Navigating the different programs and tax credits available to first time buyers can be overwhelming.  However, it is crucial that first time home buyers be aware of the ways in which they can offset some of the costs of home ownership.

First-Time Home Buyers’ Tax Credit (HBTC)

The HBTC is a non-refundable tax credit for qualifying homebuyers purchasing qualifying homes.  Basically, the HBTC can reduce the amount of taxes you owe.

The $5,000 non-refundable tax credit provides up to $750 of federal tax relief. It is based on a down payment of $5,000 and is calculated by multiplying the lowest personal income tax rate (15%) x $5,000 = $750.

To qualify, you, and anyone you are purchasing the home with, must be considered first time buyers, which means neither you nor your spouse or common-law partner have owned another home the year you purchased your home, or in the four preceding calendar years.  Furthermore, the home must be used as your principle residence, and must be occupied no later than one year after it has been acquired.

When two or more eligible individuals jointly purchase the home, the credit may be shared but cannot exceed $750.

If only one individual is eligible to claim the tax credit, the percentage of that individual’s ownership of the home can be used.  So, if you own 50% of the home, you can claim 50% of the tax credit (ie. 50% of $750= $375).

First Time Home Buyers’ Program

Not to be confused with the HBTC, the First Time Home Buyers’ Program is another way first time home buyers can offset some of their costs.

The First Time Home Buyers’ Program is a BC program that reduces or eliminates the amount of property transfer tax you pay when you first purchase your home.

To qualify for a full exemption, you must:

• Be a Canadian citizen or permanent resident;
• Have lived I BC for 12 consecutive months immediately before registering the property, or have filed at least 2 income tax returns as a BC resident in the last 6 years;
• Have never owned an interest in a principle residence anywhere in the world; and
• Have never received a first time home buyers’ exemption or refund.

 And your property must:

• Be located in BC;
• Be used as your principle residence;
• Have a fair market value o $475,000 or less; and
• Be 0.5 hectares or smaller.

 You may be eligible for a partial exemption if the property:

• Has a fair market value less than $500,000;
• Is larger than 0.5 hectares;
• Has another building on the property other than the principal residence.

And to keep the exemption, you must:

• Be moved into your home within 92 days of registering the property, and
• Continue to occupy the property as your principal residence for the remainder of the first year.*

*At the end of the first year that you own the property, you will receive a letter to confirm that you meet the occupancy and property value requirements.

For more information, visit the program’s website http://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax/understand/first-time-home-buyers.

Or call me today to discuss the options available to you!

The Down Payment

The down payment may be the first thing first time home buyers consider when looking to make their first home purchase. 

A down payment is what you pay up front when you purchase your home, with the remainder of the cost being paid through a mortgage.

When you apply for a mortgage, you will need to determine (1) How much of a down payment you will be making and (2) Where the down payment is coming from.

How much?

Calculating your minimum down payment is no longer as simple as 5% of your purchase price.  In Canada, the minimum amount of money you need to put down on a home is determined by the purchase cost:

• – For homes costing $500,000 or less, the minimum amount needed to put down is 5%.
• – For homes costing more than $500,000 and less than $1 million, the minimum needed to put down is 5% of the first $500,000, and 10% of the remaining balance.
• – For homes costing $1 million or more, the minimum down payment is 20%.

If you put down less than 20% your mortgage will be considered to be “high-ratio,” which will require you to pay an insurance premium. 

Where is the down payment coming from?

In today’s hot market, it may be difficult for first time home buyers to pull together enough to make a down payment.  However, first time buyers should be aware that a down payment can come from a variety of sources, not just their savings.  A down payment can come from cash in the bank, RRSPs you may have, or even as a gift from family.*

*Note: if you are using gifted money for your down payment, the person gifting the money will need to sign a gift letter with you, and they may need to show evidence that they have these funds.  

First time home buyers should also be aware that if you are putting less than 20% down, the funds for the down payment will need to be in your account for at least 90 days and you will have to produce bank statements to confirm this amount. If you are putting more than 20% down, some lenders will accept a 30 day confirmation of funds. 

As a property owner you may think you know what to expect.  After all, you’ve already been through the purchase process before, and probably think it can’t be too different the second time around.

However, even if you are a seasoned property owner, there are three things you need to consider when you are buying AND selling:

1. You need a deposit    

If you have not sold your existing property yet, you probably have most of your cash tied up in your house.   So how do you come up with the deposit you will need when placing an offer on your new home?*   

• You can use a line of credit that is attached to your home, if you have one set up.  
• You can use a line of credit that is attached to your chequing account.
• You can ask your lender for a demand loan to cover the deposit and it gets paid out with the sale of the property.
• You can borrow from family and pay them back after the sale goes through.

*If none of these options are available to you, talk to your mortgage broker to come up with a different solution.

2. Do You Buy or Sell First?

Most people do not want to sell and risk being left homeless, especially in today’s hot real estate market where you are not guaranteed to have your offer accepted on your new purchase.   So you definitely need to talk with your realtor and mortgage broker about the best strategy for you.  

Make sure you have narrowed down the area you want to buy in and the price range you can afford.  Take a look at how much inventory is available that meets your criteria.  If you feel that your property will sell relatively easily and there is enough choice of inventory for your new property, then sell first with a long closing date (at least 3 months) and as soon as your buyer has removed subjects, get out there and start looking for your new home.  

