Affording a Home
Your "Dream Home" can quickly become a nightmare when you end up "House Poor", with your mortgage consuming too much of your budget leaving you strapped with little left over for enjoyment.

When buying a home, it is crucial to be practical and realistic.  Over-extending yourself financially is one quick way to destroy the excitement of owning your own home.

What You can Afford to Buy?
Setting a maximum price range is more important than simply establishing an upper price limit because unanticipated costs could push you into the "House Poor" danger zone.  To determine your "affordability" price range, you must calculate 2 amounts

1. The amount of cash you can put toward the purchase (i.e. the downpayment)
2. The maximum amount of loan (mortgage) you can comfortably pay on a monthly basis

About Your Downpayment
Put down as much of your own money as possible.  Over the long-term it will really pay off.

Closing Costs
Depending on the purchase price of the home you choose, it is essential to budget approximately $5,000. for closing costs. This may include items such as Land Transfer Tax, legal fees and disbursements, mortgage arrangements and Title Insurance, moving expenses, new furnishings and appliances. By having this money securely set aside, closing day will be pleasant and uneventful (without the stress of having to find additional funds at the last minute).

How Much You Can Afford to Borrow
The first step towards establishing a maximum mortgage limit is to calculate a monthly payment you can afford.  Financial institutions do this by calculating your Debt-Service-Ratio.

To calculate your debt-service-ratio, list all your loans (car, personal loans, monthly credit card payments).

The sum of these Loan Payments + Your Mortgage Payment (including principal, interest and taxes) should not exceed 42% of your gross income.

The Mortgage Payment + Taxes should be no more than 30% of your gross income

Interest Rates and Other Variables
   Higher Interest Rate = Less House
   Lower Interest Rate  = More House

However, there are other mortgage terms to consider as well...

1.  How Open is the Mortgage ?
2.  Will Pre-Payment be allowed ?
3.  Is the Mortgage portable ?

To ensure you are prepared to go shopping for your dream home, discuss your mortgage options with your Realtor or your a Mortgage Specialist.

             Establish a Limit and Stick To It !

When a house truly matches your family's needs, it is a home. And, when these needs change, then "right sizing" is the process of accommodating these changes.

Whether this means more rooms for a growing family, different space for a growing home-based business, shifting to a more affordable home that allows one stay-at-home parent, or a changing gears when the children leave, moving to another home may be the best option.

Although a renovation is an alternative, it is often difficult to envision the new space until the project is finisihed. And, surprisingly, many of these homes are sold within 2 to 3 years of completing a renovation.

If your home needs are changing, choose a Realtor with a trackrecord of assisting "rightsizing" clients with the emotional journey of making such a move. To help qualify them, ask for references & testamonials from others like you who they have worked with.

Making incremental payments on your mortgage can provide a significant interest saving over the life of a mortgage. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that such payment privileges also be flexible in allowing you to make smaller payments on the mortgage, and as frequently as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.

Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner.

This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.

The mortgage process can be a stressful, and sometimes frustrating process. The idea is to make the entire process go as smoothly as possible. What is most important? Be prepared before you sit down with your Mortgage Broker or Banker. Here are some things you can do to help ensure successful results, as well as give you some control over your own loan process.

1. Take time to Straighten out your finances.
If you don't have a grip on what's coming in and what's going out (and where, and why), you may have a disappointing experience when you apply for a mortgage.

2. Make sure to check your credit record.  http://www.equifax.ca/
Everyone's heard the horror stories: Your best friend, your sister, neighbor, goes to buy a home only to discover the worst... that the credit report contains negative or inaccurate credit information. Instead of having a clean record, he or she has an $80,000 outstanding bill, that is not their own. The loan officer looks at the outstanding bill and gives you a choice: Clean up the credit problem or no mortgage. And you've probably heard how difficult it is going to be to get your credit history cleaned up. Maybe so, but it's important to try nonetheless.
Here's what to do: First, order a credit report on yourself. You can contact Equifax By phone: (1 800 465-7166  ), or online at: http://www.equifax.ca/

For less than $10, Equifax will send you your credit report. This is the same information lenders will receive. By getting a copy of your credit report before you apply for a loan, you'll get a first look at any problems or discrepancies that have sprung up.

