Buyers' Info

Homes come in every size, style and price range. Knowing what you can afford at the beginning of your search saves you time and disappointment later on. The following calculations outline the process financial institutions use to determine what you can afford.

FIRST AFFORDABILITY RULE

Lenders such as banks and trust companies allow you to spend approximately 32%* of your gross monthly income on housing costs (including property taxes, heating and, if applicable, 50% of condominium fees. The ratio of debt to income is referred to as the Gross Debt Service ratio or GDS.

The following calculation will you how much you can afford monthly for housing.
Your gross monthly income __________________________
Spouse’s gross monthly income ______________________
Other monthly income ______________________________
Total monthly income _______________________________
Monthly income x 32% = GDS ________________________

SECOND AFFORDABILITY RULE

The second affordability rule is that your entire monthly debt load shouldn't be more that 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This is your Total Debt Service (TDS) ratio.

The following calculation will you what you can afford for housing including your outstanding debts:

A) Monthly Income from your GDS Calculation Above x 40% = TDS____________________
B) Add up your monthly payments for loans, credit cards and other debts__________________
Monthly income left for housing costs (subtract the amount from (A) from the amount in (B).

In addition to GDS and TDS ratios, financial institutions base their lending decision on your credit history, job stability and the amount of your down payment. Interest rates also affect the amount of financing you will be able to obtain.

*Please note that many lenders are prepared to exceed these guidelines.

EXAMPLE

David earns $40,000 annually and his partner Ruth earns $43,500. They have a car payment of $350 per month and a credit card payment of $150 per month.

How much can they afford monthly for housing?

David’s monthly income $3,333
($40,000 divided by 12)
Ruth’s monthly income $3,625
($43,500 divided by 12)
Total monthly income $6,958
GDS ($6,958 x 32%) $2,226.56

They can afford to spend no more than $2,226.56 on monthly housing costs. How much can they afford with their other monthly payments? Monthly debts Car payment $350
Credit card payment $150
monthly housing cost $2,226.56
Total $2,726.56
TDS ($2,726.56 divided by $6,958) = 39%
Because their total debt including housing costs and all other monthly debts does not exceed 40%, they can afford to purchase a home.

Sales Representatives

A real estate sales representative is a professional who can save you time and trouble. And possibly even a lot of money. You see, real estate sales representatives have the home buying experience most people lack. They know all of the steps and they are good negotiators who will work on your behalf.

A sales representative will:

• Fine-tune your wants/needs list
• Get special computer access to listing information
• Screen houses so as not to waste your time
• Arrange appointments
• Offer helpful advice about the neighbourhood
• Introduce you to trusted contacts who should be on your team, such as mortgage brokers, lawyers, and home inspectors.
• Above all, find a real estate sales representative who is a professional in the type of home you're looking for. A country home professional may not be the urban market specialist you need. And when speaking with your sales representative, be as clear as possible about your needs

Contractors

If you've decided to do some renovations on your home to make it more sellable, it's time to look for a credible contractor. Before anyone begins work on your home, it is important to do your homework.

1. Ask for Referrals

Your architect will make recommendations Your sales representative will offer some suggestions Contact friends or neighbours who have had similar work done Ask at your local builder supply store When you're interviewing contractors, ensure their credibility. Contact their references. Ask to see some samples of the contractor's work and speak to his clients to ensure that they were satisfied with the price, length of time in which the project was completed and overall, how the project was handled. Also, check with your local Better Business Bureau. Once you have the names of a few contractors that look promising, arrange to get estimates from them. By arranging for three quotes you'll get a good idea of the costs and quality of work. When going over the project with your contractor, ensure that he understands your needs and your budget. Each contractor will have a different idea on how to approach the work and they should inspect your home before giving an estimate. If contractors are bidding based on an architect's plans, be certain that they have detailed their approach to the job based on the drawings. What's more, if there is a significant difference in the price, ask the contractors to explain their estimates. And keep in mind that the lowest price is not always the best. A price that's too low may mean that the contractor has undercut to get the project and then may submit additional project costs once the project is underway. As well, a high price doesn't always mean that you're getting gouged. The contractor may have budgeted for higher quality materials and may offer workmanship that is of an overall better quality. In every case, before you sign the contract, be certain that it is as detailed as possible to the point of noting the specific finishes and brand names of the products to be installed.

