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Down payment: The portion of the home price that is not financed by the mortgage loan. The buyer must pay the down payment from his/her own funds or other eligible sources before securing a mortgage.
Mortgage payment: A regularly scheduled payment that is often blended to include both principal and interest.
Property taxes: Taxes charged by the municipality where the home is located based on the value of the home.
Buying a home is one of the biggest emotional and financial decisions you will ever make, so prepare yourself to make a knowledgeable decision.
Although buying a home almost always seems like a great idea, it is important to understand what homeownership involves. Of course, being a homeowner is something to be proud of but it also means having to invest money, time, and energy and take on added responsibilities. So, before you decide to buy a home, make sure you are ready.
Here are some things to consider:
- Financial Security. If housing prices rise, your home can provide you with some financial security due to capital appreciation.
- Stability. Having a place of your own.
- Financial Stress. Coming up with the down payment, meeting regular mortgage payments and other ongoing costs will tie up a lot of your cash and can put considerable stress on your finances.
- Maintenance. Keeping your home in good shape requires time and money.
- Responsibility. You alone are responsible for payments, repairs, and maintenance.
- Flexibility. You can decorate or renovate your home to meet your own family's personal tastes and needs.
So, you have decided that homeownership is right for you. Now you need to determine if you are financially ready to buy a house. In this Step, you will find a number of simple calculations that you can do to evaluate your current financial situation, how much house you can afford and the maximum home price that you should be considering.
To avoid any future surprises, you can do some financial exercises to see where you stand.
They include calculating your net worth, determining your current monthly expenses and what your current monthly debt payments are.
Knowing your net worth is important because you will need this information when you discuss a with your mortgage professional. Your net worth is the amount left over once you have subtracted your total liabilities from your total assets. It will also give you a snapshot of your current financial situation and show you how much you can afford to put as a down payment.
Amortization: The period of time required to reduce the mortgage debt to zero when all regular blended payments are made on time and provided the terms (payment and interest rate) remain the same.
Interest: The cost of borrowing money. Interest is usually paid to the lender in regular payments along with the repayment of the principal (loan amount).
Once you have made the necessary calculations and feel that you are ready to obtain a mortgage, it is a good idea to select a lender to get pre-approved. This means that the lender will look at your finances to establish the amount of mortgage you can afford. At that time, the lender will give you a written confirmation or certificate for a fixed interest rate good for a specific period of time.
Some buyers may not wish to pursue a mortgage pre-approval until they have found the home they want to buy. However, having a pre-approved mortgage amount makes the search for your new home much easier and less time-consuming because you have a good price range in mind.
Some of the things you will need to have with you the first time you meet with a lender are:
- Your personal information, including identification such as your driver's license
- Details on your job, including confirmation of salary in the form of a letter from your employer
- Your sources of income
- Information and details on all bank accounts, loans, and other debts
- Proof of financial assets
- Source and amount of down payment and deposit
- Proof of source of funds for the closing costs (these are usually between 1.5% and 4% of the purchase price)
Now that you have a clear picture of your current financial situation, it is time to find out what you can afford in monthly housing costs. Lenders follow two simple affordability rules to determine how much you can pay.
The first affordability rule is that your monthly housing costs should not be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses known as P.I.T.H. for short. For a condominium, P.I.T.H. also includes half of the monthly condominium fees. For leasehold tenure, P.I.T.H. includes the entire annual site lease.
Lenders add up these housing costs to determine what percentage they are of your gross monthly income. This figure is known as your Gross Debt Service (GDS) ratio. Remember, it must be 32% or less of your gross household monthly income.
The second affordability rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This figure is your Total Debt Service (TDS) ratio.
Your Current and Future Needs
Before you start searching for a home, you need to think about your needs both now and in the future. Here are some things to consider:
- Size requirements. Do you need several bedrooms, more than one bathroom, space for a home office, a two-car garage?
