Top 10 things a first-time home buyer needs to know
Buying a home is a complicated process for anyone so this month, we’re going to review some of the basics that first-time home buyers will need to know. First up, here are some of the concepts you’re going to want to know:
Mortgage lenders: You can either get your mortgage directly from a bank or through a Mortgage Broker. The basic difference is the bank is providing their own mortgage directly where Brokers work with multiple lenders to provide different mortgage options and rates for your particular needs. It’s always best to investigate your options and find the best solution for your needs.
Mortgage default insurance: This protects lenders against possible default, meaning that you can’t pay your mortgage. Mortgage insurance is required when the down payment is less than 20% and the insurance premium charged depends on the amount of the down payment.
There are three mortgage insurance options (although the lender chooses, not the buyer): CMHC, Canada Guaranty and Genworth. CMHC is a government agency while the other two are privately owned. Recently, CMHC changed their policies to require a lower debt ratio (how much you earn vs. how much you owe), raise minimum credit scores and discontinue borrowed down payments. It’s estimated that approximately 10% of borrowers will no longer eligible under CMHC’s new requirements. The two private insurance companies have not followed CMHC’s lead so this is another item to consider as you choose your lender.
Down payment: The minimum down payment in Canada is 5% of the purchase price. Ask about available government incentives and first-time home buyers (or anyone who hasn’t owned a home in the past five years) can borrow from their RRSP for their down payment. Family gifts can also be used as a source of down payment. One thing to keep in mind is that there are policies with regards to proof of down payment funds. Typically, 90 days history is required for any down payment funds from your own sources and gifted down payment funds need to be deposited into your account a minimum number of days prior to closing (number of days depends on the lender).
Deposit: A deposit is a smaller amount than the down payment, usually around $1,000 for every $100,000 of purchase price, that you pay once the seller accepts your offer. It confirms that you will uphold your end of the agreement and is non-refundable if the offer conditions are met.
Closing costs: Separate from the down payment and deposit, there are a few other items you’ll need to be prepared to pay before you move in, and these are commonly called closing costs.
Inspection fees will be payable at the time of the service (usually between $750-1,750
depending on the type the property needs). The deed transfer tax is 1.5% of the purchase price and is payable at closing, as are the legal fees which usually cost around $1,000.
Obviously, the fun part of buying your first home is working with a great realtor (this gal!) to look at homes and pick the right one, but the rest of the process involves a lot of other steps that might be less fun but are really important. I want to help make sure you’re as prepared as you can be so let’s look at the process from start to end.
1. Before you do anything, decide how much of a down payment you have or can put
together. I recommend you do this before you even start getting pre-approved for a
mortgage so you have it figured out and settled before you go to your first meeting. Don’t
forget to plan for a deposit too.
2. Meet with one or more lenders to select the one you’ll go with and get pre-approved for a
mortgage amount. If you need help, I have contacts at each lender.
3. Now meet with your realtor and start the shopping process. You’ll need to disclose your
mortgage pre-approval amount so I know your upper limit. Keep in mind that in the
current seller’s market, we can expect to negotiate up, not down, so we’ll shop under
your maximum to allow room for negotiations.
4. Once we’ve found the right home, we’ll write an offer. This is a 3-4 page document that
lists your deposit, lawyers’ review, inspection(s), financing, closing date, conditions,
insurance and inclusions/exclusions.
5. We’ll present your offer to the seller and give them a specified amount of time to
respond. In a seller’s market, we’ll give them a short response period to try and avoid
getting into a multiple-offer situation (more on multiple offers in this past blog).
6. There will most likely be some back-and-forth as we negotiate things like price, closing
date, etc. When we’ve reached an agreement, we’ll receive the seller’s formal acceptance of the offer and you’ll need to pay the deposit and wait until your closing date (usually 30-60 days out).
7. It’s time for the home inspections. That always means a full inspection of the condition of
the home (including roof, heating system, plumbing, etc.) and I recommend a 4-day
radon test as well. Depending on the property, you may also need a well and septic
inspection. The inspections may result in additional negotiations and amendments to the
8. With the offer accepted, you can now finalize your utility connections for your closing
date and firm up your property insurance. You can also use this time to shop around to
make sure you get the best price possible.
9. In the weeks leading up to your closing your lender will send mortgage instructions to your lawyer for their preparation. Typically, a few days before closing you will meet with your lawyer to sign prepared mortgage documents and provide a certified cheque for your down payment and closing costs.
10. Closing day! I know you’re beyond excited to get the keys to your new home but be
prepared for a long day of waiting. Here’s how the day usually goes:
a. First thing in the morning (usually 9-9:30am), we’ll complete a final inspection to
check all inclusions are there and that any agreed-upon repairs have been completed.
b. After the inspection, you will direct your lawyer to transfer the funds to the seller’s lawyer. It could be 12:00 before this transfer is completed.
c. The seller’s lawyer will confirm receipt of the funds. This could come in as late as 4pm.
d. After confirmed receipt, I can give you your keys and you can get into your new
home! Plan your move around this time.
As you can see, there are a lot of moving parts to buying a home, so be sure you work with a
realtor who you’re comfortable with. S/he should be patient and able to fully answer your
questions, advise you, ask the questions you don’t know to ask and negotiate well on your
behalf. This will be the biggest purchase of your life so don’t be afraid to ask questions or for as much clarification as you need.
My final word of advice for first-time buyers is to save while you can. It’s much easier to save for the next house when you’re already in one, so buy as soon as you can rather than continuing to rent. This may mean that you need to bend a little on the perfect house or neighbourhood, but that first house will always be life changing.