Real estate is a popular investment because for a relatively small amount of money, you can own an asset worth significantly more. It’s the power of leverage and while there can be some significant drawbacks used wisely, leverage can help you build your net worth.
For first-time home buyers, this leverage opportunity translates into a chance to put only 5% down to own your home. For instance, you could purchase a condo or home for $450,000 with only $22,500 (plus transactional/closing costs).
But to use the 5% down payment option, the following rules apply:
* The home will be your principal residence—in other words, you will actually live in the home. So if you plan on buying a condo, only to rent it out, you won’t be eligible for the Canada Mortgage and Housing Corporation’s 5% down payment option.
* The actual 5% sum must be from your own funds or from a gift from a family member. You cannot use a loan or line of credit.
* You can prove to your lender that you can cover the transactional closing costs on the real estate deal. A rule of thumb is to keep 1% to 1.5% of the purchase price aside for closing costs. So, a $450,000 home will require you to put aside at least $4,500 to pay legal fees, land transfer costs, etc.
* You must have good credit and a minimum of one year with your current employer.
* The cost to pay the mortgage, your heat and hydro, the condo fees (if applicable) and property taxes cannot exceed more than 32% of your gross taxable income—this is your Gross Debt Service ratio, or the GDS. Plus, all your consumer debt, loans and housing-related payments cannot exceed 40% of your gross taxable income—this is your Total Debt Service ratio or the TDS. To learn how banks use these to qualify you for a mortgage, read my prior post.