Expert: Jessica Bryan - 1/14/2008

Question
Hi I have a few questions regarding buying a home. First I am putting together a down payment for a house over the next two years I will have it all together. I was however wondering how much of a downpayment is required on a older home...not brand new? I am going to be able to put together between 10,000 and 30,000 would that work? I'm in Canada, And right now the cost of a home I'd be interested in would be around 250,000 to 450,000 to give an estamte. To be honest I don't have alot of money.... getting the down payment together is going to take alot of work on my part but I'll get it by 2010. I was wondering how buying a home works...after you take the paperwork to the bank and give the down payment(?) do you move in?  Where does the other 200,000 + thosuands come from? A loan from the bank?  Would a bank loan that much to someone with lower income?   Would the bank loan that much all at once or a little at a time to pay for the home? I really don't know and can't find the info I'm looking for over the internet and am hoping you can offer some insight.

Thank you

Tara.

Answer
Dear Tara;
I first am going to assume that Canada is the same as the United States when it comes to the lending process.  In order to buy a home you will need to talk to the bank and get pre-qualified for a loan.  since you are currently saving, it might be a good idea to contact a lender right away and find out how much you will need in order to qualify for a loan. They will look at your monthly income and based on a ratio of roughly 25 percent of your income going toward repayment of the loan on a monthly basis they will calculate whether you can afford that loan.  (The ratio is usually around 25/33 with 33 percent being total debt payment per month). Say, for example you are buying a home that is $250,000 and you are putting 10 percent down with the bank financing  $225,000 you will need to make sure that the amount that they finance and the interest rate they charge will be low enough for you to make the monthly payment to them. At a 7 percent interest rate your monthly payment would be $1,500 for the principal and interest payment.  This should be 1/4th of what you earn per month. As I said when I began writing this answer, that is based on US lending practices.  You should talk to a banker right away and find out what they have to say.  You should also be aware of the fact that banks look at your credit history and make sure you are a good credit risk.  If not, it doesn't matter how much you can afford; it will be more difficult to find a loan.  

Okay...now for the process of buying a home: Once you get a loan qualification from a bank and know how much you can afford to buy, look for a home within that [price range, make an offer, sign the papers, pay your down payment and get the loan for the rest.  It is given by the bank all at once and you are given 30 years to repay the loan.  Since this will be your first home, you will amortize that loan over 30 years but will probably not stay in the home that long.  So, once you sell that home you are required to pay off the entire loan with the proceeds from the sale.  

I hope that this helps answer your questions.  If not, I suggest that you talk to a real estate agent who can walk you through the procedure.  You will need to have a representative looking out for your best interests once you decide to buy a home anyway.  So it is best to choose someone now to talk to about the process.

Good luck and best wishes,
Jessica Bryan