Courtesy of Re/Max Canada
Choosing Your Agent
Buying your first home is one of the most important investment and personal decisions of your life. It’s also one of the most complex transactions you may ever undertake.
Your first step involves deciding how you will approach your home search. Who will you work with throughout this process — and how will you work with them? Ask yourself, “Do I want an agent working with me or for me?” There is a difference.
As a buyer, you have a choice in representation. Most buyers today choose to have an agent represent their interests in a real estate transaction. This is also known as Agency Representation, which simply means that the agent you hire is legally bound to represent your interests. This involves the highest standard of care and extreme loyalty to you, the “client.” Some agents will work with you as a “customer,” which carries a different level of responsibility. Most real estate professionals require a client relationship because it allows them to provide the full range of services that buyers need and deserve. Your RE/MAX agent will discuss representation with you and will request your commitment in writing for this level of service.
As a first-time homebuyer, it’s important that you find someone you feel completely comfortable with, who you can trust, and who listens to you and respects your views. They have the market knowledge and expertise, but at the end of the day, it’s your home and your investment, so you must be able to work well with your agent. A professional agent understands and excels at this.
Like in so many professions, reputation and word-of-mouth are crucial. Indeed, for agents, client and agent referrals account for about 70% of business. As you begin your search for your agent, talk to family, friends, and colleagues who have gone through the home buying process to see if they can recommend anyone. Homeowners who’ve had a positive experience with an agent are only too happy to share this with you.
What an agent does for you
There are many good reasons to work with a qualified real estate professional. In a formalized agency relationship, you can expect your buyer’s representative to:
- Calculate Expenses
- Provide you with the highest standard of care and extreme loyalty to you as the client.
- Understand your specific needs and wants, and locate appropriate properties.
- Assist you in determining how much you can afford.
- Help you get pre-approved for your mortgage.
- Preview and/or accompany you in viewing properties.
Determining how much you can truly afford involves meeting with a mortgage representative at a financial institution. Most financial institutions, as well as Canadian Mortgage Housing Corporation, have online mortgage affordability calculators that allow you to plug in your basic numbers to see how much of a loan you might qualify for.
Consider these calculations an estimate — a mortgage representative will take your preliminary calculations and see if they hold up to further scrutiny. It’s important to be honest with yourself when you do your own financial review. If you underestimated your household expenses to make your financial picture look brighter than it actually is, your mortgage representative will probably expose a more realistic view.
The mortgage representative will then come up with some close-to-final numbers, presenting you with a preliminary figure for pre-approval. Now you should prepare a thorough and realistic checklist of your current household budget. Make sure you take all of these items into consideration when calculating your mortgage affordability.
The importance of not overspending
Real estate experts cite overbuying as one of the most common mistakes first-time home buyers make. Whether they got caught up in a bidding war or fell in love with a home they just had to have, many people spend more on their new home than they can afford. Months later they may realize that their purchase has left them “house poor” with no money left to contribute to savings, other necessities, or even rainy day funds. This further underscores the need to be honest and realistic with your mortgage calculations, as well as the importance of getting pre-approved for a mortgage, since it can actually protect you from going overboard.
Costs of Home Ownership
From deposits to moving expenses, and everything in between, buying your first home involves more than just saving for a down payment. That may be the largest cost, but there are other things you’ll need to plan and budget for.
This is the step you take when you’re ready to make an offer to purchase. Let’s say you’ve viewed a selection of properties with your agent, found one you like, and are ready to get serious about purchasing the property. At this point, you might need to put down a deposit; the amount depends on your area, the purchase price of the home, and your situation. If a deposit is required, it will be held in trust and will be deducted from your total purchase price and is considered part of your down payment.
Generally speaking, the larger a down payment you’re able to make, the better, because that means you’ll have to borrow less. But you also don’t want to leave yourself so cash-poor you can’t cover all of the other costs that come with closing a sale.
The minimum amount you can put down is 5% of the purchase price, assuming that you have made an offer to purchase and all conditions have been met. For example, a $300,000 property would require a minimum down payment of 5%: $15,000; however, if your down payment is less than 20%, which is the case for many first-time homebuyers, you will also need mortgage loan insurance.
Mortgage loan insurance
If your down payment is less than 20% of the purchase price of your home, you are required to have mortgage loan insurance, also known as high-ratio mortgage insurance. It protects your lender — not you — in case you default on your mortgage. Premiums are calculated as a percentage of the amount you put down, changing at the 5%, 10% and 15% thresholds but there is no break for anything in between. Premiums range from 0.5% to 3% and increase if you are self-employed.
So, to buy a $250,000 condo with a 5% down payment of $12,500, a premium of 2.75% on the borrowed amount of $237,500 would total about $6,500. You can pay this in one lump sum or, as many first-time buyers choose to do, you can add it to your mortgage loan amount. This type of insurance is mandatory for high-ratio mortgages, and is only offered through two carriers: CMHC and Genworth Financial.
Your mortgage lender will likely require an appraisal to ensure the property is worth what you are offering. The reason is two-fold: it prevents you from borrowing more than a property is actually worth, which might apply in cases where multiple would-be buyers enter into a bidding war; and it protects the lender from lending out more than the home’s value, which becomes critical should you default on the mortgage. If a lender has to foreclose, they want to be able to recoup the entire loan amount, as well as the costs of foreclosing. The fee for such an appraisal is typically between $250 and $350.
