Introduction to Buying a Home – A Checklist for Homebuyers
Buying a home is one of the biggest decisions people make in their lives. On the stress scale, it ranks pretty high on the list! It can also be one of the best decisions you will ever make. So to make things a little bit easier for you I have created a ‘Buying a Home – A Checklist for Homebuyers’ article. When you are done with this checklist, you could be ready to go and shop for a home!
1. Financial Planning
There are a few questions you need to ask yourself before you buy a house:
- How much are you spending right now?
- How much do you have left after expenses?
- What is your credit score?
- How much can you afford to spend on a home without breaking the bank?
- What are the upfront costs of buying a home?
Let’s look at these, one by one:
How Much Are You Spending Now?
If you haven’t done so already, it is important that you make a list of your monthly expenses. Include everything you can think of and add in ancillary costs such as buying a coffee at Tim’s, haircuts, birthday gifts, Christmas gifts, etc. For example, if you spend $1000 at Christmas, then $1000 divided by 12 months is $83 per month which you can add to your monthly expenses. See the following as an example:
- Gas/Travel to work
Entertainment & Other Expenses
- Dining out/take-aways
Loans & Debts Savings
- Savings accounts
- Charitable Gifts
- Credit cards
- Car loans
- Lines of credit
- Student loans
How much do you have left after expenses?
Once you have totalled your monthly expenses, subtract them from your total net income. This is how much you have left after expenses. Now you can work out how much you can afford.
What is your credit score?
Credit scores are an indication to your lender about who you are as a borrower. It tells them if you can be consistent with paying your bills and loans and how much you owe lenders. If you have a low score, this can be an obstacle if you don’t know how scores work and what goes into how your score gets calculated! Most mortgage providers require a score of over 600 minimum to approve a mortgage. However, the score can affect the mortgage rate you are offered and so the higher the score, the better! It is a good idea to get a copy of your credit report and see if improvements can be made. Click here for more information on this!
How much can you afford?
There are some great guidelines to help you decide how much you can afford to spend on housing without putting your financial health at risk. There are two rules you can follow:
Monthly housing costs should be no more than 35% of your gross monthly income. This is called your ‘gross debt-to-income or the ‘gross debt service (GDS) ratio. Housing Costs include:
- mortage payment
- property tax
- heating bills
- 50% of condo fees
- 50% of homeowners association fees
- site rent for leasehold tenure
Your monthly total debt load should be no more than 40% of your average gross monthly income. This is called ‘total debt-to-income’ or ‘total debt service’ (TDS) ratio. Monthly debt load include:
- housing costs (listed in Rule One)
- car loans/leases
- credit card payments
- line of credit payments
- other mortgage payments
Once you have an approximation of these expenses may be, you will need to make a new budget sheet of what your income/outgoings would be when you are a homeowner. If your budget sheet shows that your monthly housing costs would more than 35% of your gross income and your debt load would be more than 40% of your gross income – you may not qualify for a mortgage.
What Are The Upfront Costs of Buying A Home?
Making sure that you have saved enough money isn’t just all about the down payment for your mortgage. There are other expenses to consider and you should budget for those so that there are no surprises along the way! Costs will include:
- Down payment (usually around 5-10% of the total price of the home)
- Home inspection and appraisal fees
- Insurance costs – including property insurance & mortgage loan insurance
- Land registration fees
- Prepayment of property taxes & utility bills
- Legal fees
- Immediate repairs/renovations
- Moving costs
- GST/HST/QST on the purchase price for new builds or on the mortgage loan insurance
2. Next steps
If your numbers look good, you can skip to step 3. If not, here are some things you can do to keep moving forward towards your goal of home-ownership!
- Meet with a credit counsellor or your lender to make a plan for improving your financial position or your credit score
- Look at your current budget to find places to spend less and/or save more
- Pay down loans or other credit cards
- Save a bit longer for a larger down payment
- Lower your price range for a home
3. Get pre-approved for a mortgage
It’s time to meet with a mortgage lender or broker to talk about your options and confirm that you are ready to buy your home! They will outline what you need to do to ensure you get approved when you apply for a mortgage.
Getting ‘Pre-approved’ is a huge first step towards getting those keys! It isn’t a guarantee of final approval but it means that you will know how much your bank has approved you for, what your interest rate will be and what your monthly payments will look like. This will help you narrow down your search to homes that you can afford.
It will also make your offer more attractive to sellers if they know you are pre-approved, and there will be no hiccups along the way.
Your mortgage broker or lender will need to see the following in order to pre-approve a mortgage for you:
- Employer contact information/employment history
- Proof of address and address history
- Government issued photo ID with current address
- Proof of income
- Proof of down payment (amount and source)
- Proof of savings/investments
- Details of current debts and other financial obligations
4. Finding A Home to Buy
There are so many factors that go into choosing a home! We’ve all heard the term ‘Location Location Location’ and of course, this is probably the first on the list of priorities. You will also want to factor in the size of the house you need, the features the house has and what your plans are for the next decade (or longer) of your life! If you are a couple that plans to have children, then you may consider buying a home that will accommodate a growing family. If you have children who have moved out then you may be thinking that you would like to downsize a little. Let’s discuss each one of these.
Do you want to live in the suburbs, in the city or way out in the country? Do you want to live close to work, live near a great school, be near to health services? If you are commuting then being near a station or subway could be the best thing for you? Or maybe you don’t mind driving 50-100 kms to work just so that you can spend the whole weekend in peace and quiet on your porch overlooking a lake. Keep in mind that whatever decision you make about this, you will have to live with it for quite a while so take some time and make the right decision for you.
