Step by Step Guide to Buying a Home
One day you're sitting at work, or at home, and suddenly you think, "Can I live on my own?" You go to bed, and you think about it and think about it more, and before you know it, you're consumed with the question "Can I afford to buy a home?" and "Where can I live?" and I'm sure many others. It's not surprising that many become overwhelmed when buying their first home. Believe it or not, it is actually quite easy, you just need to make sure that you have a game plan.
Now that you have decided that you want to pursue purchasing a home, you may be wondering, "Ok, now what?" You may be proactive and have already done a little research, but as you probably are already well aware of, finding relevant information can be exremely time consuming. Starting here is definitely your best bet.
Ask yourself, "Is this a home that I will want to live in 5, 10 or 15 years from now?" Odd question, but if you think about it, some people can afford X amount of dollars and in certain markets, that may not get you much. Some people buy a home and stick with it for years and years because it suits them just fine. Others will get tenants that will help pay down the mortgage and then in 5 years decide that they don't want tenants anymore and it makes sense to move. So you have to decide whether you're buying a home so that in 5 years from now, after you built some equity and savings, that you may be able to buy something better in the near future.
As mentioned previously, some people decide that they want tenants. Tenants can be great and tenants can be rotten. If you're thinking more and more about having tenants, then you should weigh the pros and the cons.
- Helps pay down your mortgage more quickly.
- Instead of adding the rent towards the mortgage, you can add the rent towards renovations.
- You could end up with a bad tenant, and it could take up to 5 months before getting them evicted. In Ontario, in residential tenancy, the tenants have more rights than the landlords.
- Not only could they not pay the rent, they could also trash the apartment, leaving you with a huge bill and little legal recourse.
This one really should go after Getting Approved for a Mortgage but I think that most people out there have an idea of where they want to live. If you think you don't care where you live and that the Toronto and the GTA is your oyster to enjoy, then think again. Prices vary and so does the benefits of where you buy. Focus on an area you love most for the price range given and that will be one way of making sure that you don't get overwhelmed.
Moving onto financials...
Down payment for buying a home:
A down payment is money that the home buyer has set aside to go towards the mortgage on his/her home. The minimum down payment that the buyer must have is 5% of the total price of the home which will be applied to the mortgage upon closing. The 5% cannot be borrowed by another lending institution, family member or any 3rd party. For first time home buyers,the down payment can come from their RRSP's which doesn't get penalized when initially withdrawn. The RRSP withdrawal has to be paid back in a set amount of time, if not repaid by the due date, then it will be considered as taxable income. Further information on the RRSP withdrawal program can be found at.
Deposit for buying a home:
The deposit is a specified amount of money that the buyer must give to the listing brokerage which is held in their trust account once an agreement has been reached. The funds are released upon closing which then gets applied to the overall down payment or returned to the buyer. The deposit is used as a way to ensure the buyer is tied to the agreed purchase of the home and follow through with closing the deal. If the purchaser were to leave the deal, then the deposit could be kept by the seller as a form of remuneration for time lost. Additional legal ramifications could follow.
Example: Buyer has $40,000 saved up as part of his/her down payment. He finds the home of his dreams and gives a certified check made out to the listing brokerage in the amount of $10,000 as a sign of good faith. When finalizing the mortgage details, he gives $30,000 to the bank with the other $10,000 to be released upon closing for the total amount of $40,000 to be applied as a down payment towards the home.
In order to make your mortgage approval process move along quickly and efficiently, there are a few things you can prepare beforehand to ensure that there are no delays. Your lender will typically ask for some standard documents. By being ahead of the game, and having these documents ready, it can save you precious time, and all of that back and forth hassle. When you only have 5 business days to get your mortgage approval, time is valuable, and let's not delay!
These documents can include:
- 2 pieces of identification (e.g. driver's license, passport, birth certificate, bank issued credit or debit card, etc. Please remember that Health Card is excluded from this list)
- 2 most recent paystubs, and a letter from your current employer. The letter should include when you started, what your income is, your current position in the company, and whom to contact for verification
- If you are self employed, you will be asked to provide your 2 most recent Canada Revenue Agency issued Notice of Assessments. These document will indicate that your personal income taxes are up to date, and will provide an average of your income over those 2 years. You will also need a copy of your business registration documents to verify how long you have been self employed
- Bank statements showing the funds that you have available for your down payment and closing costs.
