Are You Ready to Buy a Home?
Buying a home, especially your first home, can be stressful but also exciting and a lot of fun. There are a lot of differences between owning and renting and each have their own advantages and disadvantages. This guide will help you decide if home ownership is the right choice for you.
- Are you financially stable?
- Can you afford the mortgage, condo fees, and maintenance?
- Are you interested in maintaining a property?
- Can you afford to buy in the areas you like?
Renting vs. Buying
Renting is easy and the most flexible option because you can move when you want. The downside is that you are paying off the landlord’s mortgage and you have to move if the property sells. The advantages include the following:
- Fancier accommodations especially in urban centres
- Perks like pools and gym
- All inclusive utilities
- No maintenance
- Move when you want
- Cheaper by the month
- Opportunity to invest other than in housing market
- No risk during downturns
- No property taxes
Buying vs. Renting
Often buying a home is simply a less expensive option compared to renting when housing appreciation and rent increases are factored in. Owning has more responsibilities and more risk. Advantages include:
- Financial growth through equity
- Leveraged investment with low down payment
- Control of your space to decorate or renovate
- Payments that actually decline in real terms through the life of the mortgage
- Sense of pride in ownership
Are Your Finances in Order?
One of the best ways to test your financial readiness is to calculate your monthly expenses required to buy a home and live within that budget for six months. Set aside the money in a savings account and see if the remainder of your income is satisfactory to maintain your lifestyle. How much can you afford? Before beginning the process of shopping for a home it’s important to know exactly how much the bank thinks you can afford. They will take into consideration a number of factors including: Credit rating Income source and type Stability Down payment saved Mortgage payments Maintenance, condo fees, etc.
Affordability Rule #1 – Gross Debt Service (GDS) The fisr rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include mortgages, taxes, and heating.
Affordability Rule #2 – Total Debt Service (TDR) The second rule is that your total combined monthly debt payments cannot be more than 40% of your gross monthly income. This includes credit card minimum payments, car payments, etc.
The next steps Contact a mortgage broker for an assessment of your situation. Brokers are independent business owners who work with all the banks. They get paid by the lender if you qualify for a mortgage and will often make an extra effort if your application is marginal. If your profile doesn’t fit the two affordability rules there are steps you can take to improve your buying ability.
- Consider a smaller home Pay off some debt Save a larger down payment
- Look at your assets to see if you can sell something
- Look at your expenses and see if you can make improvements
What do You Imagine in a Home?
When looking at prospective property, try to imagine yourself living in it for at least five years. The ideal home is one that can grow and change with your needs. Here are some questions to consider:
- How much space do you need?
- Do you need a home office?
- Is there suitable parking?
- If you have a pet, do you need a small yard?
- What features do you want?
- What do you consider your ideal location?
- Is your ideal location convenient for transit, recreation, or entertainment?
New or Used?
A new home is one that was recently built and has never been lived in. Advantages include:
- Up-to-date materials
- Energy-efficient features
- Lower maintenance costs because everything is new
- 10 year home warranty
A “resale” or used home can offer additional value in terms of possibly a larger lot or a more established neighbourhood but usually has higher maintenance costs or may even need refurbishing.
Types of Homes
Single-family Detached This is a fully detached, single family home that sits on its own lot.
Duplex This is commonly called a duplex and its predominate feature is an shared wall between the two living spaces. These are often less expensive that single family homes but they require a degree of cooperation with the co-owner. Duplexes can be side-by-side or up-and-down.
Townhouse These are single family residences forming a row with common walls separating the units. They can be freehold or condominiums. They usually have a small yard or outdoor space that is for the exclusive use of the owners.
Modular Home A modular home is also a factory-built, single-family home. The home is typically shipped in large sections, or modules, bolted together and placed on a permanent foundation at the building site. Increasingly, modular homes are indestinguishable from site-built homes.
Manufactured Home A manufactured home is a single-family home built on a steel frame for transportation purposes. It may be single or double-wide and may have drywall or vinyl paneling. These are often referred to as “park model” homes and are placed on foundations.
Mobile Home Mobile homes are similar to manufactured homes except they retain the ability to be moved and will accept wheels on their steel frames.
Apartment This is a self-contained living unit in a building with other units of a similar nature. It features kitchen, bathroom, and other rooms as designed.
Forms of Ownership
Freehold A freehold property is owned outright; there is no co-owned space or shared common areas with other home owners. Freehold owners can alter their property to suit themselves and do not require permission where the changes are allowed under municipal law. Houses and duplexes are usually freehold ownership.
