As a first time buyer this is your first rodeo, but with the help of experts – your Real Estate agent, your Mortgage Specialist, heck… even your been-there-done-that parents – the journey can be a whole lot easier.
This article provides key tips, advice and everything else you’ll need to be aware of on your journey to becoming a homeowner. First, watch this video, and then continue reading below to save yourself big-time in the heartbreak and disappointment department!
First Things First: 5 Signs You’re Ready to Buy Your First Home
I’m always on the lookout for good material for my blog, and this is not the first time Jackie Woodward, from Edmonton, Alberta, has delivered the goods. I like this article because it is spot on, yet simple, in terms of its message. A good start for anyone thinking of buying their first home.
Ready or Not?
Home ownership is likely both the largest asset and debt most people will take on in their lifetimes, so it is not a commitment to be entered into lightly. While buying your first home is thrilling, your excitement should not be overshadowed by the responsibility that comes with owning versus renting. If you’re not sure if you’re ready to buy or not, here are 5 signs that should help you to make the right decision.
1) You have a reliable income source
If you plan on getting a mortgage, living paycheque to paycheque is not conducive with owning a home and having a mortgage. Unexpected costs come along all the time with home ownership and that could break the bank if you’re on a tight budget.
Before being approved for a mortgage your lender will be confirming you have a continuing reliable income source in order to support the interest, payments and property taxes for the new home in addition to any other debt obligations you may have.
Even if you are self-employed and take minimal income from the business, you will still be asked to demonstrate you have a steady source of income that can support all of your payments.
2) You have access to a down payment, and more
Not only do you need to have a minimum 5% down payment to purchase a home, but you also need to show you have access to additional funds to cover the closing costs. These would include legal fees and any property tax adjustments along with other miscellaneous moving expenses.
Basically, the lender is looking to see you have enough funds on hand so you won’t be short on the closing date and it also looks good to the lender when you have additional savings on deposit. The lenders will ensure you’re in healthy cash to debt range, especially if you’re trying to qualify to buy your first home and the stronger you are, the better for qualifying.
3) You’re not drowning in debt
Your non-mortgage debt levels are an important factor in determining the maximum mortgage amount you qualify for. The more debt you have, the less mortgage you can qualify for. Some lenders look at it like you’ve maxed out all of your available credit limits while others are looking at minimum payments on only what you owe when you apply.
Determine which method your potential lender prefers before applying as you may have to change lenders in order to qualify; though reducing your debt levels before applying for a mortgage would be a good thing to do.
4) You’ve crunched the numbers
While you can usually depend on your mortgage professional to provide you with the information you need to make an informed decision, they can’t make the choice for you. It is still up to you to determine which mortgage and property option fit your lifestyle.
Be prepared for a mortgage payment, condo fees if applicable, property taxes, property maintenance and repair costs, house insurance and more. Be sure you’ve done your research before you apply for a mortgage pre-approval.
5) You don’t need a co-signer
A co-signer is brought on if additional application strength is required before a lender will grant you a mortgage approval. If you’re in the position where you require a co-signer, you may also be in the position to rent for a bit longer. Depending on why you need a co-signer, it might be a better idea to delay home ownership until you can qualify on your own.
But if you don’t want to put off buying any longer, at least have an exit strategy to eventually get your co-signer off the mortgage so you can make decisions about your home without the signed consent of your co-signer.
If you’re still undecided about home ownership, it may be best to wait until you’re absolutely sure. Don’t be afraid to explore all your options before you commit to one as buying your first home can be quite stressful. Again, be confident about your choices by doing your research before you sign on the dotted line.
7 Steps to Becoming a Homeowner (if you’re ready that is)
Now that you had a chance to evaluate yourself and decide if you’re ready to buy I present these seven distilled steps to buying a home to help put some simplified structure around the progression from pre-approval through to closing day.
1) THE PRE-APPROVAL
When buying your first home it’s essential you understand right at the beginning how much purchasing power you have. No point in hanging your hat where your hands can’t reach! Consult a mortgage broker up front; share your personal and financial information, and find out the maximum mortgage amount you will qualify for.
Your broker will also factor in estimates for property taxes, condo fees, and heating costs to ensure the mortgage pre-approval reflects as much as possible the type of property you wish to buy. Armed with this information, your real estate agent can show you potential properties and districts which suit your budget, and your search begins in earnest.
2) MAKE AN OFFER TO PURCHASE
Buying your first home isn’t easy. You don’t simply agree to pay the asking price, tell your bank to send your pre-approved mortgage money and then walk away with the keys. In recent years, in and around the Greater Toronto Area, the rules of engagement have become skewed in favour of sellers.
In fact, in early 2017, the real estate market was downright ridiculous. Reminiscent of the famous tulip frenzy in Holland in the 17th century, buyers were pressured into buying homes without any conditions whatsoever and to make offers at prices substantially above the asking price. I have seen and heard of some really tragic stories where first time buyers overpaid or bought run-down houses without a proper inspection.
Now things have cooled off, and buying conditions seem less chaotic. I strongly recommend you have an experienced real estate agent prepare and present your offers. One who is comfortable in all types of markets, and who will use every superpower in their arsenal to protect you, because you are a newbie.
You may live in a market where it has become standard practice to compete with several other avid buyers for the property you want. You may feel pressure to make an offer which has no strings attached – no conditions. This puts a lot of pressure on you to get it right the first time, since there is no wiggle room or cooling off period.
Do not go it alone, and make sure if you are buying in an area where this is possible, that your real estate agent has experience and success in these matters, otherwise the seller’s realtor and the other buyers’ real estate agents will exploit any weakness.
