Embarking on your very first real estate purchase? Being a prepared home buyer will help you make informed decisions during the buying process, and can give you a competitive edge when engaging in bidding wars with other buyers.
Regardless of the state of the market, doing your homework beforehand will help you understand what you’re going into. Before jumping into the market for a new home, you should have the following resources ready:
Your Real Estate Agent
A common myth is that first time home buyers have to pay for their real estate agent. Most of the time, real estate agent fees are not included in first time homebuyer closing costs. It’s the seller who pays the buyer’s real estate agent’s commission (which is usually a 2 – 5 per cent of the selling price).
An agent acts as a buyer’s representative, helping you negotiate your offer terms, research the market value in a certain area, as well as potential properties in area(s) of interest. It’s important to have an agent who understands your desired area inside and out. Knowing (and understanding) the market price is crucial – it will help you avoid overpaying for a home in a heated bidding war.
Your Real Estate Lawyer
Real estate lawyer services usually average around $1200 – $1700, depending on the circumstances. Lawyers will help you facilitate the real estate transaction – they act as the middle person between the buyer(s) and seller(s). They have other crucial responsibilities, including, but not limited to:
- Ensuring that all of the terms and conditions are met
- Preparing title insurance and registering the property under the buyer’s name
- Preparing a statement of adjustment
- Reviewing inspection documents
- Making applicable tax payment(s)
If you’re buying a pre-construction home, you’ll need to have a lawyer to review the Purchase & Sales Agreement (PSA) forms. It’s recommended this be done right after the PSA forms have been signed.
Your Mortgage Pre-Approval
Obtaining a mortgage pre-approval will help you understand your limits. Most buyers understand that establishing a budget is key – but it can be very tempting to fall in love with, and make an offer on, homes outside your budget range. A mortgage pre-approval establishes just how much of a mortgage a lender is willing to give you, and effectively puts a ceiling on your budget. And, if the temptation to financially stretch yourself is getting too great, your real estate agent should be able to help – after all, it’s their job to find you the right deals within your budget range.
From my home buying experience, I did a calculation of the estimated monthly budget prior to purchasing the property. Keep in mind that the mortgage amount the bank approves you for is not always the amount you can afford – it may not take other expenses into consideration (i.e. day care and medical expenses). To help tackle affordability situations like these, I recommend amortizing your mortgage over 30 years (an option available to purchasers who pay more than 20 per cent down) for two reasons: lower monthly payments, and higher pre-approval amount. Make sure there is an option to make lump sum payments, to help pay down the mortgage sooner.
Your Down Payment
Here’s where it can get slightly tricky for those entering the real estate market for the first time. Should you opt for the minimum 5 per cent down payment, or save up for a 20 per cent down payment? This is where your mortgage specialist will be able to run through the numbers – and compare the different financial scenarios.
If you’re opting for a down payment of less than 20 per cent, consider that you’ll need to pay CMHC insurance fees, which is relatively costly. Ratehub has a CMHC insurance calculator. The insurance portion can be financed into the mortgage, however the 8 per cent PST on the CMHC insurance must be paid upfront, adding on to your closing costs.
Because of this, I recommend having as much down payment you can afford to decrease/eliminate your CMHC insurance costs. Having a down payment of at least 20 per cent does not require CMHC insurance, and the mortgage can be amortized over 30 years (the maximum amortization for CMHC mortgages is 25 years).
There are many factors that go into home buying – no two buyers are the same. Everyone has different preferences in terms of location, municipality, house size, and type of home. Prepare a checklist beforehand to help you determine what you’re looking for. This checklist can include items such as:
- Location (i.e. proximity to GO a station)
- Finishes (i.e. granite countertops, hardwood floor)
- School rankings
- Resale vs. pre construction
Creating your checklist will give you a better understanding of what you’re looking for. It’s typical to face trade offs (i.e. finding a home in the right location, without the desired interior finishes). In situations like these, I highly recommend to have location as a priority item on your checklist. Other items (i.e. interior finishes) can always be updated after closing.
The Bottom Line
Have a budget, know what you’re looking for, and be prepared to make tradeoffs. It’s highly likely to not have everything on the checklist. Keep your budget in mind while shopping for a house. Take advantage of the resources available to you – and do your research before buying into a specific area.