- Special features. Do you want air conditioning, storage or hobby space, a fireplace, a swimming pool? Do you have family members with special needs? Do you want special features to save energy, enhance indoor air quality and reduce environmental impact?
- Lifestyles and stages. Do you plan to have children? Do you have teenagers who will be moving away soon? Are you close to retirement? Will you need a home that can accommodate different stages of life?
Try to buy a home that meets most of your needs for the next 5 to 10 years, or find a home that can grow and change with your needs.
Even if the home you choose has everything you need, the location might not be appropriate. When deciding where to live, you should consider:
- Whether you want to live in a city, a town or in the countryside
- Where you work, how easy it will be to get there and the commuting costs
- Where your children will attend school and how they will get there
- Whether you need a safe walking area or recreational facilities such as a park nearby
- How close you would like to be to family and friends
A home containing one dwelling unit, that stands alone and sits on its own lot thereby offering a greater degree of privacy.
A single-family home that is joined to another one by a common wall. It can offer many of the advantages of a single-family detached home and is usually less expensive to buy and maintain.
Two single-family homes located one above the other in a building. Often, the owner lives in one unit and rents the other.
Row House or Townhouse
Many similar single-family homes, side-by-side, separated by common walls. They can be freehold, condominiums or rental units. They offer less privacy than a single-family detached home but still provide a separate outdoor space. These homes can cost less to buy and maintain but they can also be large, luxury units.
Usually consists of two-storey homes stacked one on top of the other in a row of four or more homes. The units may have more than one level. All units have direct access from the outside.
Link or Carriage Home
Houses joined by garages or carports which provide access to the front and back yards. Builders sometimes join basement walls so that link houses appear to be single-family homes on small lots. These houses can be less expensive than single-family detached homes.
A factory-built single-family home that is transported to your chosen location and placed on a foundation. The term manufactured home has replaced the term mobile home.
Also a factory-built single-family home constructed in compliance with local building codes. The home is typically shipped to a location in two or more sections and placed on a foundation.
A condominium is a form of ownership, not a type of construction. Condominiums can be high-rise residential buildings, townhouse complexes, individual houses and low-rise residential buildings. Condominiums are known as stratas in British Columbia and syndicates of co-ownership in Quebec.
Offer to Purchase
A written contract setting out the terms under which the buyer agrees to buy the home. If the Offer to Purchase is accepted by the seller, it forms a legally binding contract that binds those who have signed it to certain terms and conditions.
Once you have found the home you would like to purchase, you need to present the seller with an Offer to Purchase or an Agreement of Purchase and Sale. As your home is probably your biggest investment, it would be wise to work with your real estate agent and/or a lawyer/notary in preparing your offer. Remember that the Offer to Purchase or Agreement of Purchase and Sale is a legal document and should be carefully prepared.
Any offer or agreement will typically include:
- Your legal name, the name of the seller and the legal civic address of the property.
- The purchase price offered.
- The chattels that will be included in the purchase price (for example, window coverings, appliances). Whatever items in or around the home that you think are included in the sale should be specifically stated in your offer.
- The amount of deposit.
- The closing day (date you take possession of the home) usually 30 to 60 days from the date of agreement. It can also be 90 days or longer. Generally, an Offer to Purchase obliges the buyer to take possession of the house and property on a certain date. As of the closing date, the buyer is responsible for taxes, utilities, repairs and maintenance.
- Request for a current land survey of the property.
- Date when the offer becomes null and void that is, it is invalid.
- Any other conditions that go with the offer, including property inspection and approval of mortgage financing.
The process of making an offer, receiving a counter-offer and then revising it again is not uncommon. The whole process can seem like a roller coaster ride - exciting, but stressful. It is all part of making the deal work best for you and the seller.
The diagram below outlines the entire process for you in detail.