2. Evaluating a Quotation
• Are the specific details of the project outlined?
• Are the specific costs detailed?
• Is there a provision for extra costs?
• Has a cap been set for the total project?
• Is there a firm project timeline?
• Has the contractor allotted time for inspections?
• Have you indicated that you wish to see all material receipts?
• Will the work be subcontracted?

Appraisers

Hiring an appraiser to appraise the value of a property you are considering to buy may seem sensible but it is highly unnecessary. Your lender will want their own personal appraiser anyway, so you could be wasting valuable money. As well, most sales representatives are competent and can do a "Comparative Market Analysis" for you, to establish a value range. The only situation where hiring an appraiser would become necessary is where the property is unusual with no comparable sales.

Lenders

The true test for a buyer is "What else can we buy for the same or less money?" In short, a lender is anyone who will give you money. There are private lenders and institutional lenders, like banks and credit unions. Even your brother-in-law can be your lender. Of course, when you're looking for a lender, you are looking for a long-term relationship and terms and rates which are beneficial to you. You really have a few options. You should go to a mortgage broker who will search the mortgage market for the best rates and conditions based on your circumstances. Usually, the broker is paid by the lender without cost to you. However, the cloudier your credit history, the more likely there will be a fee! A good mortgage broker will be connected to all major lenders through the mortgage market. You can also do your own search. With a good credit history, it's really not that complicated. Pick up your newspaper and you'll see what the different lending institutions are offering. Find the institution you feel you would be most comfortable with and one that offers the terms and conditions you're looking for. Then, go in person and negotiate your best deal. We'll go into more detail about this process in the arranging a mortgage section.

Mortgage Brokers

This is a person who will do the work in finding the institution which offers the mortgage terms and conditions that are right for you. Much like an insurance broker, this professional works for you and can offer you an unbiased referral. Although most brokers are paid a finders fee by the lender, some will charge 2% of the total mortgage to find you a lender.

Lawyers/Notaries

A lawyer is there to represent your interest, and to process the documentation required. The legal aspects differ from province to province. Your sales representative can recommend lawyers to advise you on the steps to be taken before the keys to your new home are presented to you. A lawyer helps ensure you are protected!!!

Home Inspectors

Have the home inspected! Whether you make it a condition of purchase or not, having the property pre-inspected by a qualified home inspector will give you the added confidence that you've made the right decision. Be very careful to verify the qualifications of your home inspector because there are no government standards or licenses for home inspectors. Some home inspectors in Canada do not have any form of accreditation. For your protection make sure your home inspector is a member of (PACHI) or (OAHI). This is your assurance that they have met their education requirements, have the experience and carry E & O Insurance.

Insurance Brokers

You'll want to make sure your property and valuables will be covered. A broker offers independent advice and can save you time, trouble and money. Plus, the bank will insist that you carry full insurance since your property is used as collateral against your mortgage.

AMORTIZATION

The period of time required to reduce the mortgage debt to zero when all regular blended payments are made on time and provided the terms (payment and interest rate) remain the same.

ANNIVERSARY

Most lenders allow borrowers to make a payment on the anniversary mortgage. (For a mortgage assumed on June 1, a payment can be subsequent June 1 for the term of the mortgage). It is applied against principal and is a good way of reducing a loan.

APPRAISAL

A process for estimating the market value of a particular property.

APPRECIATION

The increase in value of something because it is worth more now than when you bought it.

APPROVED LENDER

A lending institution authorized by the Government of Canada through CMHC to make loans under the terms of the National Housing Act. Only Approved Lenders can negotiate mortgages that require mortgage loan insurance.

ASSESSMENT

The value of a property set by provincial assessors, for the purposes of calculating property tax.

