Steps in Home Buying

So you’ve decided to take the big leap and become a first-time home buyer. Below are the steps that you can take as you prepare for the big milestone.

Step #1: Determine your budget

Compared to renting, there are a lot more financial factors to consider when it comes to buying a home. In addition to the purchase price of the home itself, there are lawyer fees, closing costs (such as adjustments), and property title insurance (which is usually a one-time fee). To determine your budget for a house, you should consider:

• Based on my current income, how much monthly housing payment (mortgage + maintenance fees (if in a condo) + property tax) can I afford?
• How much down payment do I have already saved up?
• Do I have enough savings to cover for unforeseen circumstances?
• What are my housing needs? (For example, do I need extra rooms for the kids? Do I need or want a backyard? What location do I want to live in?)

Thinking about all of the above and evaluating your current financials can help determine what price range is within your budget.

Step #2: Gather down payment

After coming up with a maximum house price that is within your budget, it’s time to gather the amount for down payment. The minimum down payment for homes that cost up to $500,000 is 5%. If you’re looking to purchase a home between $500,000 and $1 million, the minimum down payment is 5% of the first $500,000 plus 10% of the remaining balance. For homes that are over $1 million, a minimum down payment of 20% is required. Those who are self-employed or those with poor credit score / history may be required to provide a larger down payment.

Most people use their savings for down payment. If you have amount set aside in your Registered Retirement Savings Plan (RRSP), the Canadian Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 tax-free from RRSP to buy or build a qualifying home. You need to repay the amount withdrawn within 15 years. Note that failure to make the repayments within 15 years could end up costing you a lot of money in income tax.

Step #3: Get pre-approved for a mortgage

Unless you have money tree growing in the backyard or a stack load of cash, you would need to get a mortgage for your home. Getting pre-approved for a mortgage before starting the home shopping process can save a lot of time down the road, especially in a hot house market such as Toronto, where there are often multiple buy bids for a single property. The pre-approval can also provide you with an idea of how much you can afford (in validation of the budget that you calculated in step #1).

To get pre-approved for a mortgage, you can go to a bank or credit union branch and speak to a Mortgage Specialist or Mortgage Advisor. They will ask questions such as your current savings and annual income. Another option is to get a Mortgage Broker, who will advise you on the different loan options from various companies and programs. This can help you compare more options and find the best rates.

Step #4: Find a real estate agent

Real estate agents are important partners who can provide you with helpful information on the home buying process, negotiation skills, and insights into homes, buildings, and neighbourhoods (from their experience in helping other buy and sell in those areas). Using a real estate agent does not cost anything for the buyer – they’re usually compensated by the commission paid by the seller of the house. Agents can also provide listings of new properties that come onto the market (from MLS listing). AtHouse Real Estate is made up of a team of real estate agents with the expertise and experience in guiding home buyers through the process. Contact us for details.

Step #5: Shop for a home and make an offer

You can ask your real estate agent to send you daily listing of homes that are up for sale (based on pre-defined criteria that you can set out), and start touring homes and attending open houses. When touring homes, it’s important to also get a feel of the neighbourhood (if it’s in an area that you’re not already familiar with) and amenities that are close by (such as schools, hospitals, clinics, grocery stores). Don’t forget to check out the details of each place you tour. For example: look for cracks and blemishes in the interiors, test the plumbing by running the tap water, turn light switches on and off to test the electrical system, open and close doors and windows to ensure that they work properly. You might want to have a checklist handy and notepad, as it might be hard to remember all the little details – especially when touring multiple homes on the same day or within the span of a few days.

Once you are ready to make an offer, your real estate agent can help you determine the offer price using past data on sold home prices (based on similar homes in the area that have been sold recently). Your agent can also help explain the offer process and time windows.

Step #6: Go into escrow and get a home inspection

Once a price and conditions agreement is reached between you and the seller, an Agreement of Purchase and Sale document will be drafted and signed by both parties. The house will then go into escrow. Escrow is the period of time it takes to complete all the remaining steps in the home buying process. During this time, you should get a home inspection to check for anything that may need fixing – such as plumbing, electrical, or structural damage. Purchase offer is usually conditional upon satisfactory home inspection. If the inspection report contains items that need fixing, you can ask the seller to fix them before closing the sale.

Step #7: Secure your mortgage loan and get a home appraisal

In order to finalize your mortgage documents to secure financing, the lender would want to get a home appraisal. This is where the lender (usually a bank or credit union) checks out the house to make sure that the home price (and thus the amount that they will be lending to you) is reasonable, and that the house is a good investment. It’s similar to a home inspection, but for the lender. In this step, you can also select your mortgage payment frequency and other features.

Step #8: Close the sale and get ready to move in!

On closing date, meet your lawyer and sign the final papers. There is usually a lot of paperwork involved, and there may be closing fees that you need to pay. This may include adjustments or fees that you need to pay for a portion of the utility or property maintenance bills (that the seller has already pre-paid previously). You should budget 2% to 8% of the home price for closing costs.

Once all closing costs are settled and all paperwork is signed by both the buyer and seller, the escrow agent (usually the lawyer) will then release the funds to all appropriate parties and you will get your house keys. Then it’s time to pack, arrange for a moving truck, and move in!