If you are thinking of buying a house or just simply preparing yourself on the costs around home ownership, this blog is for you.
Buying a home is a significant moment and in society, its highlighted as a sign of stability in one’s life. I think each of us at some point, regardless of our outlook on home ownership, must have entertained the idea of owning a home. Although there are near infinite home buying experiences, what worked for someone else may not work for you. It is a personal journey that requires you to be in a healthy mindspace regarding your emotions, health and finances. This is key because you need to feel secure around your plans because as soon as you enter the market you are going to be surrounded by individuals constantly influencing you to make decisions that serve their own interests first. You need a strong mind to filter out bad suggestions/ideas to one that you will feel comfortable accepting.
1. Research:
So you want to buy a house. The first thing that you need to have done is research around buying properties in Canada. I suggest spending atleast 3 months understanding processes around mortgage, interest rates, down-payment, pre-qualification, qualification, legal review, and many others. Even if you enlist a broker, it is highly important that you know the process well enough to engage in productive negotiations. DO NOT compromise on this research even at the face of brokers or others saying, “We need to move quickly as interest rates may rise soon”. I in fact recommend enlisting a broker after this 3-month mark.
2. Budget:
You should have a budget set based on your research. During low interest rate environment, the “back of napkin” math puts your mortgage maximum at 5 times your household income. That is if your household income is $100,000, the lender is likely going to approve a mortgage for $500,000. Your total purchase price becomes this mortgage plus downpayment amount plus closing costs. The mortgage amount you’ll qualify for ultimately depends on your credit score, debt and current interest rates. Your downpayment can be as low as 5% of the property price but please be aware that for downpayments less than 20% of property prices, you will typically need to buy mortgage loan insurance.
Please refer to this useful link from Government of Canada on Down Payment. https://www.canada.ca/en/financial-consumer-agency/services/mortgages/down-payment.html
3. Brokers:
When you enlist a broker, they will almost always at some point say – “This is the best time to buy a house”. Ignore this like you ignore your junk mail. The best time to buy is when you are financially and emotionally ready to commit to homeownership for a long-term. Even if you decide to sell it in the short-term, always plan for your worst-case scenarios.
You will likely be on the lookout for two kinds of brokers – Real Estate Broker and Mortgage Broker. Real Estate Broker is the one who is going to help introduce you to inventory that fits the description of your preferences in a house. They are going to represent you – “Buyer” in all negotiations with the “Seller”. Mortgage Broker is somebody who is going to help you find the lowest/best interest rate in the lending market based on your financial profile. Best way to finding a broker is through friends and family who have had positive experiences. You can also look online with a simple google search or respond to ads that you see for brokers. In my case, my friend recommended me to a broker and through them I also got introduced to a couple of mortgage brokers. ALWAYS shop for brokers and settle with someone who you find appropriate and trustworthy to represent you. Real estate brokers ask you to sign a “Buyer Representation Agreement (BRA)”, which is an agreement between the broker and you that firstly allows the broker to legally represent you and secondly, ensures that if you were to buy a property during the term of the agreement, they are eligible for their commission. Please read the buyer representation agreement carefully. Once you sign the agreement, you should not have another real estate broker represent you. If you are dissatisfied with your broker after the agreement is signed, then you will likely have to wait until the term of BRA expires before getting someone else to represent you.
4. Pre-qualification:
When you begin your search for properties, make sure you are pre-qualified. This is essentially a letter from your possible lender telling you the maximum mortgage amount you can afford and at what interest rate. The quoted interest rate will also be locked in for the period of prequalification which can range from 30 to 90 days. Your mortgage broker can help you generate this letter from a lender. You can shop around to make sure you have the best quoted interest rate. Shopping for the best rate is what your broker does anyway but you should also expend your own efforts in finding the best rate in the market for your financials.