ASSUMABLE MORTGAGE

A mortgage that can be transferred to a new owner. The new owner then assumes responsibility as the guarantor for the unpaid balance of the mortgage.

ASSUMPTION AGREEMENT

A legal document signed by a homebuyer that requires the buyer to assume responsibility for the obligations of a mortgage by the builder or the previous owner.

BALANCED MARKET

Where demand for property equals the supply of available property and usually accept reasonable offers and houses generally sell in sufficient periods. Prices remain stable and there are usually a good number of them to choose from.

BALLOON PAYMENT

The final payment of a mortgage loan when it is larger than the regular payment. It usually extinguishes the debt.

BLENDED MORTGAGE

A combination of two mortgages, one with a higher interest rate than the other, to create a new mortgage with an interest rate somewhere between the two original rages.

BLENDED PAYMENT

A mortgage payment that includes principal in interest. It is paid regularly during the term of the mortgage. The payment total remains the same, although the principal portion increases over time and the interest portion decreases.

BRIDGE FINANCING

Interim financing to bridge between the closing date on the purchase of the new home and the closing date of the current home, which is sold firm.

BROKER

A person licensed by the provincial government to trade in real estate. Real estate brokers may form companies or offices, which appoint sales representatives to provide services to the seller or buyer, or they may provide the same services themselves. In parts of Canada, brokers are referred to as agents.

BUYER'S AGENT

A person or firm representing the buyer. A Buyer’s Agent’s primary allegiance is to the buyer.

BUYER'S MARKET

When there are a higher number of homes to choose from than buyers. Prices of homes tend to be lower and they remain available longer. Buyers usually have more leverage in negotiating a purchase.

BUYER BROKERAGE AGREEMENT

A written agreement between the buyer and the buyer’s agent, outlining the agency relationship between the two parties and the manner in which the buyer’s agent will be compensated.

CHATTEL

Removable personal items that are not normally included in the sale of a home, but may be added to the purchase price to make the property more attractive to buyers. (Examples include microwave ovens, portable dishwashers, washers and dryers.)

CLOSED MORTGAGE

A mortgage that cannot be prepaid or renegotiated before the term's end unless the lender agrees and the borrower is willing to pay in interest penalty. Many closed mortgages limit prepayment options such as increasing your mortgage payment or lump sum prepayment (usually up to 20% of your original principal amount).

CLOSING COSTS

Costs in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on the closing day. They range from l.5% to 4% of a home's selling price.

CLOSING DATE

The date at which the sale of a property becomes final and the new owner takes possession.

COMMISSION

An amount agreed to by the seller and the real estate broker/agent and stated in the listing agreement. It is payable to the broker/agent on closing and shared, if applicable, among those salespeople involved in the sale.

COMMITMENT LETTER - MORTGAGE APPROVAL

Written notification from the mortgage lender to the borrower that approves the advancement of a specified amount of mortgage funds under specified conditions.

COMMON ELEMENTS

The portions of a condominium development owned in common (shared) by the unit owners.

CONDITIONAL OFFER

An Offer to Purchase that is subject to specified conditions, for example, the arrangement of a mortgage. There is usually a stipulated time limit within which the specified conditions must be met.

CONDOMINIUM

Shared ownership in property. Owners have title (ownership) to individual units and a proportionate share in the common elements.

CONDOMINIUM FEES

A mortgage loan up to a maximum of 75% of the lending value of the property. Typically, the lending value is the lesser of the purchase price and market value of the property. Mortgage loan insurance is usually not required for this type of mortgage.

CONVERTIBLE MORTGAGE

A mortgage that you can change from short-term to long-term, depending on your financial needs.

COUNTER-OFFER

If your original offer to the vendor is not accepted, the vendor may counter-offer. This means that the vendor has amended something from your original offer, such as the price or closing date. If a counteroffer is presented, the individual has a specified amount of time to accept or reject.

CREDIT REPORT

The main report a lender uses to determine your creditworthiness. It includes information about your ability to handle your debt obligations and your current outstanding obligations.