Size and Features
How many bedrooms and bathrooms do you need? Do you want a garage to keep your car or a garage for storage? What size garage do you want? If you work from home then a separate room to work in would be a good idea. Do you want a pool? A basement apartment to rent? Make a list of the features you want in a home and list it in order of importance.
Plans for your future
Most people buying a home would plan to live there for at least 10 years unless you have the ‘7 year itch’. A lot can happen in that time and so you may want to consider what you will be doing whilst you are there. Are you planning a family? Do you have younger or teenage children? How will your family change with time? Do you have elderly parents that you may want to bring to live with you? Are you close to retirement? As time goes on, your needs for a home may change and it is always a good idea to buy a home that can accommodate those changes as much as possible.
Types of Homeownerships
There are 4 different ways of owning a home, each will have different responsibilities for owners. I have listed the 4 below, but the first 2 are by far the most common:
- Freehold – this is where you own the building and the land it is built on. You are responsible for the maintenance of everything and have full control of the land and building subject to local bylaws and any restrictions in place when you buy.
- Condominium – this is where you own the unit and share ownership of the common areas with other unit owners. The maintenence of these common areas are the responsibility of the condominium corporation and there is usually restrictions on the changes you can make to your unit. Some have restrictions on pets, even the colour of your curtains!
- Leasehold – this is where you own the building and you rent/lease the land it is built on. This is common for apartments, mobile homes or sometimes townhouses built on land owned by the city.
- Co-operatives – this is where you buy a share in the whole building and are assigned a unit to live in. If you decide to sell your share, the co-op’s board can reject buyers they feel are not an asset to the community. For this type of ownership it is difficult to get mortgage insurance which will mean you needing to find at least 20% down payment for your mortgage.
5. Gather Your Team
You will need a team of people to support and guide you through this process! It is important that you research these professional’s references, qualifications and get recommendations before you welcome them onto your team.
Real Estate Agent
A real estate agent is your guide and can help you find a home, tell you about the community, make an offer for you and negotiate the best deal. They will also help you to find the other professionals you need on your team. When finding an agent, ask lots of questions and make sure they are the right fit for you. The Canadian Real Estate Association is a helpful resource for finding an agent or you can call your local real estate association. Of course, I am available should you want to consider me – I’m happy to answer any questions! Just click here to do that.
You will need home, contents and mortgage life insurance when you own a property. This gives you peace of mind for any damage to your property, or its contents through mishap, fire or flooding. Mortgage life insurance will protect your family if you pass away before your mortgage is paid off. An insurance broker will be able to get you the best price for insurance services.
Most people will need to borrow money to buy a home and there are many ways to do that! Banks, trust companies, credit unions, pension funds can be utilised and usually, mortgage brokers are a good resource for information about the best deals around as they work with multiple lenders. You can get a recommendation for a good mortgage broker from your real estate agent or family/friends.
Before buying a home you should always have the building inspected by a professional home inspector. Home inspectors assess the condition of a house and tell you if any repairs need to be made immediately or if any repairs will need to be done in the near future. Home inspectors are regulated by the Canadian Association of Home Inspectors (CAHI). Sometimes the home inspection has already been done by the sellers so check with the listing agent to see if an inspection report is available on a home you are considering making an offer on.
An appraiser is usually sent by the bank and will verify that the purchase price is in line with sales in the immediate area. This is more to protect the bank so that they don’t mortgage a property for more than it is worth. Lenders require an appraisal before they confirm your mortgage.
Most of the time, the land survey that outlines the boundaries of the land you are buying is already available. However, if it isn’t then you can choose to have a surveyor create a new land survey. With the introduction of title insurance, there is less need for a land survey.
A lawyer will protect your legal interests and will inspect paperwork to make sure that the property is free from liens, charges, and work/cleanup orders. They will also review all contracts before you sign them.
6. Making an Offer
When you have found the home you want to buy, your real estate agent will discuss the main elements that need to go in an offer. The offer is written up on a form called an ‘Agreement of Purchase and Sale’. This is a legal contract that is carefully prepared by your real estate agent or your lawyer. The offer includes:
- Your legal name, name of the seller and the address of the property
- The purchase price
- The amount of your deposit
- Any extra items you want included in the purchase
- The closing date – which is the date you want to take possession of the home (usually 30 to 60 days after the agreement is signed or longer for new builds)
- The date the offer expires
- Any conditions that must be met – for example a satisfactory home inspection or lender approval of your mortgage.
There may be negotiations that your real estate agent will deal with and advise you on. This can be a little stressful, but a good agent will either get the best deal for you or advise you to continue your search if the seller’s expectations are too high for your budget.
7. Closing Day
So exciting! Today are you finally taking possession of your new home! You will need to sign the final papers at your lawyer’s office and these events will then unfold:
- Your lender moves your mortgage money over to your lawyer
- You give your down payment (less your deposit) to your lawyer with closing costs (which are usually from 1.5% to 4% of the purchase price) to cover legal fees, land transfer taxes and other costs
- Your lawyer pays the seller, registers your home in your name and gives you the papers and the keys to your new home
Conclusion – Buying a Home – A Checklist for Homebuyers
Hopefully, this article will help you get started on the road to your new home! For other articles see the Real Estate Section of Explore Markham – there are lists of homes for sale and other aspects of home owning or renting. Click on the home page, scroll how and use the blue search bar to find a home you will love! And don’t forget to contact me if you have any questions!