You will also have to keep in mind the two kinds of interest rates offered which behave differently for your monthly budgets. A fixed rate interest will be fixed for the term of the mortgage. Your monthly mortgage payments will be fixed. A variable rate interest will vary depending on the Bank of Canada (BoC) rates. Usually, it is set to prime -1%. Your mortgage payments vary based on how BoC sets its rates which can lead to changes in your rates a maximum of 8 times a year. Depending on your financial appetite, you can choose one or the other.
5. Search:
This starts with you sharing your criteria and preferences to help your Real estate broker send you targeted listings. You need to have an understanding of the geographic area you are looking at, house size, amenities, maximum budget and so on. The clearer you are in communicating your preferences, the easier it is for your broker to find you your space. Just as with everything, you should parallelly do your searches on popular real estate websites such as housesigma, condos.ca etc. Your broker will help schedule viewings and you need to be prepared to take time off from work every now and then. Doing this is better than trying to always schedule time after work hours which is likely what everyone else is trying to do. You must be patient with the searches. It’s a long process and sometimes can be defeating, especially in a market where there are bidding wars. There is always going to be a sense of urgency with things as everyone around you is going to scare you to move quickly. Although, it is in your best interest to make decisions fast, you should only do so if you have previously prepared yourself to do it. Otherwise, take your time. This is precisely why, earlier in the article, I recommend taking around 3 months to research and prepare yourself for when you are in the market. Its like playing a competitive sport. You are going to be confident of performing in a match when you know you have trained well.
6. Offer:
You have been searching for a while, likely have gone back on forth on your preferences as well. There are a couple of places you like and see yourself and your family living in them. Work with your Real Estate Broker to strategize on the offer value you want to submit. You can submit offers on multiple properties on the same time. Although this is possible, this can get quite overwhelming too quickly and I only advise you to do it if you are clear-headed. Always, ensure that the offer is conditional on the following two things:
– That the house inspection yields no significant issues
– That you are able to obtain a mortgage from your lender (“Financing Condition”)
These conditions protect you from walking into a bad deal.
If the seller accepts your offer, you will be asked to submit a deposit within a few days of offer acceptance. This deposit is usually 5% of the purchase price. You need to make sure that this money is available in your account to swiftly transfer to the seller.
NEVER waive your financing condition. If you waive your financial condition and for some reason you are not able to secure a mortgage, you lose your deposit.
7. Closing:
Your offer is accepted. You got the house inspected and found only minor items that need work. Inspection of any property usually doesn’t result in a perfect score including in a newly constructed house. If there are minor items, then you can either work with the seller to get them fixed or simply put it on your list to work on after possession. These items usually do not impact the offer price although one can try to negotiate down with the seller.
To satisfy the financing condition, you need to work with your mortgage broker/ lender to understand if they can give you a mortgage on that specific property. They do their due diligence including evaluating the property against market rates. Now, the next thing that I am going to write is highly important. When the lender does a property evaluation and realizes that the market value is higher than the offer price, there will be no issues in you getting that mortgage. However, if the market value is lower that the offer price, then the lender will only give you a mortgage against the market price and you will be responsible to pay for the difference between the market price and offer price. As an example, if after the market evaluation the property value came out to be $900,000 and the offer price was at $1,000,000, the lender will give you a mortgage to cover a $900,000 purchase price. You are responsible to now find $100,000 ($1,000,000 – $900,000) from your accounts. Remember, this $100,000 is on top of your deposit money. To alleviate any risk, always have the results of the property evaluation before waiving any financing condition.
You will need to make sure that by this time you have the following things ready:
– (Downpayment amount – Deposit) ready in your account. Considering this can be a sizeable amount, please make sure that you understand the process of generating the funds ready to send to Client without delay on the closing day
– Approved Mortgage from lender. All the documents pertaining to mortgage approval should be ready
– Legal Support. You will need to hire a lawyer to look over all the documents that are made as part of the deal such as seller documents, buyer documents, property information. The lawyer is going to legitimize the transaction and offer you confidence that the transaction is done rightly.
On the day of closing, simply sit back and wait patiently. The Lawyers will do the final transaction and when ready you will be informed. If you have made it this far into the homebuying process, Congratulation! You are a homeowner.