Not every situation is similar however, and your mortgage provider can ask you to provide additional information at a later date. These situations can vary slightly if you are self employed, buying a rural or investment property, if a family member is gifting your down payment, or if you may not have standard employment verification documents. Your lender will advise fairly early on in the process what documents will be necessary.
One thing that many first time home buyers overlook when buying a home is what it will cost you to buy that home. I've put together a list of what your typical costs will be. If you're selling and buying a home, the costs will be quite a bit more.
For first time home buyers:
- Gas: Driving around to home to home can be costly. Especially if you're driving all over the map. With today's gas prices, and the gas consumption of the average gar, budget $5-$10 per trip.
- Home Inspection: Home inspection prices vary, but the "norm" is $350 + taxes. If you have to do any other tests, such as mold, thermal readings, air quality, etc, the costs could easily double. Most home inspections don't require the extras.
- Lawyer Fees: If you are buying a home and the deal is fairly straight forward, the lawyer fees will range between $750 - $1000 + tax.
- Survey Surveys aren't generally needed these days as title insurance covers you, but if for whatever reason the survey is needed, you or the seller will have to pay for it if it if the seller doesn't have it in their possession. A new survey made by a professional could cost thousands of dollars.
Title Insurance: Title insurance is a form of insurance that protects you and your lender from financial loss due to defects found in title to the property or any liens associated with that property.An example would be, the previous owners didn't pay their property tax, and a lien was on title. You purchase the home and find out afterwards that you're stuck with the bill, in this case, Title insurance would cover you. Title insurance will generally cost around $300.
Home Appraisal: A real estate appraisal specialist determines the value of the land and the building on it. Since real estate values differ from property to property, an appraisal may be needed in order for the lending institution to approve a mortgage.In some very few instances, an appraisal may be required by a certified appraisal professional to come to a dollar amount of what the property is worth. In this case, the fees generally are $300 - $500.
- Moving Expenses: When moving your belongings from point A to point B they require either you, a truck and a bunch of family members or friends or a moving company that does the leg work for you. If you do it yourself, plan on $200 - $300 for the rental of the truck, gas and some food and beverages for your "helpers". If you hire a moving company to move within the Toronto or the GTA and your belongings can fit in one load plan on spending $1200 or more plus taxes.
- Time Off Work: You may end up having to take some time off work to do the home inspection or pick up the key from the lawyer, or take a couple days off to move. Only your budget can tell what this may or may not cost.
Land Transfer Tax: Land transfer tax is a tax that is imposed by the Government when title is transferred from one owner to another. The taxable amount is a percentage based on the property value once title is exchanged. In cases like Toronto, there is the Municipal and the Provincial land transfer tax that is due once title is transferred.
See below for the first time home buyer rebates
CMHC - Canadian Mortgage and HousingCMHC is Canada's Housing Agency that provides mortgage loan insurance, housing policies and regulations, mortgage backed securities and housing market research.
When applying for a mortgage on a home with less than a 20% down-payment, the CMHC imposes a fee for mortgage insurance. This is set up for people who default on their mortgage, and in turn, protects the lenders from any financial loss. The fee is based on the purchasers down payment amount and can be blended in with the total mortgage amount. Those who have 20% or more, do not pay the CMHC fee. Find out how much your fee will be with this calculator.
- If you are buying a home that is a fixer upper, than you need to have either a substantial savings, a line of credit, or if your mortgage company will allow, a lump sum of money that has been included into the mortgage that can be used to fix up the home. This amount can easily add up to the tens of thousands. Make sure that when you purchase a home, you aren't leaving yourself vulnerable to a task to big to handle.
First Time Home Buyer Rebate
The first time home buyer tax credit is a rebate on a portion of the land transfer tax. The maximum rebate allowed to be applied to the land transfer tax payable is $2000. Toronto has an additional land transfer tax with a similar tax credit for first time home buyers in which the maximum rebate available is up to $3,725.
For example, a home outside of Toronto cost $450,000 and the land transfer tax is $5,475. The first time home buyer will get a $2,000 rebate which will be applied right away with an amount owing of $3,475.