Let's backpedal a moment and talk about Credit Bureaus. In this computerized, big-brother-like world we live in, Credit Bureaus generally have exchange agreements with companies who provide credit, such as credit cards (Visa, MasterCard, American Express, and others) and Department or Retail stores, as well as, Banks, Credit Unions, and others.

On a daily, weekly, monthly, or semi-nnual basis, these companies electronically send all their information to the Credit Bureau, which then stores it in a huge database and updates the records of each person on file. When you go to any Department Store and sign up for its Credit Card, it calls the Credit Bureau (for a credit check) to be sure you have enough funds to pay your bills. Banks also follow the same process. So, when you go to apply for a Mortgage, the lender wants to know how many debts are outstanding, and what your track record is in paying them.

Credit bureaus provide that information. They can even tell if you've been paying your taxes, or if you have court judgments against you.
So let's assume you've ordered your credit report and it turns up an erroneous bill that does not make sense. You realize that this isn't your bill. What do you do? You could go to the Credit Bureau, but since they didn't originate the information (remember, all the information is sent to the Credit Bureau from the companies giving credit), they probably won't be able to help you.

Instead, go to the source of the problem—the company or credit originator that claims you owe them money. Ask them to pull up the payment record and try to work out whose bill it actually is. (Or if it turns out to be yours, pay it.) There should be some identification other than name that can easily solve the problem, like a Social Insurance Number, the male/female check box, age, race, etc.

Once you prove that the bill is not yours, the credit originator should correct its computers. Of course, it may take some time for that correction to work its way through the company's computers all the way through to the credit bureau. If you've started the process before you've found a home, you shouldn't have too much trouble. On the other hand, if you've gone to a lender because you've found the home of your dreams and then discover your credit is in jeopardy, you may want to get a letter from the credit originator that explains there has been a mistake and it has been corrected. You want to get your name cleared up as quickly as possible.

3. Gather The Information You Need Ahead of Time.
It's a great idea to gather information ahead of time and organize it so that it's easily accessible for you to review and have corrected. Now, you'll also need complete copies of your past two or three Tax Returns plus a current pay stub, or a current Profit and Loss statement if you are self-employed. In this way, you'll have that information on hand when you sit down with your Mortgage Broker or Banker and look much more organized.

4. Know The Current Lending Guidelines.
Get a current copy of the lending guidelines. If you are applying for a high ratio Mortgage, the federal Canada Mortgage and Housing Corp. (CMHC) must insure these loans. The protection is for the lender, not for you. Mortgage insurance is expensive: it can range up to 2.5 per cent of the value of the loan. You have to insure the entire loan, not just the amount that is above 75 per cent of the purchase price. That means the insurance premium for a $140,000 mortgage would be $3,500. Most lenders will let you roll the insurance premium into your mortgage, however, if you do, you end up paying a good deal of interest on the insurance fee, as well.

One advantage to this type of financing is that CMHC-insured mortgages become open after three years. All that's required to pay off your mortgage at that point is to pay a penalty of three months' interest. (An open mortgage means you can pay it off or refinance at current rates at any point.)

5. CMHC's 5 % Down Program
If you are a first-time buyer, you can put as little as 5 per cent down with an insured mortgage — provided you earn enough income to qualify. The amount of money you can borrow under this plan depends on where the house is located. Contact CMHC for more information about your specific situation and location. Recently, a second funder, GE Mortgage Insurance Canada has entered this market as an alternative to CMHC. Ask you Mortgage Broker or Banker which is the right one for you.

These loans must be insured, and while you can choose any term you wish, your income must be able to meet the payments required under a three-year term.