When you make an Offer to Purchase, your real estate agent or your lawyer/notary will most likely add certain conditions to it, making it a conditional offer. This means that the contract will only become final when the conditions are met. The following four conditions are generally standard in an Offer to Purchase, especially for first-time buyers:
- A satisfactory home inspection report
- A property appraisal
- Lender approval of mortgage financing to finance the purchase
- Buyer obtaining insurance to cover the property
Once these requirements are met, the conditions are removed and the Offer to Purchase becomes final.
It is always a good idea to have the home you are buying inspected by a knowledgeable and professional home inspector. The inspector will go through the property and perform a comprehensive visual inspection to assess the condition of the house and all of its systems. When you receive the home inspection report, you and your real estate agent will have to discuss whether the condition of the home warrants withdrawing your offer to purchase or how the required repairs may affect the sale price that was agreed upon. A pre-delivery inspection (PDI) may be a requirement in closing the purchase of a newly built home. Be aware that pre-delivery inspections are fairly specialized and not all home inspectors have experience in this area. Note also, that some builders have policies concerning who may be present during the pre-delivery inspection so it is best to inquire with the builder during the negotiation of the sales agreement whether or not this is possible.
Generally new home warranty programs are provided by provincial and territorial governments, but there are private new home warranty programs. These warranty programs are not available in Nunavut and the Northwest Territories. Check with your real estate agent or lawyer/notary to find out what the new home warranty program in your province or territory covers.
Warranty coverage varies from one province and territory to another, but typically covers labour and materials for warrantable items in your new home for at least one year after completion. It is also intended to address structural defects for a minimum of five years, and up to 10 years with some extended coverage options. A dollar cap is common. Make sure that you know what is covered by the New Home Warranty program in your province or jurisdiction. Do not confuse the builder's warranty with the New Home Warranty.
To buy a resale condominium or strata unit, you will have to get a satisfactory Estoppel Certificate or Certificate Status (does not apply in Quebec). This should be included as a condition in the Offer to Purchase.
A pre-approved mortgage certificate is not a guarantee of being approved for the mortgage loan. Even if you have a pre-approved mortgage certificate, you must still meet your lender during the conditional offer period to get a final mortgage approval. To ensure that the process goes smoothly, make sure you bring:
- A copy of the property listing; and
- A copy of the signed Offer to Purchase
Your lender will update/verify your financial information and put together the information required to complete the mortgage application. Your lender may require an appraisal and/or a survey. Title insurance may also be required. Your lender will also inform you about the various types of mortgages, terms, interest rates, amortization periods and payment schedules available.
Depending on your down payment, you may have a conventional or high-ratio mortgage.
Conventional mortgage: A mortgage loan up to a maximum of 80% of the lending value of the property. Typically, the lending value is the lesser of the purchase price and market value of the property. Mortgage insurance is usually not required for this type of mortgage.
A mortgage loan higher than 80% of the lending value of the property. This type of mortgage may have to be insured by CMHC, for example against payment default.
A conventional mortgage is a mortgage loan that does not exceed 80% of the lending value of the property. The lending value is typically the lesser of the property's purchase price and market value. Your down payment is at least 20% of the purchase price or market value.
If you contribute less than 20% of the home price as a down payment you will typically need a high-ratio mortgage. This type of mortgage usually requires mortgage loan insurance, of which CMHC (www.cmhc-schl.gc.ca/en/co/index.cfm) is a major provider. Your lender may add the mortgage insurance premium to your mortgage or ask you to pay it in full upon closing.
Mortgage interest rates are either fixed, variable or adjustable. A fixed rate is a locked-in rate that will not increase for the term of the mortgage. A variable rate fluctuates based on market conditions while the mortgage payment remains unchanged. With an adjustable rate, both the interest rate and the mortgage payment vary based on market conditions.
A closed mortgage may be a good choice if you would like to have a fixed payment that will allow you to adjust your budget to your new lifestyle. However, closed mortgages are not flexible and there are often penalties or restrictive conditions attached to prepayments or additional lump sum payments. It may not be the best choice if you decide to move before the end of the term or if you want to benefit from a potential decrease of interest rates.