Another example would be, a home cost $550,000 in Toronto and the total land transfer tax payable is $7,475 for provincial and $6,725 for municipal which totals, $14,200. The first time home buyer will receive a rebate of $2,000 for the provincial and $3,725 for the municipal, which brings the total amount payable upon closing to $8,475.
The First Time Home Buyers RRSP Plan The First Time Home Buyers RRSP Plan (HBP) allows first time home buyers to withdraw up to $25,000 from their RRSPs to buy or build a home without getting penalized. It is required that the RRSP's are repaid within 15 years with a minimum yearly repayment of 1/15 of the amount withdrawn. If less than the minimum is repaid in any particular year, the balance is added onto the taxpayer's income. In order to qualify for the Home Buyers Plan, an individual must not have not owned a home ever, anywhere in the world.Getting out there..
These days, Realtors are a dime-a-dozen, but that doesn't make them all worthy candidates to look after one of your biggest investments. Some Realtors do it on the side, which leaves their clients vulnerable to a possible bad purchase. This is not to say that part time Realtors can't get the job done, but time is required for a successful transaction, and time is not plentiful with part time Realtors. Working in real estate requires market knowledge, experience, and up to date education. Achieving this can not be easily done by working here and there. Make sure that when you are ready to buy, that the Realtor you have knows what the market is like, how to negotiate on your behalf and understands the process involved to ensure you - the client, are extremely looked after.
Buyer Representation Agreement
Buyer Customer Service Agreement
Confirmation of Co-operation and Representation
Agreement of Purchase and Sale
Agreement of Purchase and Sale Condominium
Working with a Realtor
You have found the home that want, so now what is the next step?
Your Realtor will look up the comparable homes in the area to see what is selling, what has expired and what homes have been terminated on the street and in the area, to see if the asking price of the home is accurate or way off. For the most part, the Realtors will know the market price of the area when they show the home, but it is advised to see the homes on paper so that you are comfortable with the price you will be offering.
You will also have to decide what conditions will be added to the agreement in order for you to be legally safe. An example of conditions would be:
- Condition to Financing
- Condition to Home Inspection
- Condition to the Sale of the Buyers existing home
- And several others
These are a few examples of conditions, and it is ultimately up to you what conditions you want in the agreement with the advice from your Realtor.
Another key part of this, is the closing date. You have to come to a date that will work well for you to get the keys once title has been transferred over, but ultimately, you want to work with the closing date that the seller would like most. This is because when it comes to negotiating, you have given them the closing date they wanted and in which case, they may be more obliged to work with the offer you have given.
Once you have decided the price that you are willing to start the negotiation price with, the Realtor will then draft an agreement of purchase and sale, along with a confirmation of co-operation and representation, and any other necessary paperwork to accompany the offer in which you will have to sign. Dont worry when you see everything that needs to get signed, it is all part of the process and there is nothing to fear. Your Realtor will then call the listing brokerage to register an offer, and will usually get in touch with the listing sales representative to arrange a time when the buying representative can present the offer.
The negotiation process can be the most painful part of the whole home purchase adventure. Once all the paperwork is signed, the Realtor will then present the offer to the sellers and explain why you came in at the price you offered and the perks to working with your offer. After the buying agent has presented the offer, he or she will usually leave so that the listing agent and the sellers can discuss the offer in private.
Their options are:
- Accept the offer
- Change the offer (price, closing date, etc.)
- Flat out refuse the offer
- or do nothing...
If they decided that they would like to work with your offer, but would like to change a few things, their Realtor will change the items that they have requested and then would get sent back to the agent representing the buyers. The buyers then have the choice of:
- Accept the offer
- Change the offer (price, closing date, etc.)
- Flat out refuse the offer
- or do nothing...
These options usually end with an offer that gets accepted, but can sometime go back and forth several times before the agreement is finally reached. This process can go on for hours if not days, and its no wonder that this waiting and anticipating is the most stressful part of buying a home.