6. Conventional Mortgage:
Conventional mortgages require a down payment of 25 per cent of the home's appraised value. If you're looking at a house with a price tag of $200,000, that means you need to come up with $50,000 of your own money. But if you don't have that much saved, you may still be able to purchase that property.
Although it may seem that the lender's primary job is disqualifying mortgage applicants, the reverse is true: The lender wants to qualify as many applicants as possible (lenders make their money by approving mortgages not declining them) but are restricted by the rules and regulations of a larger, more powerful body.
If you understand up front what your lender is going through, it may help smooth the process.

7. Qualify your lender.
Just as you shop for a Realtor Estate professional and a new home, it's very important to shop for a lender. as well. Your Realtor can help you by making recommendations. Always ask for at least 2-3 different Mortgage Lenders as all lenders are not created equal. Mortgage products, services, style, and personal attention vary greatly. Look for a Mortgage specialist that is best qualified and offers the greatest flexibility in the products they represnet, as well as, your access to them when you need them. Like Realtors, some Mortgage specialists are highly available via pager or cell phone virtually anytime to meet your needs. Look for someone who is knowledgeable, seasoned in the business, and who you are confident can guide you through with a practiced hand.

For example, if you're self-employed, and you've only been self-employed for a year, you may find it more difficult, even though you may have paid every bill on time in your life. The reason for that is that lenders need to see that you've been self-employed, maintaining an income for at least two years, and have the tax returns to prove it. At this point, your choices would be to wait until you've been self-employed for two years, or ask your Realtor to recommend a capable Mortgage specialist with the experience, savvy, and contacts to help make purchasing a home possible for you, also.

When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases.

When you finance your property at 95%, a premium of 3.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.

As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.

The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings.

Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee.

If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.

As Canada’s national housing agency, CMHC is uniquely positioned to offer you a range of financing options to ensure you have access to a wide choice of quality, affordable housing.

CMHC’s Refinance

Open the door to a full range of financing options with CMHC’s Refinance product. Your lender may now be able to help you refinance your home for up to 90% of the market value to a maximum of $200,000 of additional funds. These funds can be used for any purpose other than default management.

CMHC-insured Line of Credit

Enables your lender to provide you with access to up to 90% of the value of your home either at the time you purchase or when you want to refinance. You have the flexibility to draw funds as often as you wish (up to your maximum credit limit)—and equally important—to prepay without penalties over the life of your loan, as often as you like, and you have 25 years to repay the entire amount.

CMHC’s Flex Down

Own your own home sooner by using a wider range of sources for your down payment. If you have a proven track record of meeting your debt requirements and sufficient income to support mortgage loan payments, your lender may be able to provide you with CMHC’s Flex Down product. Sources for your down payment can include: borrowed funds, gifts and lender cash back incentives.

Purchase Plus Improvements

Found your dream home? Want to renovate it? With CMHC’s Purchase Plus Improvements, you can work with your lender to finance the cost of renovating by increasing your mortgage, up to 95% of the “as improved” value.

Energy Efficiency Pays!

Save 10% on your premium — if a CMHC-insured mortgage is used to buy an energy-efficient home, or to renovate a new or existing home with the intention to making it more energy efficient, you may also have the option of extending the amortization period for an additional 10 years. (link to energy efficient premium refund page)

Second Home

Understanding that changing lifestyles affect the decisions you make on how and where you live—CMHC offers mortgage loan insurance on the purchase or refinance of a second home. This home can be located anywhere in Canada, provided it is not an investment property, and must be suitable for, and available for year-round occupancy.

Self-employed

Borrowers have easier access to mortgage loan insurance than ever before with no additional fees or premiums because CMHC has improved its employment verification requirements for self-employed borrowers.

Please check with your lender for the qualifying criteria and availability of these innovative products within their product offerings.

This information is offered courtesy of CMHC. A complete copy of this article may be found by copying the folling URL and pasting it into your browser:
http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_006.cfm#flexdown