CURB APPEAL

How attractive the home looks from the street. The first impression you have of a home is important. A home with good curb appeal will have attractive landscaping and a well-maintained exterior.

DEBT-SERVICE RATIO

The measurement of debt payments to gross household income which may include, in addition to the main wage earner’s salary, salaries of other wage earners, commissions, bonuses, overtime, etc.

DEED

A legal document that is signed by both the vendor and purchaser, transferring ownership. This document is registered as evidence of ownership.

DEFAULT

Failure to abide by the terms of a mortgage loan agreement. A failure to make mortgage payments (defaulting the loan) may give cause to the mortgage holder to take legal action to possess (foreclose) the mortgaged property.

DELINQUENCY

Failing to make a mortgage payment on time.

DEPOSIT

Money placed in trust by the purchaser when an Offer to Purchase is made. The real estate representative or lawyer/notary holds the sum until the sale is closed and then it is paid to the vendor.

DEPRECIATION

The decrease in value of something because it is now worth less than when you bought it.

DISCHARGE

The removal of all mortgages and financial encumbrances on the property.

DOWN PAYMENT

The portion of the home price that is not financed by the mortgage loan. The buyer must pay the down payment from his/her own funds or other eligible sources before securing a mortgage. It generally ranges from 5% to 25% of the purchase price but can be more.

DUAL AGENT

A real estate Broker or salesperson who acts as agent for both the seller and the buyer in the same transaction. Both buyer and seller are the agent’s clients.

EASEMENT

This is where someone else has the right for access to or over another person’s land for a specific purpose, such as a driveway or public utilities.

ENCROACHMENT

An intrusion onto an adjoining property. A neighbor’s fence, storage shed, or overhanging roofline that partially (or even fully) intrudes onto your property are examples of encroachments.

ENCUMBRANCE

A registered claim for debt against a property, such as a mortgage.

EQUITY

The difference between the value of the property and the amount owing (if any) on the mortgage.

FIRST MORTGAGE

The first security registered on a property. Additional mortgages secured against the property are “secondary” to the first mortgage.

FIXTURES

Permanent improvements to a property that are normally included with the purchase unless specifically excluded in the Agreement of Purchase and Sale. Examples include wall-to-wall carpeting and built-in appliances.

FORECLOSURE

The legal process where the lender takes possession of your property and sells it to cover the debts you have failed to pay off. When you default on a loan and the lender feels that you are unable to make payments, you may lose your home to foreclosure.

GROSS DEBT SERVICE

The amount of money needed to pay principal, interest, taxes and sometimes, energy costs. If the dwelling unit is a condominium, all or a portion of common fees are included, depending on what expenses are covered.

GROSS DEBT SERVICE RATIO

Gross debt service divided by household income. A rule of thumb is that GDS should not exceed 30%. It is also referred to as PIT (principal, interest & taxes) over income. Sometimes energy costs are added to the formula, producing PITE, which moves the rule of thumb GDS to 32%.

HIGH-RATIO MORTGAGE

A mortgage loan higher than 75% of the lending value of the property. This type of mortgage may have to be insured – for example by CMHC or a private company – against payment default.

INTEREST

The cost of borrowing money. Interest is usually paid to the lender in regular payments along with repayment of the principal (loan amount).

INTEREST ADJUSTMENT DATE (IAD)

A date from which the accrued interest on the mortgage advance is calculated and paid in your first regular payment. This date is usually one payment period before the first regular mortgage payments begin.

JOINT TENANCY

The ownership of property by two or more persons who took title at the same time, in the same manner, in equal portions and on the death of one, the survivor(s) retain ownership.

LAWYER FEES

Each real estate transaction requires the assistance of a legal professional to review the Offer to Purchase, search the title, draw up the mortgage documents and take care of the details on the day of closing. Lawyers’ fees range widely depending on the complexity of the transaction.

LIEN

A claim against a property for money owing. A supplier or a subcontractor who has provided labour or materials but has not been paid may file a lien.

