Buying a home can seem like a very big and consuming process–but when you have the right knowledge and tools, it can be a breeze. I want to make your home buying process as simple as possible, so we’ll be covering some important topics for first time home buyers.
I’m confident this guide will give you all the information you need to help you buy your first home in Canada. And if you find this newcomer’s guide to buying a first home in Canada helpful, please share it with your friends and family!
Is homeownership right for you?
As you well know, buying a home is a giant financial decision. It’s not something to take lightly or to do without thinking long and hard about it. You should really sit down and evaluate if owning a home would be a better option for you than renting. You might be ready to buy if you have steady income, will be able to stay in one location for at least the next five years, have saved some money for a down payment, and have your debts under control. Of course, you don’t have to be perfect at those things, but if you’ve started paying down debt and saving money, then you’re on the right track.
Are you ready financially?
Being ready financially for owning a home is important. It’s one of the biggest purchases of your life, and if you aren’t adequately prepared, you could face some sticker shock at the closing table. As you go through the pre-qualification process with your lender, you should ask questions and also do some calculations to figure out how much you can afford and how much you want to spend on a house. Even if you qualify for a higher amount, you should never pay more for a home than you can afford in monthly payments.
When you’re ready to make an offer, you should have a down payment amount of 5%-20% of the list price of the home you can afford. You should also be ready to put down a deposit to show the buyer you’re really interested. You’ll probably want to save more than you think. There are many costs associated with buying a home, many of which seem to pop up at or before closing. You should consider very seriously both the positive and negative aspects to owning your own home.
Choose your mortgage type and loan length
Canada has a series of mortgage loans to fit different lifestyles and choosing the right loan is all about finding the right fit for you, both with time constraints and with cost.
A conventional or low ratio mortgage is a mortgage where you have 20% or more to put down on the house. This type of loan does not usually need to have mortgage protection insurance. A high ratio mortgage, on the other hand, is when you are paying less than 20% of the home cost in the down payment. You will have to pay mortgage protection insurance on this loan through one of three companies: Canada Mortgage and Housing Corporation, Canada Guarantee, or Genworth Financial.
An open mortgage will allow you repay the mortgage at any time without penalty. The terms are usually shorter for an open mortgage but can include a variable rate or longer terms. The rates are typically higher on an open mortgage. A closed mortgage is just the opposite of an open one– you cannot pay back the loan before the term is over.
You also cannot renegotiate the loan or refinance it except by its terms. A fixed rate mortgage has an interest rate that is locked for the term of the mortgage (meaning it can’t go up or down). Lenders will sometimes offer different prepayment options to you to help pay it off faster.
Finally, we have Variable Rate Mortgages (VRM) and Adjustable Rate Mortgages (ARM)– these loans have interest rates that can change throughout the term of the mortgage. The rate usually starts out at the current average interest rate and, over time, it can change with market trends. This can either save you a lot of money or cost you a lot of money, depending on the market but the lender can alter the mortgage repayment plan.
How to get pre-approved
It’s a good idea to get pre-approved before you go shopping for your home. It will help you know what you can afford to spend on a house and it will make you look more serious to sellers. To get pre-approved, you will meet with a lender and discuss your finances, debt, and credit score. The lender will pre-approve you to spend a certain amount on a mortgage and then you can get started looking at home that falls within your price range and criteria.
Costs associated with buying a home
Here’s a breakdown of all the possible costs that come when you buy a house. First, you’ll have your down payment and as mentioned above, that starts at 5%. In order to get a conventional mortgage and not pay mortgage loan insurance, you’ll need a down payment of 20%.
You will also need a deposit (the amount can vary) to show the sell you really want to buy this house. If the deal goes through, this becomes part of your down payment. If you back out of the deal, you will lose the deposit.
You might have to pay a mortgage broker’s fee, if you used a mortgage broker to help you find a lender and the best interest rate for you.
You might have to pay for a survey or certificate of location if the seller doesn’t have theirs or it’s more than 5 years old. It can cost between $1,000-$2,000. You will also have to pay for title insurance, which will cover loss from defects of title to the property. You will have to pay land registration fees and this may be called something different in another province, but the cost is a percentage of the purchase price of the home. Plan on spending a few thousand dollars here.
You will also have to pay property taxes and utility bills in the area where the home is located. You will also need to get property insurance (which will be paid as part of your overall mortgage payment) and finally, you’ll have to pay lawyer’s fees which start out around $500. As you can see, all these payments can add up very quickly so it’s good to be prepared for them ahead of time!
Services you need to buy a home
In order to buy a home, you’ll need help from a few different sources. A good realtor can make a world of difference and ensure a successful and smooth home buying process. Your will help you find the right home and guide you through negotiating an offer and help answer your questions all the way through to closing on the house.
You will need a reputable mortgage lender. This could be a bank, an institution or an individual, but the lender that works for them will help you through the financing process of your mortgage. Find someone who will answer your questions openly and honestly. You can ask for a referral of a great lender from trusted friends, family or your realtor. Finally, you will need a real estate lawyer to complete the closing transaction on your home and to deed the title over to you.
Making an offer
Once you’ve found a house you love, talk with your realtor about a reasonable offer amount. The realtor can’t tell you what to offer but can advise you on an appropriate and reasonable amount based on his expertise and knowledge of the local market. If your offer is accepted by the seller, you will want to schedule an inspection for the home. The inspection is typically performed after your initial offer so the buyer knows you’re serious about buying the home but you still have time to make sure everything is in good working order.
When you make your final offer, you will talk with your realtor and look at price comparables of similar homes in the neighborhood. If the offer is rejected, you can choose to raise it or move on to another house. If your offer is accepted, you’ll need to prepare for closing– you’re so much closer to getting your home!
What happens at closing
Before closing, you’ll want to make a final trip to the home to make sure everything is in good working condition. You will also make arrangements for moving in at this time. You will have to get a fire insurance policy for the home before going to closing. Make sure you understand how much money you’ll need to close the deal at closing, like deductions from mortgage insurance and appraisal fees. You should provide proof of income and the down payment in advance so money is not delayed.
Right before closing, the lawyer will receive a letter of adjustments, which could also affect the final amount you need to pay, so be prepared for that. You will also decide at this time how you want to take the title of the home and you can order title insurance. You’ll also want to schedule any internet, phone, cable services to your new home and pay utilities on the home.
When you are prepared beforehand, the entire home buying process will likely go much more smoothly. Finding and buying your first home will be a breeze after going through this guide.
All the best on your house search and let me know how I can assist you in finding the Canada house of your dreams!