The alternative is to find that new property first, again, go with a long closing date, and then put your place on the market ASAP and ensure that if you do NOT sell, you have a backup plan – and this is where your mortgage broker will have to advise as to whether you can carry both properties.

3. Bridge financing

Bridge financing is when you have sold AND bought but your dates don’t line up.   So your sale is going to go through AFTER your purchase.   Some lenders do an excellent job of bridging funds.  Some will only bridge your down payment, some will bridge the down payment and your closing costs – inquire with your mortgage broker about what’s possible for you.

Lenders need to see that you have the income to support a mortgage.  When you apply for a mortgage, you should have the following ready to go:

• 1. Recent paystubs;
• 2. Job letter stating your position, salary, and duration of employment;
• 3. T4 from the previous year;
• 4. Tax return; and 
• 5. Notice of Assessment (NOA). 

Most of the time, a lender will only ask for a recent paystub and job letter, however, in some situations they may need further documentation—so be ready to produce the documentation listed above.

There are some situations where more information will most likely be needed, such as:

• – If you have recently changed jobs;
• – If your income is mostly from commission;
• – If you have a contract position;
• – If you are taking a leave of absence from work; or
• – If you are self-employed.

Having a mortgage broker on your side means that someone will be there to make sure that you are providing the right documents to the right lender, and that your income is adequately represented in your application.

Stay tuned for the fourth part of my First Time Home Buyers Series, where I will discuss what you need to know about down payments!

The Office of the Superintendent of Financial Institutions (OFSI), announced today its recommendations to all federally regulated institutions to promote “prudent underwriting of residential mortgage loans.”

OFSI made several recommendations that will put mortgage applicants under increased scrutiny, including suggestions that lenders more closely examine rental income and appraisals.  OFSI is also calling for an end to the idea that a considerable down payment (35% or more) or equity will translate into an automatic mortgage approval for potential borrowers.  OFSI expects lenders to emphasize income and character when assessing a potential borrower’s application.

What does this mean for you?

If you already have your mortgage approval, make sure you don’t lose it!You already worked so hard to provide all the right paperwork to get your approval, and it would be a shame if you had to not only redo everything, but provide additional paperwork and documentation if lenders amend their guidelines.

For new borrowers, you can prepare for stricter lending rules having your ducks in a row and ensuring your 5 C’s of Credit are in line: 

        Collateral – is there any issue with the property that a lender may not approve (e.g. presence of an oil tank, asbestos, etc.)?  

        Capital – where is your down payment coming from?  Do you have bank statements to show you have the funds?  

         Credit – have you been making your monthly debt payments on time?   Are there any issues on your credit that you need to take care of like an unpaid collection or credit card bill? 

         Capacity – ensure your income confirmation is current (job letter and paystub).   If you are self employed, ensure your income taxes are up to date and you can provide full copies of your tax returns and Notice of Assessments.  Avoid changing jobs if you are planning to apply for a new mortgage.  

         Character – your mortgage broker will tell a story to the lender about your application – does the story make sense?   Is it reasonable?

What does this mean for the Vancouver market?

If financial institutions actually make changes to their policies to reflect OFSI’s recommendations, it will be harder for borrowers to get mortgages, possibly reducing the number of home purchases in Vancouver.

Furthermore, these guidelines may only make it more difficult for new buyers to break into the Vancouver market, while buyers with more access to funds can continue to qualify for mortgages. However, it is important to note that it may take lenders months to implement policy changes, if they decide to adopt any recommendations at all. 

It is impossible to determine how these recommendations, if implemented by financial institutions, will impact the Vancouver market.  What is clear is that buyers will have to be even more prepared to provide documentation and to prove they have the character to have their mortgage approved.

What should you do?

OFSI’s recommendations that lenders increase scrutiny on income and character means that buyers should have their paperwork proving their income ready, and then call a mortgage broker.  A good mortgage broker knows how to tell your story in a way that demonstrates that you have all the Cs, making you more appealing to a lender.

Call me today to discuss how OFSI’s recommendations will impact your situation, and how I can help you get your mortgage approved in this increasingly challenging market. 

You can read OFSI’s press release and letter to financial institutions here: http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/nr20160707.aspx

As a first time home buyer, you may not be aware of all the costs in buying a home.  This makes determining how much of a mortgage you can afford difficult.

Qualifying ratios
Generally, lenders will use a 32/42% Gross Debt Service (GDS)/Total Debt Service (TDS) ratio.  This means that 32% of your GROSS income (before taxes) can go to your housing costs, which include: mortgage payments, property taxes, strata fees (if applicable) and heating costs.  42% of your gross income can go towards your housing costs plus your other monthly debt payments.

What else you should consider 

Strata fees
When you are shopping for prospective properties, make sure to pay attention to the strata fee, as these can be up to $400-$500 a month in some developments.

Other debts
Lenders have specific formulas when calculating minimum payments on loans and lines of credit.  Be prepared for the possibility that you may have to pay down some debt or re-organize it.  Your mortgage broker can assist you here, especially since they have so many lender connections.

Credit Checks
Your mortgage broker will do your credit check.  Make sure you get this done early in the pre-approval process, just in case there are issues you may have to address.  If your credit score I unexpectedly low, you will need time to get it to the minimum level where a lender will consider it.

Budget
While your mortgage broker will tell you what you qualify for, every person has different expenses.  Review your bank statements for the last 3 months and determine how much you can realistically pay for housing costs.  If you live at home and don’t pay rent, each month put aside what you think you would pay in housing costs and see if that amount is sustainable with your lifestyle.