This type of mortgage is flexible and can usually be pre-paid by any lump sum or paid off at any time without penalty. An open mortgage can be a good choice if you plan to sell your home in the near future or to pre-pay with large lump sums. Most lenders will allow you to convert to a closed mortgage at any time, although you may have to pay a small fee.
Your lender will also tell you about the term options for the mortgage. This is the length of time that the agreed-upon mortgage contract conditions, including interest rate, will be fixed. It can vary from six months to ten years. Choosing a longer term (for example, five years) gives you the chance to plan ahead and protects you from interest rate increases while you adjust to homeownership. Weigh your options carefully and do not be afraid to ask your lender to work out the differences between a one, two, five-year or longer terms.
This is the amount of time over which the entire debt will be repaid. Many mortgages are amortized over 25 years, but longer periods are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run.
A mortgage loan is often repaid in regular payments, either monthly, bi-weekly or weekly. Payment schedules that are more frequent can save some interest costs by reducing the outstanding principal balance more quickly than with monthly payments. The more payments you make in a year, the lower the overall interest you have to pay on your mortgage.
Keep in mind that mortgages may have important payment features that can save you money and let you be mortgage-free sooner.
Once all the conditions of the offer are fulfilled or dropped, it is time to start thinking ahead and making arrangements:
- Give notice to your landlord if you are renting.
- Start looking at moving options hiring a professional or doing it yourself.
- Make necessary address changes (utilities, services, post office).
- Arrange for property insurance.
An offer will usually include a clause that allows the buyer to revisit the property a couple of times before closing (after all the conditions are fulfilled) so that he/she can:
- Measure for window treatments.
- Measure for special-sized furnishings.
- Bring in a tradesperson for a renovation or remodelling estimate.
Arrange for these visits in advance to make sure your real estate agent is available.
Costs in addition to the purchase price of the home, such as legal fees, transfer fees and disbursements, that are payable on closing day. They range from 1.5% to 4% of a home's selling price.
A legal document that is signed by both seller and buyer, transferring ownership. This document is registered as evidence of ownership.
Closing day is the day when you finally achieve your goal you take legal possession and finally get to call the house your own.
You are sure to feel great relief and satisfaction but remember that the home buying process is not over just yet. There are quite a few things that need to be done on closing day:
- Your lender will provide the mortgage money to your lawyer/notary.
- You must provide the balance of the purchase price to your lawyer/notary along with the closing costs.
- Your lawyer/notary pays the seller, registers the home in your name and gives you the deed and the keys to your new home.
It is now time to hire a mover. Friends or relatives may be able to recommend a professional moving company but do not forget to ask the mover for references. You will also want an estimate and outline of fees (flat rate or hourly charge, et-cetera). Once you have selected a mover, it is a good idea to have the representative come to your home to see what will be moved and revise the estimate if necessary.
During the move, you will want to ensure that your belongings are insured. Your home or property insurance may cover goods in transit but call your broker or insurance company to be safe and to ask about the extent of coverage. Many moving companies offer additional insurance coverage. Be aware that professional movers are not responsible for items such as jewellery, currency or important papers. You will have to move these yourself.
If you decide to do your own packing, keep in mind that you will need the proper materials and that packing can take up a lot of time.
On moving day, go through the house with the van supervisor and provide any special instructions. The supervisor will also make note of the condition of your goods on an inventory list. Go through the house with the supervisor to make sure the list is complete and accurate. Then, when the van arrives at your new home, mark off the items on the mover's list as they are unloaded. Remember that even if the movers unload and unpack boxes and remove packing materials, they will not put dishes or linens into cupboards.
Saying goodbye to one home and neighbourhood and discovering a new one can be very exciting. Just make sure it is not hectic as well. Plan ahead to make the transition as smooth as possible for everyone involved. That way, you can breathe easy and enjoy your new home without having to worry so much.
If you have been considering purchasing a home and would like to receive more information, please feel free to call MINCOM Island City Realty Inc. Brokerage at 613-498-2222