Are you (and your significant other) looking at buying your first home? There are a few things you should do to make sure you’re ready, once you get into the home buying mode of going to look at houses you don’t want your enthusiasm soured by having to take a step back.
BEFORE you go look for homes:
Know your budget
- How much do you have saved?
- Are you planning on using your RRSP?
- How much help are you getting from relatives?
- How much debt do you have (what are the balances and what are the monthly payments)
- If you want to impress your mortgage person just remember to convert bi-weekly payments to a monthly figure you multiply by 26 and divide by 12
- How much do you make, before and after tax?
The first two points give you how much you realistically can afford for a down payment. If you are putting down less than 20% (common for first time home buyers, especially if you are doing it on your own!) then just be aware that you will have additional insurance to buy through CMHC that affects your eventual monthly payment amount.
The debt you have (principal + interest) divided by the amount you make after tax gives a ratio that is referred to as your debt-service ratio. If you make $1,000 a month and have a $300 monthly car payment (and no other debt) then your debt-service ratio is 30%. Your mortgage specialist will be able to give you more information on what the lenders look at but generally the lower this ratio the more favourable you are looked at (with the important caveat that you have to have *some* debt presently or in your past for them to know you actually pay your debts).
All of that to say the most important step in the home buying process (especially for first timers) is to find the mortgage broker or agent that you want to work with. If you need help finding a mortgage specialist let me know and I can point you to a few options.
Just to reiterate: The first step: Meet with a mortgage specialist.
Now that you’ve met with your mortgage specialist and have a pre-approval for some dollar amount you know how much house you can afford – yay!
Some important reminders at this point:
- You need cash on hand at closing to pay for closing costs (don’t necessarily count on your First Time Home Buyer Tax Credit being credited to you at the closing table)
- Do NOT increase your debt load between the time you get “pre-approved” until after the deal closes. Don’t do it. Stop. Are you doing it? No? Good. (also, don’t quit your job)
- Your lender has pretty much up until ~48 hours or so before the closing to pull their financing if your situation has changed
- Do you have furniture to fill the house?
- Are you a handy person who can make repairs yourself and/or do you have reserve funds if something goes wrong in the first year?
All that to say, don’t max yourself out financially. If you qualify for a mortgage up to $400,000 .. try shopping around $350,000, etc. That’s not a hard and fast rule but just be realistic with yourself.
I want to take a minute to talk about Closing Costs because, personally, this was the most infuriating part of the whole home buying process for me. There’s a rule of thumb that people like to defer back to because they don’t want to do the work of giving a breakdown of the things to look for (that rule of thumb btw is 3%-5% which is just a huge variance (5 is almost double 3) and just ridiculous in my opinion. It’s probably going to be thousands dollars sure and for the purposes of writing content that appeals to everyone fine I’ll say three to five percent but in reality it’s things like property taxes or other municipal utilities owing, lawyer fees and land transfer taxes. HST in some rarer cases, etc etc. All things that really you should be able to nail down with a pretty good sense of accuracy prior to closing. Check the property taxes out online, request copies of water bills from the seller, ask your lawyer about their fee packages, calculate the transfer tax, etc etc.
Now that you know how much you can afford (realistically), start making your “must have” and “nice to have” lists (and also your will not haves)
You really do want these three categories very well defined:
Keep this list as small as possible, it’s your first home remember and most home owners move every 5-7 years according to studies done in the U.S. by the National Association of Realtors. With that in mind what are your needs going to be like over the next few years .. do you really need 4 bedrooms? Do you really need a 1/2 acre backing onto the Grand River? It’s personal and I won’t tell you not to put something in this category BUT just do yourself a favour and keep it light. If you have a young family (or are planning on starting one) then proximity to family might be all you really care about.
Nice to haves
This is where you could really go crazy so, again, just be as realistic as possible. With both lists remember, paint is relatively cheap and a little elbow grease goes a long way.