Condominium A condominium is freehold ownership of a single unit in a building or development and co-ownership of common areas and land the development is on. Condo owners manage the development through a condo council. Condos are usually high-rise apartments, townhouses, and factory-built home developments.
Make an Offer to Purchase:
When you have found a home you would like to buy the next step is to formally present the owner with an “offer to purchase”.
This offer is usually conditional on financing, home inspection and other areas that your REALTOR® may suggest. The offer gives the owner some assurance that you are serious about purchasing the property. When conditions are removed the contract is said to be “unconditional” and is a binding offer.
A typical offer to purchase may look like this: Initial offer is made with conditions for inspection of premises and condo minutes and financing. Vendor returns the offer with a slightly higher price (or different possession date, higher deposit, etc.). You may or may not return the offer with amendments and changes. The vendor may or may not accept the offer.
Obtaining a Mortgage You should always obtain a pre-approval from a lender or mortgage broker before entering negotiations. Your offer to purchase will always contain the clause “subject to financing” as a safe-guard for your benefit (unless you are paying cash for the property). Be aware that a pre-approval isn’t a promise to advance a mortgage, only an approval in principal based on the qualifications you presented at the initial application. Your lender may require a property appraisal, land survey, and other information about the property to confirm that it is worth the purchase price.
Depending on your income source and down payment you may qualify for a conventional or high ratio mortgage. Conventional mortgage This is a loan equal to or less than 80% of the property’s lending value. The lending value is the market value or the purchase price, whichever is less. This type of mortgage does not require mortgage insurance. High-ratio mortgage This is a loan for an amount greater than 80% of the lending value. The maximum ratio is 95% loan to value. This type of loan requires mortgage insurance at rates based on the total amount down. Mortgage term and amortization The term is the length of time for the mortgage conditions and ammortization is the total length of time the payments are spread over.
For example, you might have a five year mortgage with a 25 year ammortization. Your payments will be based on 300 months and the contract will need to be renewed with a lender after five years.
Payment schedules You can choose a payment schedule that is convenient and efficient for your situation. More frequent payments can reduce the overall interest paid to the lender and shorten the ammortization time. It may be convenient for you to choose a payment frequency similar to your pay cheques.
Top 10 Mistakes New Home Buyers Make
Get pre-approved before house hunting: Talk to a mortgage broker before you begin looking for a house. It lets everyone know you are serious about buying a home.
Think long-term value: Buying a house is the single largest investment you will ever make.
Think about resale value: Look for good locations, and how feasible it is to add features later.
Research the neighbourhood: Walk around the block and see how other people live. Introduce yourself to the neighours and ask what it’s like to live in the neighbourhood.
Research “bargain” properties like foreclosures: Get estimates on repairs or renovations. Get answers as to why the property was given up by the former owners.
Buy within your budget: It’s easy to overspend especially when everyone seems to be encouraging you. An “extra $2 a day” may require sacrificing entertainment or other lifestyle choices.
Falling in love at first sight: A certain amount of pragmatism is required when house hunting. It’s easy to fall for the house that reminds you of Auntie’s or be swayed by the smell of baking bread. Be objective.
Get a home inspection: Never assume that because the home looks tidy and organized that all is well. All homes should be professionally inspected. Even condos and new homes may have issues with common areas or fit-and-finish that you need to be aware of.
Read the fine print: Ask to see the mortgage documents and other transaction paperwork well before you sign anything so there are no surprises.
Always have options: Never sign an offer that doesn’t allow you to back out of the deal because you cannot get financing or the home inspection turns up something expensive. Your real estate agent will add clauses to the offer that will give you the option to cancel if everything isn’t to your liking.
It’s very important to make all your payments on time. Your lender will set-up an automatic payment from your chequeing or savings account. You may want to inquire about overdraft protection for this account as additional protection. Late payments will negatively affect your ability to obtain additional credit such as credit cards or even a mortgage renewal. If you fail to make payments your lender may initiate foreclosure which may lead to a court ordered sale of your property.
Plan for Maintenance Costs Set aside an amount each month equal to 25% of your mortgage payment as a cushion against unexpected repairs or planned updates. It’s much better to have these funds saved than it is to borrow for a new roof or emergency repairs. If you are buying a condominium you should save at least 10% of your payment to cover special assesssments, repairs, or to replace appliances, etc.
Set a Household Budget It’s a good idea to create a new budget even before you buy your home. Try to live within this budget for at least six months to be certain you are ready. After you buy, adjust this budget to allow for savings for maintenance but also personal savings of at least 10%.
Interested in buying a new home? I’d love to help you! Simply head over to the handy Buyers Form and begin by telling me a bit about yourself and the type of home you’d like to purchase.