Buying your first home
Ready. Set. Nest.
Mortgages, realtors, and appliances, oh my. Becoming a homeowner is one of the biggest (and most intimidating) investments you'll make in your life, but these 10 steps will help you make a successful transition from real estate rookie to an enthusiastic equity builder.
From the driveway to the drapes, you've anticipated buying your first home and the time has finally come. This domestic rite of passage can be both exciting and a little overwhelming at the same time – but armed with a bit of education and solid advice, you'll know exactly what to expect. Feel prepared and confident with these 10 steps to buying your first home.
1. Determine what you can afford.
Be sure you're aware of all the costs involved. Not only is there the actual purchase price of the home, but there are a number of additional costs during, and after, the purchase.
The biggest upfront cost is the down payment. Conventional mortgages require 20% of the property purchase price. While this may seem daunting, especially given today's high cost of housing, there are a variety of ways to pull a down payment of that size together. You may be able to receive a loan or gift from family members; you can also use your RRSPs through the government's Home Buyers' Plan (HBP).
If you have a down payment of less than 20% of the purchase price, you'll need a "high ratio mortgage". These mortgages are insured by a third party, such as CMHC for a one-time fee. With this insurance, the minimum down payment you're allowed is 5% of the purchase price. This type of mortgage includes an added insurance premium, which can be added to the overall amount of the mortgage.
2. Determine your financing eligibility.
Your lender is going to look at two indicators:
- Gross Debt Service Ratio, which compares your monthly housing costs against your monthly gross income. Generally, your monthly housing costs should be less than 32% of your monthly gross income.
- Total Debt Service Ratio, which takes a look at all your debt including housing, credit cards and loans. Generally, your total monthly debt should be no more than 40% of your monthly gross income.
3. Get your mortgage pre-approved.
By getting your mortgage approved before you start house-hunting, you'll verify how much you can afford. Also be sure to get a "locked in" rate that won't go up, but will go down if rates decline. Once you're pre-approved, ensure your down payment will be ready and that you have 3% - 4% of the purchase price available for closing costs and other expenses.
Remember: down payment + amount you can borrow - closing costs = your maximum price.
4. Go shopping.
Finding the right house is all about narrowing down your price, neighbourhood and must-haves. Have a life plan. Create your wish list: number of bedrooms, number of bathrooms, square footage, parking space, if it's good for children and pets, and so on. How long are you going to stay in this home? If you think you'll move again soon, you may be able to live with what otherwise might be deal breakers. There are a variety of resources to help familiarize you with the market: MLS web listings, newspapers, developers' brochures and real estate magazines. Have a good idea of what you want before you enlist a professional.
5. Find a realtor.
An active search is best done by a realtor who will make viewing appointments, explain technicalities and present offers to the home owners on your behalf. When your realtor helps find your home, they generally earn a portion of the fees paid by the seller.
To find the right realtor, ask friends, family, co-workers and people in the neighborhood for referrals. Visit local real estate offices to find a specialist in your price range and area. When you have a list of candidates, interview them to determine compatibility.
6. Make an offer.
You've found it! It's an emotional time, but try to remain objective. Visit the property a few times. Observe the neighborhood at different times of day and, above all, don't be rushed. An Offer to Purchase is a legal contract. Be sure about making your offer, but also understand that no single property will meet all of your needs. Aim for one that fits most of your needs. Your offer will include:
- Offer price, amount of deposit, amount of down payment.
- Possession and closing dates (when choosing dates consider whether you need to give notice or need extra time to move)
- Expiration date and time of offer.
- List of fixtures (items you want with the home, like window coverings and appliances.)
- List of subjects (conditions that must be met for the sale to go through). These subjects are not "escape" clauses since you must do all that's reasonable in order to complete them. Standard subjects can include arrangement of appropriate financing, completion of a satisfactory home inspection and the seller providing a complete site survey. Your realtor will be able to help, but be sure you understand what each subject means. If you're unable to meet the conditions, the contract ends, and the sale will not proceed.
- Home inspection. This may be part of your list of subjects. Currently, home inspectors are unregulated so ask your realtor to recommend a home inspector they know and trust. You'll be paying for the home inspection so the results belong solely to you – you're not obliged to share the results with anyone. Obviously, you want the inspection to go well, but sometimes major issues are discovered. You'll have to decide if it's serious enough that you revoke your offer; but perhaps you'll want to discount the offered price or simply accept the defect as part of the original offer. If you're being rushed to forego a home inspection to "speed things along,", be suspicious. Step back and remind yourself that this is one of the largest investments in your life and you need all the information available.
7. Present your offer.
Once you've reviewed the offer and signed it, your realtor will present it to the seller. They have the option to accept the offer as it stands, decline the offer or counter-offer. A counter-offer means that the original offer has been rejected and a new offer is being presented. Counter-offers can go back and forth until agreement is reached or one of the parties declines the offer thus ending the negotiation.
One of the hardest parts of the whole process is waiting to hear if your offer has been accepted. But once it has, it's time to get in gear. You'll need to make a deposit (if you didn't do so when the offer was submitted), which will make up part (or all, in some cases) of your down payment. The deposit amount varies, but may be up to 5% of the purchase price.
8. Nail down your financing.
One of your biggest concerns after your offer has been accepted is finalizing the mortgage, the legal document that outlines the terms, conditions and repayment schedule. If you've been pre-approved, you will have already completed some of the steps. You'll need the following to apply:
- A payroll statement or T-4 slip; or, if you're self-employed, income tax returns for three years.
- Your Social Insurance Number.
- The approved offer to purchase, the real estate listing and a picture of the home.
- Confirmation of down payment and closing cost funds.
- Detailed information on your finances including income, assets and debt.
- Survey certificate and assessment details (if required).
- Your authorization that the lender can contact a third-party provider for your credit score.
Once you qualify for your mortgage and an acceptable credit report is received, the following steps will occur:
- The lender will (typically) arrange an appraisal.
- If it is a high ratio mortgage, the lender will submit information to a default insurance provider. The insurance provider will review the property information and will insure the loan when they confirm that the value of the property is appropriate for the mortgage amount.
- Mortgage documents are prepared and issued.
9. Close the deal.
Your realtor will inform your lawyer of closing dates as well as provide documentation to the legal team and your financial advisor. If you don't have a lawyer in mind, your financial advisor or realtor will be able to suggest someone.
Once the mortgage documents are prepared, your legal representative will explain the mortgage and details. You'll sign the documents and the lawyer will register the mortgage and obtain the mortgage funds, tax adjustments, down payment and closing costs required. Your legal representative will also handle other details including preparing ownership transfer documents, preparing a statement of adjustments outlining the disbursement of funds and delivering the final amount due to the seller.
Following the completion of legal documentation, you'll sign for your mortgage with your lender and confirm any outstanding details.
10. Home, sweet home.
Congratulations on your new home! Before you plan that house-warming, some final tips:
- Moving companies. They can make the move easier if you're tight for time and take a load off both physically and mentally. Keep in mind that you can obtain insurance on your possessions while they are in the care of the movers.
- Address changes. Canada Post offers address change cards and a mail forwarding service.
- Mortgage payments. Before your first mortgage payment, you may owe an interest adjustment to your lender. Interest is payable from the time the funds are provided (your closing date) to the time the mortgage is scheduled to start. Ask your financial advisor if this applies in your case.