Entering the housing market can be a daunting task for first-time home buyers. To help you navigate the process, here are 11 tips to keep in mind when purchasing a home in Ontario, Canada.
1. Start saving as early as possible.
Purchasing a home involves some varying costs at different stages throughout the process. Here are some of the main expenses to be aware of:
The down payment:
In Ontario, a minimum of 5% of the purchase price is required as a down payment on a home. However, if your down payment is less than 20%, you will also be required to purchase mortgage loan insurance. Properties that exceed a value of $500,000 also have additional conditions for the down payment that must be met. For more information on these conditions, see How much do you need for a down payment.
There are several fees and expenses associated with finalizing your mortgage, which usually range between 1.5% to 4% of the purchase price. These costs are usually referred to as Land Transfer Tax (LTT), Real Estate Lawyer fees, registration and insurance fees.
Moving itself can have associated fees that vary depending upon your needs. These expenses can include moving truck rentals, property maintenance, furnishings, etc.
2. Clean up your financial situation.
Getting approved for a mortgage can be a challenge, especially considering the ever-rising housing prices in Ontario. Lenders consider several factors while assessing a borrower, such as the amount given for a down payment, their income, and if they have a healthy credit score.
A borrower’s credit score can be particularly important, as it not only determines approval for the mortgage, but also the resulting interest rate. Having a good credit score means that the borrower has low default risk and is therefore a better candidate for lending. In general, a credit score of 650 and above is considered good, with 750 and above being excellent. Before applying for a mortgage, do your best to get your credit score in the best shape possible.
3. Hire a reputable real estate agent.
The role of the real estate agent is to guide you through the homebuying process, while keeping your best interests at heart. A good real estate agent should be transparent and knowledgeable of current market opportunities. It is advisable to interview at least 3 different agents to ask questions about their knowledge of the market, along with their empathy to consider your needs and wants of a property.
Remember to negotiate the commission fees associated for the agents. Typically, 5% of the purchase price plus HST is the standard rate. In practice however, the commission can range from 3.5% to 5%. This total is to be divided between the buyer and seller agents, with the buyer’s portion typically fixed at 2.5%.
4. Research programs for first-time home buyers.
There are many programs that exist within Ontario that were developed to help prospective home buyers enter the market. These can range from dedicated RRSP plans, tax credits, and special rebates. If you are considering buying a home, or have recently made a purchase, be sure to thoroughly research incentives available to you. These could significantly affect your budget for a property. Here are a few suggestions to get you started:
5. Get a pre-approval letter.
A mortgage pre-approval is a written offer made by a lender, stating the amount and specific terms they are willing to approve the borrower for. It may also be called a mortgage pre-qualification or mortgage preauthorization. Completing this step can prove to potential sellers and real estate agents that you are a serious buyer, which may give you an advantage over others who haven’t when negotiating terms or offers. When getting pre-approved, be sure to ask your broker or lender:
How long will they guarantee the pre-approved rate for?
Will you automatically receive the lowest rate if interest rates go down while you are pre-approved?
Can your pre-approval be extended, if needed?
6. Stick to your budget.
Throughout the home-buying process, you may feel at times needing to exceed your budget. This can be due to pressure to beat another buyer’s offer, a lender offering more than you are comfortable with borrowing, unforeseen expenses after a pre-purchase inspection, etc. To avoid financial stress later-on, set a budget and stick to it. If you somehow arrive at a point where you need to reconsider, be true to yourself and only operate within your means.
7. Understand your needs vs. wants.
Remember that buying a home is a very personal decision. Be sure to properly consider your lifestyle and if the property you are evaluating will meet your needs. To simplify this, try categorizing your needs vs. wants and evaluate your options accordingly. Include details such as minimum square footage, number of bedrooms and bathrooms, if you require a garage or workspace, etc. Only you can best determine your living requirements, so make sure the property you are considering is able to accommodate.
8. Make a competitive offer.
Once you have found a listing that you are seriously interested in, you need to submit an offer. Depending on the state of the market and the specific property, you may need to offer more than the listed asking price. However, in some situations you may be able to negotiate the asking price with the seller. Typically, you will have more negotiating power if the home has been on the market longer than usual, compared to others in the area. There are certain methods for making your offer stand out:
Include a mortgage pre-approval letter.
Include contingencies that will give you the option to walk away from the deal, if needed.
Write a personalized letter to the seller explaining why you love the home.
9. Complete a home inspection.
When making an offer, it is wise to make your purchase conditional on the home passing a professional home inspection. These inspectors will look for potential problems and can allow you to make an informed decision before going further with a deal. Be sure to understand what types of inspections are covered by the inspector you hire, as some may not look for faults like radon or pests. Also, as a buyer, try to be present for the inspection so you can ask questions on site. Carefully consider the feedback they provide as you will need to address any issues if you decide to purchase the home. If unknown issues were revealed in the inspection, you may be able to use this information as leverage to negotiate a lower offer than the original asking price.
10. Keep calm and wait.
The last thing you should do as a first-time home buyer is take on more debt or make significant changes to your income before closing day. Lenders will be checking your finances regularly, including your credit history and employment status. Now is not the time to change jobs or take out a separate car loan, as it could seriously impact your mortgage approval.
11. Get ready for closing day.
Once a purchase agreement has been signed, your lender will schedule a home appraisal to determine the property’s current market value. If the appraisal is low, it will be up to you to negotiate this into the offer with the seller, or you will need to pay the difference yourself. If the appraisal is at or above the sales price, then things are good to go. All that you need to do is show up on closing day, sign the deal, pay what is owed and get your keys!
A large amount of preparation is needed for buying a home and much of the process can seem overwhelming, especially to first time buyers. Doormat was created to help simplify a part of this process by streamlining real estate legal services. Get in touch with us today to learn how we can provide the best property transaction experience possible!