets of the financial sector remain strong.

Harper is further supporting Economists’ suggestions that the troubles in the US should not “spill over into Canada.” Canada has strong economic fundamentals and a government that has been prudent and pro-active.  The Canadian government anticipated the US bubble would burst over a year ago and the crisis this week was not surprising, nor unexpected.  It is however, not expected to affect Canada to anywhere near the extent it has affected the US. 

There is no direct tie between the US housing market and the Canadian housing market and Canada’s strong economy and dearth of high-risk mortgage lending should help the real estate sector withstand the volatility that has been buffering the equity markets.   Ultimately, the Canadian market should be relatively unscathed by the turbulence experienced in the US.

MBN Mortgage

CBCNews.ca

November 11, 2008

So why did Ottawa agree to insure the money they routinely borrow from other banks, a practice that keeps their credit operations liquid? Ironically, the troubled non-Canadian institutions that received capital injections and loan guarantees in other countries now carry a government seal of approval that tilts the playing field in their favor when it comes to borrowing. That leaves Canada’s big banks, including Scotiabank, TD Bank Financial Group, RBC Royal Bank and CIBC, at a competitive disadvantage. So the government acted to level the field, not to aid troubled banks.

Why has Canada withstood the subprime tornado better than other countries, and should the Canadian banking system be a model for G-7 and G-20 leaders when they gather in Washington on Nov. 15? Consider that the Geneva-based World Economic Forum, an influential think tank whose annual conference attracts the likes of Bill Gates and Tony Blair, earlier this month ranked Canada’s banking system as the soundest in the world. The U.S. came in at No. 40, and Germany and Britain ranked 39 and 44, respectively. (Switzerland was No. 16, just ahead of Namibia.) “For Canadian banks, having higher capital ratios than anyone else in the world is a source of pride,” says analyst Mario Mendonca with Toronto-based investment bank Genuity Capital Markets.

The average capital reserves for Canada’s Big Six banks — defined as Tier 1 capital (common shares, retained earnings and non-cumulative preferred shares) to risk-adjusted assets — is 9.8%, several percentage points above the 7% required by Canada’s federal bank regulator. That’s a little better than major U.S. commercial banks like Bank of America, but significantly higher than an average capital ratio of about 4% for U.S. investment banks and 3.3% for European commercial banks.

Another factor that helped make Canada the new gold standard in banking was Ottawa’s decision in the late 1980s to allow commercials banks to acquire investment dealers on Toronto’s Bay Street, the country’s financial hub. As a result, these institutions are subject to the same strict rules as commercial banks, while U.S. investment dealers are subject to only light supervision from the Securities and Exchange Commission. Morgan Stanley and Goldman Sachs, of course, will now be under the U.S. Federal Reserve’s supervision since they have been chartered as bank-holding companies.

Canada’s banks make bad investments on occasion. When Toronto-based CIBC, Canada’s most aggressive big bank, took $3.5 billion in charges against the U.S. subprime debacle, federal regulators quickly arrived on the scene. But here’s the difference: CIBC ended up selling $2.94 billion worth of its own shares in the first quarter of this year to shore up capital reserves. “The relationship between government and banks is a positive one,” says Minister of Finance Jim Flaherty. “We have a lot of discussions and regular meetings. The common goal is a sound financial system.”

There is, of course, a flip side to Canada’s regulatory system. When the global economy was flying high, Canadian banks complained about not being allowed to merge to become more significant international players. “In hindsight, that decision may have saved Canada from having a Royal Bank of Scotland on its hands,” says Lawrence Booth, a finance specialist at the University of Toronto’s Rotman School of Management, referring to the overly ambitious bank’s bailout earlier this month by the British government.

Says FFlaherty: “The credit crisis we’re facing is the result of unbridled greed. We need to bridle greed.” Perhaps when world leaders sit down in Washington to forge a 21st-century New Deal for the global financial system, it may have more than a smattering of Canadian banking know-how.

MBN Mortgage

TIME

Monday November 10, 2008