FIRST-TIME HOME BUYER’S WORKBOOK
HOW DO PEOPLE PAY FOR A HOUSE?
In the simplest of scenarios, a person with unlimited financial resources would purchase a home with 100% cash from
their own savings. This cash buyer would then find a house they like and make an offer either directly to the seller
(known as a private sale) or through a Realtor® (a listed sale). If the offer gets accepted by the seller, a closing date is set.
On the closing day, legal professionals make sure the seller gets their funds and the property gets transferred into the
buyer’s name. Both the buyer and seller pay the applicable closing costs and the buyer takes possession of the home.
Unfortunately, this is not a common scenario. Most first-time home buyers require financing assistance (or a mortgage
loan). The following example breaks this down further:
•John wants to buy a home that has a purchase price of $500,000.
•Luckily, John has saved $25,000 cash, which he has set aside in his
bank account to use towards the purchase of a home.
– This $25,000 is known as the down payment.
•His dream home costs $500,000, but with only $25,000 of his own
resources available, John needs to find a financial institution (a Lender)
that is willing to lend him the outstanding $475,000.
– This type of real estate-related loan is called a mortgage.
•$475,000 is 95% of the $500,000 purchase price
($475,000/$500,000 = 95%), or, as it is more commonly
referred to, a 95% loan-to-value (LTV) mortgage.
•Typically, the types of institutions able to issue a mortgage include:
Banks, Monoline Lenders (a lender focused solely on issuing mortgages),
Credit Unions and Trust Companies. Each of these companies would
have their own unique guidelines against which prospective borrowers
would be measured during the institution’s decision-making process.
Prospective borrowers can sometimes get frustrated by these guidelines
because they can seem inflexible and may require the borrower to
obtain or prepare additional paperwork, etc. However, these guidelines
are in place to ensure the borrower is effectively qualified to maintain
affordable homeownership for the long-term.
It’s helpful for borrowers to put themselves in the Lender’s shoes and imagine what questions they would ask, or what
information and reassurances they would need, of someone who was asking to borrow $475,000.
DOCUMENTS YOU WILL REQUIRE
The documents or “docs” a borrower may
have to gather to help them qualify for
hundreds of thousands of dollars in mortgage
loans can often be collected in a few hours.
However, the sooner you start collecting these
docs in your home buying journey, the better.
Preparing and presenting these documents
to your mortgage professional, in advance,
may help reduce any surprises that can occur
during the home buying process.
In Canada, any property
purchased with a down
payment that is less than 20%
of the purchase price, will
be required (by law) to have
mortgage default insurance
(more commonly referred to as
“mortgage insurance”). This
insurance is designed to protect
the lender in the event the
home buyer defaults on their
mortgage. A mortgage default
insurance premium will be
added to the mortgage amount
and amortized over the life of
the mortgage loan. This is not
an upfront cost.