Cannot / Will not haves
For the love of the almighty go to Google Maps (or Bing if you’re into that) and view the aerial surroundings. Do you want to live downwind (that’d be east) of that chemical refinery? It’s not for me to say. But no, you probably don’t. A diligent REALTOR® will drive you around the neighbourhood(s) you’re interested in and point out pros and cons but make sure you do your own homework as well.
Wow, that’s a lot of words and we haven’t even started looking at houses yet. But that’s kind of the point, there’s a lot of leg work to do before you get to the fun part.
Finally, start searching for your first house!
Let’s not kid ourselves, you jumped ahead and have been doing this all along.
There’s a number of self-serve options.. this website for example. The trouble in the Canadian marketplace is that we haven’t yet (as of writing this: June 21, 2018) gone fully open and digital. We’ve come a long way in the past few years but sadly we’ve still got a long way to go. So take a multi-pronged approach:
- Give your REALTOR® your criteria, make sure it’s clear what falls into what category (as noted above) and have them set you up with a property alert on their local MLS® software.. that’s the system new properties get entered into so it’s still the best system to get notifications from
- Search REALTOR.ca .. as a former real estate tech company employee it pains me even now to do this .. but they are still your best bet for the most comprehensive publicly available property dataset
- Keep your eyes open and drive the neighbourhoods you’re interested in. While I have many opinions on the marketing tactics of “coming soon” listings (spoiler: not a fan) they’re here to stay for the foreseeable future
This process is going to involve finding homes you like, scheduling an appointment to view them and then ultimately deciding on the right choice for where you are in your life.
The good news for First Time Home Buyers is that you don’t have a prior house to sell! But do you have a lease or other rental agreement for where you currently live? It’s not generally hard to get out of residential leases so we won’t worry too much about that here but just be aware it’s another “date” to consider.
So you’re ready to make an offer – the key things to keep in mind that vary from deal to deal are going to be:
- the closing date, when do you want to take posession? most listings will have a seller that wants a specific closing so another advantage to being a first time home buyer is that you can announce your flexibility in this regard (though there does have to be a specific date on the offer)
- the deposit, these are funds that you give, typically with the offer otherwise normally within 24 hours of your offer being accepted
- this is more of that cash on hand we talked about earlier, but don’t worry it gets credited towards things at closing
- also it’s normally a cheque or a certified cheque .. not actual cash
- depending on the property there may be additional conditions to add or considerations to ask for (I’ll talk about chattels and fixtures some other time but just make sure if there’s something you want with the home purchase that it is explicitly spelled out in the offer)
Your offer is accepted.. now you wait.
If you don’t have a lawyer by now, you should certainly find one. The agreement of purchase and sale is a legally binding document and as such some people like to have a lawyer review it prior to even submitting it. That’s fine but just be aware of time delays in a “hot” market. To put your mind at ease you could ask your REALTOR® to put in a clause that states the sale is conditional upon a satisfactory review of this agreement by a lawyer.. I haven’t personally seen that happen but I’m sure it has somewhere at least once.
Remember, between the offer being accepted and the closing date there will be a number of things that happen.. conditions of the deal must be met (if any, but for first time home buyers at the very least a financing condition will need to be there to protect you). A pre-approval is not an approval.. the lender will reserve the right to approve the specific house and purchase price (to avoid someone who is pre-approved for $300,000 going out and offering that for something that should be $150,000 as an extreme example).
As I stated above, under no circumstances take on more debt or change your financial situation. Even after you get “approval” the lenders can still revoke that as I stated above if they feel like your situation has changed to dramatically.. it’s one of those things that will be listed in the fine print of all the papers they get you to sign.
I hope you’ve found this helpful .. I know it was a lot of words so as a reward here are the downloadable PDF and Microsoft Excel versions of the checklist I created. If you did find this or the checklist helpful please consider sharing this article (not just the PDF or Excel file please) on social media.
If you are a first time home buyer and you think you’re ready to start the home search process, please give me a call (226) 218-0433 or send a text / email [email protected]