There are few milestones more satisfying than buying your first home. It’s about much more than having a place to lay your head. Your new home becomes a sanctuary, a blank canvas to create years of memories.
However, as a first-time buyer, there are some misconceptions to be aware of. Here are five things you should know before you embark on your purchase.
Misconception # 1: your down payment must be 20%
Myths and misconceptions over what it takes to qualify for a mortgage could fill an entire book. One of these is that you can’t buy a residential property unless you have a 20% down payment. At current housing prices, this puts ownership out of reach for many people!
Let’s take a closer look.
Needing 20% down is an old, outdated idea from many years ago. Times have changed since then.
You can make an offer with much less, as long as you can prove that you have mortgage insurance. In Canada, you need 5% on the first $500,000 of the sale price and 10% on anything over that amount.
Imagine you had your eye on a home that was $800,000. If we crunch the numbers quickly, you’d need $55,000 for your down payment.
(Here’s a more detailed breakdown for the math-minded: 5% of $500,000 works out to $25,000. There is $300,000 remaining where you need 10%, which is $30,000. Add them together for the total: $25,000 plus $30,000 works out to $55,000.)
Of course, $55,000 is a significant amount of money, but it’s far less than the $160,000 (20%) you thought you needed!
However, be aware that if your down payment is less than 20%, you’re required to opt for mortgage insurance at an added cost. If you’re not sure what your best options are, we can refer a mortgage professional who can help you decide on the best approach to reach your specific goals.
When buying your first home, information is power. Here are some other recent posts that will help you make an informed decision:
- Our Top 10 Buyer FAQs
- What You Need To Know About Multiple Offers
- What You Need To Know About Buying or Selling on The Waterfront
Misconception # 2: pre-qualification is the same as pre-approval
It’s easy to confuse the two because they’re similar. What’s the difference?
Pre-qualification is an informal estimate of how much you can borrow based on your current financial health. It’s a fast and easy way to find out what you can afford with no commitments.
Pre-approval is more concrete and sets you up as a serious buyer. The bank provides you with a letter of pre-approval, which is valid for up to 90 days. This isn’t a firm guarantee that you will get financing, but it gives you two distinct advantages:
- It also locks in your interest rate and protects you in case rates go up (as anticipated later this year).
- A letter of pre-approval gives you an edge when making an offer. A seller is more likely to accept your offer than someone who hasn’t taken this step.
Should you get pre-qualified first? It depends.
If you’re just beginning your home buying journey and are curious about your options, getting pre-qualified lets you know where you stand.
But if you are serious about buying and want to skip this step, you can go straight to pre-approval.
If you want to get started buying your first home right away, book your free, no-obligation buyer’s meeting.
Misconception # 3: Having a cosigner will lead to approval
There’s a belief that if you don’t qualify for a mortgage, you can just get someone to cosign for you.
This is more of a half-truth than a myth, but one that needs clarifying. Many potential buyers are surprised when their loan comes back declined, even with a cosigner.
A mortgage requires more commitment than any other loan.
The bank will perform a deep analysis of a cosigner’s assets, income and debt repayments.
If the cosigner’s income to debt ratio is too high, the bank will likely decline the loan. To increase your chances of approval, try to find a cosigner who offsets your weaknesses.
If you are declined because your credit score is too low, a cosigner with a stellar credit history will help.
If your income is too low to qualify, try to bring in a cosigner with higher earnings.
Involving a cosigner has significant financial implications for both parties.
There are other avenues to explore if a co-signer does not work out for you. Working with a real estate agent knowledgeable in your area can help you with other options you might never discover otherwise.
Misconception # 4: It doesn’t matter whether you opt for variable or fixed-rate
Obtaining mortgage approval is cause for celebration, but it’s not time to start packing yet.
Now you need to choose an interest rate. There are two options; fixed or variable. What’s the difference, and how should you decide?
Here is a closer look at these options and the pros and cons of each:
Fixed-rate:
Your rate is locked in for the entire mortgage term, and you don’t have to worry about rate hikes.
The downside is fixed rates are typically higher than variable rates, with higher penalties if you end your term early.
Why choose a fixed rate?
Your Realtor® might recommend a fixed rate if you want assurance that your payment won’t increase AND if you plan to be in the home for the long term.
Variable rates:
Variable rates are very attractive on paper because they are often lower than fixed rates. The penalties for breaking your term are also smaller.
The downside is that your rate can and will change over time, meaning your payments can vary each month.
Why choose a variable rate?
If you’re not risk-averse, a variable rate can be the better option to save money. This is especially true if you plan to move in the near future and need to renegotiate.
Misconception # 5: Your down payment and deposit are the same
Very few first-time buyers understand the difference between a down payment and a deposit.
The truth is, they are two different things, and you will need both to purchase your home.
Here’s how it works:
The deposit secures the offer.
Your deposit is usually 5% of the total purchase price and is due within 24 hours of your offer being accepted.
For your protection, your deposit is held in trust account and never given directly to the seller. Why? A real estate deal could fall through for several reasons. If that happens, you’d be unlikely to recoup your money.
Once the sale goes through, the deposit is credited to your purchase price and can also be allocated to your down payment.
The down payment means the deal is done!
The remainder of your down payment is due when the sale closes.
Upon closing, the seller receives the deposit and the down payment, and now you can officially move in!
Misconception # 6: You pay real estate commission as a buyer
This is a particularly dangerous misconception because it scares many buyers away from obtaining the help of a buyer’s agent.
How much commission would you have to pay? What happens if a deal falls through? Would you be out of pocket, with no house to show for it?
These fears are understandable, but they are unfounded.
The truth is, the seller pays all commissions, which are split between the selling and buying agents.
You don’t pay commission as a buyer, even if the deal falls through.
There’s a lot to consider when buying your first home, and a full-service agent can help you with every step. They’ll connect you to experts who can help you qualify for financing, help you find the right home at the right price, and craft a compelling offer to beat out your competition.
Do you want even more advice when buying a home in Toronto? A few of our other buyer resources can answer many questions:
- Buying Your First Home? Here’s How Family Members Can Help or Hinder You
- Should You Buy a Bigger House if You Don’t Yet Need the Space?
- Upsizing in Toronto? Here’s What You Need to Know so You Don’t Overpay
- What You Need to Know About Buying and Selling on the Waterfront
