First Time Home Buyer?
So you are thinking about taking the giant leap into home ownership. The Pride of home ownership is the number one reason why Canadians desire their own home. There is no landlord looking over your shoulder. You are able to make home improvements knowing that any appreciation that results, will be to your benefit. Home ownership gives you and your family a sense of stability and security. It’s making an investment in your future.
Appreciation. In Canada, especially in the last few years, homes have appreciated considerably and in doing so have added substantially to owners net worth. Unlike stocks and bonds, you get to live in your real estate investment. Also, in Canada your principal residence is exempt from capital gains taxes.
Mortgage Reduction Builds Equity. Each month, part of your monthly payment is applied to the principal balance of your home loan, which builds your equity. You can borrow against a home’s equity for a variety of reasons such as home improvement, sending your kids to university or college, or starting a new business. Why pay-off your landlord’s property when you can own your own?
Buying a home will probably be the most substantial purchase you’ll ever make. But the satisfaction of making that big purchase can sometimes be spoiled by the confusion and hassle that comes along with it. Read on for some helpful tips on how to make the process easier and a little less confusing.
Making a Wish List
Before shopping for a home, you need to determine your needs and wants. Develop a predetermined shopping list of features you are willing to compromise on and ones you aren’t. To properly prepare a home buying strategy, you must examine your lifestyle and budgeting priorities. The decision between a condo or house, detached or semi-detached could have just as much to do with personal preference as it does with expense. Once you have figured out exactly what you want in a new home, your next important step is to ensure that you are financially qualified to make such a substantial purchase.
The Down Payment
The first question to ask yourself is how much of a down payment can you afford. Depending on the interest rate environment, you may be able to spend a lot more (or less) than you imagined. But it’s vital to remember what you have saved isn’t necessarily what you want to use, as there are extra costs that come in to play as you go through the entire purchase, including emergency funding. While a conventional mortgage down payment is 20%, the minimum down payment in Canada is 5% of the value of the home.
It is important to know that most lenders require you to have an additional 1.5% of the purchase price, on top of your down payment, set aside for closing costs.
Particularly for a first-time home buyer, it’s absolutely critical to find out what kind of mortgage you can afford, even before you start looking. Too often, arranging a mortgage is left to the very end, forcing borrowers to scramble for financing.
After you’ve considered how much you can afford for a down payment, the next step is contacting a mortgage broker about obtaining a pre-approval. Based on personal information you provide such as your income, debt and assets, you can receive a pre-approved mortgage, including an interest rate commitment for a set length of time (usually 4 months).
Don’t forget to work with the broker to find the right type of mortgage that suits your needs. You’d be surprised to discover what’s negotiable. Some people want an open mortgage, some people would prefer a closed mortgage. A broker will take you through a needs-analysis assessment where they will ask questions about your borrowing strategies and what’s important to you. Then they could present what would be the right lending solution for you.
Once you receive a pre-approved mortgage, you can confidently negotiate the purchase of a home. It’s a no-cost, no-obligation deal that lets you know before you go house hunting how much you can afford to buy based on how much you can afford to borrow.
It is important to know that a pre-approval does not necessarily guarantee that you will get the mortgage loan. Once you have a specific home in mind, the lender will want to verify that the home or property meets certain standards (such as the condition or market value of the home) before approving your loan. At that point, the lender could decide to refuse your mortgage application, even though a pre-approval for a certain amount was made. In some cases the loan may be approved by the lender, but because you are putting less than 20% as down payment, the mortgage insurer (eg. CMHC) will not approve and the loan will be declined.
Finding the Right Realtor
When looking for a home, one of the most important factors you’ll have to consider is location. Once you’ve determined a few options for where you want to live, the next step is finding the right real estate agent.
Real estate agents are like matchmakers, bringing buyers, sellers and homes together. Agents must be on top of the market – in terms of sales, listings and house prices in the area. But most importantly, real estate agents need to make their clients feel at ease.
While employing a real estate agent won’t cost you anything (he or she gets paid by the seller), you may be asked to sign an exclusivity agreement with the agent which is entirely up to you. Try to find an agent that you can get along with and who will work with you. You don’t have to agree to anything for a while, just look around if necessary.
To find a good agent, let the referrals speak for themselves. Ask friends and family to recommend agents they’ve dealt with in the past. We can also recommend agents who we have had business dealings with in the past.
Making an Offer
A good real estate agent will also be an experienced negotiator, with an understanding of how flexible a certain seller may or may not be. But before making an offer, do your research. Find out how long the property has been on the market. If it’s a new development, find out how much other comparable properties have been selling for.
In many cases, a deposit is made and you may be advised to sign a “conditional” offer. When buyers and sellers strike a deal, loose ends often need tidying up before the buyer will proceed, such as financing or selling your existing home. For resale homes, you should never make the offer final without a proper home inspection, conducted by a licensed engineer to look for any major problems with the house that could end up costing you down the road.
Once these conditions are met, you should be prepared to make the offer “firm and binding.” If not, the deal is off and your deposit is returned.
Finding the Right Lawyer
Don’t wait until after the deal is struck before choosing a lawyer. Then you lose the valuable input he or she can provide scrutinizing the offer before you sign the deal. When looking for a lawyer, make sure he or she is a real estate specialist. To find the right one, remember that quality and experience are the key, not just the price. Since a lawyer’s role is part advisor and part confidant, a good rapport with him or her is a must. As with finding a good real estate agent, ask friends and family if they have anyone to recommend.
Closing the Transaction
Unfortunately for first-time home buyers, closing costs are often an unwelcome surprise. Besides the basic purchase price, you will face a long list of expenses before taking possession of your new home: legal fees, land transfer tax, title insurance, disbursements, adjustments and insurance policies to name a few.
For a resale home, these “extras” can easily add 1.5% to 2% onto the basic purchase price. For brand new homes, that figure can easily reach 2.5%. The time to check out these charges is before the offer is signed, not afterwards.
REMEMBER…all of the professionals involved, mortgage broker, realtor, and lawyer are here to help and want to see you succeed in purchasing your first home. Don’t be afraid to ask questions, regardless of how insignificant you think they are. Good luck and happy house hunting.