LISTING AGREEMENT

The legal agreement between the listing Broker and the seller, setting out the services to be rendered, describing the property for sale and stating the terms of payment. A commission is generally payable to the Broker upon closing.

LOAN TO VALUE RATIO

The ratio of the loan amount to the lending value of a property expressed as a percentage. For example, the loan to value ratio of a loan for $90,000 on a home, which costs $100,000, is 90%.

LUMP SUM PREPAYMENT

An extra payment, made in lump sum, to reduce the principal balance of your mortgage, with or without penalty. A closed mortgage typically restricts the amount and frequency of the prepayments you can make. With an open mortgage, however, you can make a lump sum prepayment at any time without penalty. Making prepayments can help you pay off your mortgage sooner and ultimately save on interest costs over the life of your mortgage.

MARKET PRICE

The price at which real estate sells.

MARKET VALUE

The price which a property will command, from a willing and informed buyer for property offered on the open market, allowing for reasonable exposure, while not acting under duress or unusual circumstances.

MATURITY DATE

The last day of the term of the mortgage. On this day, the mortgage loan must either be paid in full or the agreement renewed.

MLS – MULTIPLE LISTING SERVICE

A multiple listing service is a real estate agents’ cooperative service that contains descriptions of most of the homes that are for sale. Real estate agents use this computer-based service to keep up with properties they are listing for sale in their area.

MAINTENANCE FEE

A monthly fee paid by condominium owners for maintaining the development’s common areas.

MORTGAGE

A mortgage is a security for a loan on the property you own. It is repaid in regular mortgage payments, which are usually blended payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). The payment may also include a portion of the property taxes.

MORTGAGE BROKER

A person or company having contacts with financial institutions or individuals wishing to invest in mortgages. Appraisal and legal services may or may not be included in the fee.

MORTGAGE LIFE INSURANCE

Mortgage life insurance provides coverage for your family should you die before your mortgage is paid off. This insurance can be purchased through your lender and the premium added to your mortgage payments. However, you may want to compare rates for equivalent products from an insurance broker.

MORTGAGE LOAN INSURANCE

If you have a high-ratio mortgage (more than 75% of the lending value of the property) your lender will probably require mortgage loan insurance, which is available from CMHC or a private company.

MORTGAGE PAYMENT

A regularly scheduled payment that is often blended to include both principal and interest.

MORTGAGEE

The person or financial institution lending the money, secured by a mortgage.

MORTGAGOR

The property owner borrowing the money, secured by a mortgage.

NET WORTH

Your financial worth, calculated by subtracting your total liabilities from your total assets.

WARRANTY (NEW HOME WARRANTY PROGRAM)

A guarantee that if something covered under the warranty needs to be repaired it will be. If the builder doesn’t repair it, the repair will be made by the organization that provided the warranty.

OFFER TO PURCHASE

A written contract setting out the terms under which the buyer agrees to buy the home. If the seller accepts the Offer to Purchase, it forms a legally binding contract that binds those who have signed it to certain terms and conditions.

OPEN MORTGAGE

A mortgage that can be prepaid or paid off or renegotiated at any time and in any amount without interest penalty. The interest rate on an open mortgage is usually higher than a closed mortgage with an equivalent term.

OPERATING COSTS

The expenses that a homeowner has each month to operate a home. These include property taxes, property insurance, utilities, telephone and communications charges, maintenance and repairs.

ORIGINATION FEE

A fee or charge for work involved in the evaluation, preparation, and submission of a proposed mortgage loan.

PORTABILITY

An option available on a mortgage that enables the mortgagor to take a current mortgage loan with them to another property without penalty.

POWER OF SALE

Should default occur it is the right of the mortgagee to force the sale of the property without judicial proceedings.

PRINCIPAL

The amount that you borrow for a loan. Each monthly mortgage payment consists of a portion of the principal that must be repaid plus the interest that the lender is charging you on the outstanding loan balance. During the early years of your mortgage, the interest portion is usually larger than the principal portion.

P.I.T.H.

