Looking to finally purchase a home?

Congratulations! A chat with a mortgage professional will help put things in perspective. You might be asked about your plans to start a family, how much you are contributing to your RRSP, what your career goals are, how old your cars are.

This conversation will get you thinking about whether you really want to borrow $439,000, which includes the mortgage principal and mortgage default insurance. You should also consider the ramifications of rates rising in the future.

There will be property taxes, homeowner’s insurance, utilities and regular maintenance. There may be emergencies, such as a leaking roof, a broken furnace or a flooded basement. There could be landscaping, appliances, snow removal costs or condo fees. All this needs to be rolled into the budgeting process. 

There’s total shelter costs, which include monthly payments for principal and interest, taxes, heating and half of a condo fee, if there is one. (According to industry standards, half of the fee is seen to represent true shelter costs, while the other half includes things like condo maintenance.) This total is divided by monthly gross household income. As a general rule, the total monthly housing costs should be no more than 35% of gross household monthly income.

Then there is the total debt-servicing-ratio calculation, which adds other monthly debt payments to shelter costs. This total is divided by gross monthly income. Again, as a general rule, servicing these costs should be no more than 42% of gross household income.

CMHC has a suite of online calculators to help homebuyers crunch the numbers. 

At this point, you might think a less expensive property might be more reasonable. But it sometimes happens, though less often, that people find they qualify to borrow more than they expected. Once a target price has been established, it’s time to apply for a pre-approved mortgage.

A pre-approval will help you refine the process and know exactly what you have to work with when you find the right place and are ready to make an offer. A pre-approval entails a credit check and information such as the rate being offered (usually locked in for 120 days), as well prepayment options. Ask for details about such closing costs and legal fees. 

A word of caution: A preapproval is not a final approval, so make sure you know what the conditions of getting final approval are and that you can meet them. If you go out and lease a new Mercedes before closing, you could end up with a nasty surprise about your ability to qualify. And don’t forget to save a little for that new lawn mower.