4) NEGOTIATION & OFFERS
Your real estate agent will submit your offer to the seller’s agent and wait. If you are competing with other buyers, the process will be managed by the seller’s agent who will exercise all her skills to maximize the price at the most favorable terms for her client.
If the sellers do not reject your offer, often they will now make a counteroffer, and so the process evolves. Once the sellers accept an offer from you, you’re off to the races.
At that point you (the buyer) are legally obligated to go through with the transaction (hopefully with some conditions which give you some time to get all of your ducks in a row); therefore, it is crucial you understand all the terms in the offer document.
5) FIRM UP YOUR APPROVAL
Your mortgage pre-approval was all about YOU, not any particular property. The final critical step in the mortgage approval process is the lender’s review of the property itself. Only when there is a ‘real deal’ with an actual property can your mortgage lender tell you for sure if you are approved.
If there are no comparable completed sales around your offer price, an appraisal report might not support your purchase price. In that case, you will still be eligible for a mortgage, but your mortgage lender will expect you to come up with the shortfall.
Also, the property itself might not meet your lender’s lending criteria. This can happen with very old properties which have serious issues (e.g. asbestos content, knob and tube wiring, being in a poor state of repair) With condos, it might be that a condo corporation’s financial statements are very weak. Or that your lender will not finance condos less than a minimum square footage (be careful with micro condos) Or you may have your sights set on a condo building which is not on your lender’s approved list.
6) FULFILLING THE CONDITIONS OF YOUR OFFER
Sometimes a mortgage lender will stipulate a home inspection must be done, but usually, it is optional for the borrower. Many buyers include the review of the inspection as a condition within their offer. Careful buyers will schedule the inspection as early as possible to avoid surprises after all conditions are removed. Any issues and resolutions that arise at this point should be negotiated and included in an offer amendment signed by both parties.
7) CLOSING DAY
A deposit is required as part of your offer. In small markets, this amount can be quite modest, but in the GTA, this amount has increased a great deal in recent years. 3 – 5% of the purchase price is not uncommon. This deposit is in the form of a certified cheque or bank draft, held in trust at the seller’s real estate brokerage. It will eventually go towards your down payment.
On the closing date, your mortgage lender will release your mortgage loan to your lawyer. You will provide her with the balance of your down payment and all relevant closing costs. She will send your down payment and the mortgage proceeds to the seller’s lawyer.
Your lawyer then completes the legal title work, registers the house in your name, and finally hands you the keys to your new home. This typically takes place in the afternoon, by 5 pm of your closing date
Buying your first home is a pretty big deal – to say the least. But with experts on your team and knowledge up your sleeve… you’ve totally got this!
And Now the Bad Stuff: Five Common First Time Buyer Mistakes
Over the years, I’ve structured 100’s of mortgages and unfortunately have seen my share of unnecessary problems buyers face when they have rushed to make an offer on a purely emotional basis. Common sense flies out the window and at some point in the buying process, they realize they’ve made a mistake. Here’s the summary of the top 5 mistakes I see buyers make, I trust that you’ll find these useful and save yourself a lot of problems.
Mistake #1: They do not pre-qualify themselves for a mortgage before shopping
Sadly we have seen several recent instances of buyers who were totally not suited for a mortgage on the home they bought – and to make it worse, they bought under pressure without any condition of financing. This is so crucial, please don’t shortcut this vital step. You’ll likely lose your deposit if the deal doesn’t close or get gouged on the interest rate due to being on the clock with limited mortgage options.
Mistake #2: They overpay for a house in a hot market. What if the appraisal comes in low?
A pre-approval is not a guarantee of a mortgage – rather it is simply the mortgage lender’s view that if all the info you provided checks out, then you are approved up to a certain spending limit.
The property you choose still has to be factored in. If you overpay, the lender will not want to finance your mistake. They will finance the true value of the home. This can mean having to come up with tens of thousands of dollars at the last minute to close the purchase.
Mistake #3: They underestimate their closing costs.
It’s such a grind saving up the down payment, but not enough consideration is given to all the one-time costs associated with your home purchase.
A rough rule of thumb is to have an additional 1.5% of the purchase price stashed away.
This is super important and if you don’t have it, your mortgage lender might think twice about your mortgage approval!
Land transfer taxes; legal fees & disbursements; PST on hi-ratio insurance premiums; title insurance; adjustments for property taxes and condo fees; utility hooks ups and moving costs are the main ones. CMHC’s ‘Estimate the Total Cost of Your Home Purchase’ checklist, will help you keep track of them all.
Mistake #4: They underestimate the cost of living in their own home.
Before you went out on your own, the bank of mom and dad may have insulated you from understanding the true cost of home ownership.
Mortgage payment, property taxes, and condo fees are the obvious ones. But then there is also heating, hydro, water, cable, internet, and home insurance.
And just like your car, your home is always going to need some regular TLC – home maintenance costs can easily be a few thousand dollars a year.
Mistake #5: They sign up for a five year fixed rate mortgage with a major bank;
Setting themselves up for very large prepayment penalties if they have to break the mortgage before the term is up. This happens much more than people realize.
I cannot stress enough the importance of understanding your lender’s mortgage prepayment penalty before you sign on the dotted line. Unless you are able to take your mortgage to your next property, breaking your mortgage mid-term can wreak havoc on your finances. Avoiding this and other first-time buyer mistakes puts you on firm footing for home ownership right out of the gate.
Need a Mortgage?
Looking for a first-time home buyer mortgage? Search no further. First-time buyers are one of our favorite client types. From easy pre-approvals to low down payments and great rates, Ross Taylor & Associates will take care of you through your home buying process.