Principal interest, taxes and heating – costs used to calculate the Gross Debt Service ratio (GDS)

PROPERTY INSURANCE

Insurance that you buy for the building(s) on the land you own. This insurance should be high enough to pay for the building to be rebuilt if it is destroyed by fire or other hazards listed in the policy.

PROPERTY TAXES

Taxes charged by the municipality where the home is located based on the value of home. In some cases the lender will collect a monthly amount to cover your property taxes, which is then paid by the lender to the municipality on your behalf.

RATE (INTEREST)

The return the lender receives for loaning you the money for the mortgage.

REAL ESTATE

Includes real property, leasehold and business whether with or without premise, fixture, stock in trade, good of chattels in connection with the operation of the business.

REAL ESTATE BOARD

A non-profit organization representing local real estate Brokers/salespeople, which provides services to its members and maintains and operates a MLS system in the community.

REFINANCE

To pay off a mortgage or other registered encumbrance and arrange a mortgage, sometimes with a different lender.

RESERVE FUND

This amount is set aside by the homeowner on a regular basis so that funds are available for emergency or major repairs. Setting aside 5% of your monthly take-home pay will give you a well-funded reserve.

ROLLOVER MORTGAGE

A mortgage loan where the interest rate is established for a specific term. At the end of this term, the mortgage is said to “roll-over” and the borrower and lender may agree to extend the load. If satisfactory terms cannot be agreed upon, the lender is entitled to be prepaid in full. In this case the borrower may seek alternative financing.

SECOND MORTGAGE

An additional loan on a property that becomes second in position behind the first mortgage. Generally at a higher interest rate and shorter terms than a first mortgage.

SELLER’S MARKET

More buyers are looking for homes than there are homes for sale. There is a smaller inventory of homes available for sale and many buyers looking to make a purchase. House prices generally increase and homes sell quickly.

STATEMENT OF ADJUSTMENT

A balance sheet statement that indicates credits to the vendor for the purchase price – and any prepaid taxes and credits to the buyer’s deposit, and the balance due on closing.

STATUS CERTIFICATE

Is a certificate that outlines a condominium corporation’s financial and legal state.

SURVEY

A professionally prepared document that provides accurate details about a property’s location, boundaries, size and legal description, as well as any improvements to the property including buildings, fences, etc.

SURVEY OR CERTIFICATE OF LOCATION

A document that s property boundaries and measurements specifies the location of buildings on the property and states easements or encroachments.

TENANCY IN COMMON

The ownership of property by one or more people, which is not passed on as a right of survivorship, but rather is an asset and can be willed.

TERM

The term of a mortgage is the length of time that the mortgage conditions, including the interest rate you pay, are carried out. Terms are usually between six months and ten years. At the end of the term, you either pay off the mortgage or renew it, possibly renegotiating its terms and conditions.

TITLE

A freehold title gives the holder full and exclusive ownership of the land and building for an indefinite period. A leasehold title gives the holder the right to use and occupy the land and building for a defined period.

TITLE INSURANCE

Insurance against loss or damage caused by a matter effecting the title to immovable property, in particular by a effect in the title or by the existence of a lien, encumbrance or servitude.

TITLE SEARCH

A detailed examination of the ownership documents to ensure that there are no liens or other encumbrances on the property, and no question regarding the seller’s ownership claim.

TOTAL DEBT SERVICE RATIO (TDS)

The percentage of gross monthly income required to cover the monthly housing payments and other debts, such as car payments.

VARIABLE-RATE MORTGAGE

A mortgage in which payments are fixed, but the interest rate moves in response to trends. If interest rates go up, a larger portion of your payment goes to interest; if the rates go down, more goes to cover the principal.

VENDOR TAKE BACK MORTGAGE

This is where the vendor rather than a financial institution finances the mortgage. The title of the property is transferred to the buyer who makes mortgage payments directly to the seller. These types of mortgages, sometimes referred to as take-back mortgages, can be helpful if you need a second mortgage to buy a home.

ZONING LAWS

Municipal laws restricting the use of land for specific purposes.