Buying a home is one of the biggest financial decisions you will make. Once you decide to stop renting and start building your own equity, you may be wondering where to start. This guide covers everything you need to know before, during, and after the homebuying process.
Before Buying a Home
Before you jump into buying a home, you should determine if homeownership is the right move. It’s a big commitment but an exciting one if you’re appropriately prepared. Creating a “buying a house checklist” can keep you on track and make the most out of your purchase.
Figure out your long-term plans
Think about your future goals and how homeownership fits into your plans. Some people want to trade rent payments for a mortgage to build equity. Others are looking to invest in real estate or view owning a home as a milestone. Knowing if you’re buying the keys to your forever home or just want to break into the market will help you decide what you’re willing to pass on and what choices are non-negotiables.
Assess if you are financially ready
Several fees and costs come along with buying a home that can be easy to breeze by if you’re just looking at the sticker price. In Canada, a minimum of 5% is required for a down payment. Then, you need to factor in your mortgage payments, insurance, and land taxes or property taxes. In some cases, these taxes can be built into your mortgage, or it may be a separate monthly payment.
On top of that, closing costs can be 2-5% of the home price once you factor in all of the fees for lawyers, land transfer, underwriting of a mortgage loan, real estate commissions, and taxes. Using a $300,000 home as an example, you can expect closing costs to be $6,000-$15,000.
Identify the type of house that suits your needs
There are several options for residential properties. Depending on your living situation and goals, you can look at condos, townhomes, detached single-family homes or multi-unit homes. You also have a choice between a turnkey home so you can kick your feet up and relax, or a fixer-upper to put your own flare into the property.
It’s also a good idea to know what features are non-negotiable for you to help narrow down the selection process. This list can include:
- Good appliances
- Yard
- Garage
- Type of neighbourhood
- Location
- School district
Find out how much mortgage you qualify for
If you are in the early stages of home shopping, mortgage calculators can give you an idea of what you could be approved for. Sometimes you may not qualify for the amount you think. It’s good to shop around to different brokers, lenders, and banks to get the best rate possible.
You will need to provide pay stubs, banking statements and asset information when applying for a mortgage. Lenders need to look at your debt-to-income ratio against your annual income to see how much you can realistically afford while still making payments towards your other debts. Lenders may also do a stress test which looks at how you can financially handle interest rate increases.
Find out how much you can really afford
Just because you’re approved for a loan doesn’t mean you have to borrow that much. It’s crucial to look past the purchase price and consider the home’s total cost, including insurance, land taxes, maintenance, and repairs. If you have a monthly amount in mind, make sure you account for the expenses beyond your mortgage, so you aren’t stuck paying more each month than you accounted for.
A simple way to see what you can afford each month is by calculating 28% of your monthly gross income, which is what lenders will typically approve you for. This includes your mortgage, interest, taxes, and insurance. Generally, lenders will not allow you to borrow more than 43% of your income across all forms of debt.
Ramp up savings
The more you save before buying a home, the better. When your offer is accepted, there will be considerable upfront payments to cover before you close. There is also the possibility of unforeseen repair costs, which is a reality of being a homeowner. Having money set aside will help make the expenses easier to manage. You might want to consider using a high-interest savings account to earn a return on your home fund. Many banks and financial institutions now offer the First Home Savings Account (FHSA) to help Canadians save for their first home.
Identify who will help you find and buy a home
Buying a home can seem straightforward until you are in the thick of it. There is a lot involved, including finding the perfect place, drafting an offer, and negotiating, which all require paperwork. Some people decide to purchase a home on their own, while others choose to work with a real estate professional who can help navigate the home purchase process. Doing it on your own means you don’t have to pay an agent. However, having an agent means they are doing the work on your behalf. Looking at what your time is worth can assist in this decision to work with an agent or navigate the process on your own.