In some areas such as Toronto and many parts of the GTA, the homes available do not meet the demand and thus, there can be multiple buyers all wanting the same home. In this case, the home is usually left on the market for a period of 7 days more or less to allow people to come in and see the home. After the "showing period" there is usually a date that has been set that the sellers will review any offers that have been registered. In some cases, there have been over 50 offers!!! This part of the home buying process is the most aggravating for first time home buyers, veteran home buyers and also for the real estate agents. When a multiple offer situation presents itself, it is wise that the buyer does not get emotionally attached to the home and instead be patient and think things through with the advice of their Realtor. Sometimes, the multiple offer situation gets out of control, in which the buyer leaves out any conditions which would otherwise safeguard them in case of any underlying issues. When leaving out conditions such as financing or home inspection, that can leave the buyer with a lot of head aches.
For Example: If the buyer goes in free and clear of all conditions, that means the offer is meant to be taken as, if the offer is accepted, the home will be sold firm, right then and there. No turning back, the home is yours. If the buyer gave the listing brokerage a down a deposit of $10,000 and the buyer finds out that they have been denied financing, the seller can be legally entitled to keeping the deposit and added legal headaches if the buyer were to back out of the deal.
Another example would be the buyer goes in free and clear and purchases the home. Only after moving in, do they realize that there is a termite problem that they overlooked and probably would have been seen by the home inspector, in which case, the buyer is left with a home that is ready to collapse with little legal recourse.
Any time a multiple offer rears its ugly head, I always advise my clients of all the options before they decide to make any decisions. Sometimes, going in free and clear of any conditions is the only way to get the home, and in which case, proper steps must be taken to ensure that you, the buyer, will not be left in a situation that you emotionally and financially cannot handle.
You can finally take a deep breath and exhale a sigh of relief. You've won the battle, now there's the conditions that need to be fulfilled. Most often you'll see the condition to financing and condition of home inspection. Your Realtor will email the agreement to your mortgage agent, if not, you'll need to get the paperwork over to them right away. Your Realtor will more than likely have a home inspector, if not, you can call Wes from A Buyers Choice to help out. Usually with conditions, you'll have 5 business days to get your finances and home inspection in order.
Conditions in an agreement of purchase and sale
A condition in the agreement of purchase and sale is a requirement that must be fulfilled before the deal can be called firm legally.
For example, the prospective buyer of a home says to the owner, "I will buy your home, but only if the bank says I can." or " I will buy your home only if the home inspector says that the home won't collapse on me". When a home is conditionally sold, it means that the an agreement was made between the buyer and the seller, but the conditions need to be met before the sold sign can go on the lawn.
- Condition of financing
- Condition to obtaining insurance
- Condition to sale of the buyer's home
- Condition to home inspection
- Condition to obtaining a survey
- Condition to obtaining an electrical standards certificate
- Condition to the seller removing any loose dust particles in the home
You can literally make a condition to anything you want, but it doesn't mean that the the other side will accept it.
What does a home inspector do? The home inspector is an integral part to finalizing the deal as he/she can determine what may be wrong with the house and if any work needs to be done to bring it up to code. They usually spend about 3 hours going through the home, inspecting and deficiencies, in the integral parts of the home.
Inspection usually includes
- Electrical panel
- Air conditioner
- Outlets are properly grounded
- Roof (weather permitting)
For a thorough home inspection of your home, call Wes at A Buyers Home Inspection.
Closing the deal..
Once the conditions have been met, the Realtor will make either an amendment to the agreement of purchase and sale, deleting the conditions, or the Realtor will create a Notice of Fulfillment of conditions.Once you sign the document, the seller will acknowledge it, and that's it, that's all. The home is yours....well almost yours.
You probably already have a lawyer already but if you don't, you will need one. The lawyer takes care of:
- Transferring the Title from the original owner into your name/
- Make sure that there are no liens or encumbrances on the property that will affect transfer
- Prepare legal documents
- Make sure that mortgage instructions are clear, concise and correct
- Arrange Title insurance so that you are well looked after
- Ensure that the adjustments are correct with the deposit, taxes paid, utilities paid, etc.
Last but not least, you need a reputable moving company. There are tons of movers available in Toronto and the GTA, so who do you use? We have all heard the horror stories of movers not showing up, or hung over and damaging furniture, but there are good moving companies out there that take good care of your belongings and won't charge you a premium for it. Start by asking your friends and family who have previously moved and see if the movers are worth re-hiring. Enjoy!