You wouldn’t buy a used car without having a trusted mechanic perform an inspection for you, and a house is no different. Don’t even think about buying a home without first having a proper inspection done. In fact, your lender may insist on one to verify the condition of the home.
It’s an excellent way to learn as much as you can about the various systems in the home, from the furnace and plumbing to the electrical and roofing. The inspection may identify some repairs that are essential, which you and your agent can either negotiate into the purchase price or insist be completed before you proceed with the deal.
The cost of an inspection starts from $350.00 and depends on the size, condition, and age of the property. But this is money well spent, and is an expense that you simply cannot, and should not, avoid.
Your mortgage lender will require you to have property insurance in place on closing day. Since the property is actually the security against the loan amount, the lender wants to make sure insurance is in place to cover the cost of replacing the home, and its contents, should something happen.
The fees for insurance vary widely, since they depend on the value of the property. Insurance has become a very competitive business in recent years, with new companies entering the market, offering different products and options. Consider using the services of a broker, whose job is to find customers the best deal possible among the companies they represent. You may also be able to get a discount if you use the same company you have your other insurance policies with.
Legal fees for buying real estate range in price, depend on your situation, and must be paid upon closing. When purchasing brand new condos, since such deals can involve more paperwork, the cost might be higher. Your agent can provide you a local lawyer if you don’t already have a relationship with one.
Title insurance is yet another type of insurance you will require. Your lawyer will advise you of this type of protection, which insures you against any defects of title to the property. For example, if the previous owners undertook major renovations of the property without proper permitting, you would be protected against any costs required to bring the house up to code. Typically, this one-time premium costs less than $500.
Moving expenses and services connections
When you’re totaling up all the costs of buying your first home, don’t forget to include moving expenses and connection fees or deposits for services, such as phone, electricity, and other utilities.
Moving expenses vary widely, depending on your personal circumstances and possessions. As a first-time home buyer, perhaps you’re moving from an apartment, or even your parents’ home. If this is the case, you may not need the services of a moving company. You could choose the do-it-yourself route and enlist the help of family and friends. If so, ask them or your agent for a referral for a truck rental company they trust, as this is an area of your move that you want to go smoothly. Don’t be fooled by the price! Reliability is key.
If, however, you do contract a moving company, do your homework well in advance; get referrals from your agent and friends and do your own research. Rates and levels of service can vary widely among moving companies, as can insurance coverage, so give yourself lots of time to look into these matters.
Often overlooked are the costs of making sure your services and utilities — such as your phone, electricity, cable TV, and other connections — are up and running for move-in date. Make sure you call well in advance to make these arrangements, and ask about all associated fees. For example, some utility companies require deposits, or charge other fees for new customers with whom they have no billing history.
Loans and Interest Rates
Searching to find the right home is a process you should undertake thoroughly and carefully, and you should be just as diligent in sourcing the best loan for you.
The past few years have seen historically low mortgage interest rates — the lowest in decades — leading some to call them “once-in-a-lifetime rates.”
Consider, for example, that in the late 1980s, five-year, fixed rate mortgages were more than 12%, and even in the late 1990s, they were almost 7%. In 2009, you could get the same mortgage for about 4.5%, a five-year variable rate mortgage at 2.25%, and a five-year fixed rate at 3.99%.
Perhaps these rates really are opportunities of a lifetime.
This, of course, raises an important question for home buyers: should they lock in at these rates, or is a variable rate the better option?
This is an excellent question, but it is not easily answered. It depends on your comfort level with rate fluctuations.
If the bank rates decrease, then it’s in your favour. If the bank rates increase, your cash flow will be restricted.
The importance of pre-approval
Taking the important step of getting pre-approved affords you knowledge and confidence: you’ll know in advance exactly how much financing you qualify for, and you’ll be confident during your search knowing where you stand.
This is also likely the time when you will first be introduced to the often intimidating and complex world of mortgages. It’s critical you understand your options so you can make an informed decision that suits your personal circumstances.
When you meet with your financial representative, if there’s anything you don’t understand, ask. Ask lots of questions. If you still don’t get it, ask again. This is not an area to take chances or to be shy, since how you structure your mortgage could amount to tens of thousands of dollars over the term of your loan.
If during this process you sense your lender representative isn’t patient in answering your questions, move on. The financial services industry is very competitive and, assuming you qualify for a mortgage, if one company doesn’t want your business, someone else will.
Fixed or variable
A fixed mortgage involves a fixed rate of interest over a specified period of time, known as the term. This provides a certain level of peace of mind, since you’ll know exactly what your monthly payments will be, which allows you to budget accordingly.
A variable mortgage, on the other hand, is just like it sounds: the interest rate fluctuates based on the market rates. This can be a good arrangement if rates are on the way down, but it also tests one’s nerves if rates begin to rise.With rates being as low as they have been over the last couple of years, more and more home buyers are locking into fixed mortgages to take advantage of the low rates.
Long versus short term
The term of the mortgage refers to the life of the mortgage contract, typically anywhere from one to five years. At the end of the term, the mortgage becomes due and payable. In most cases, however, the lender and borrower negotiate a renewal for a new term, which also provides you the opportunity to change the terms of the mortgage if your circumstances change.
So, long versus short term is pretty self-explanatory. Generally speaking, if rates are low it might be a good idea to lock in for a long term. If rates are high, it may be advisable to choose a shorter term until you know how the rates are trending. If they begin to rise, you can consider locking in for a longer term.
Open versus closed
This refers to how much flexibility you have to repay the mortgage, in full or with large lump-sum payments, at any time over the term without penalties.
However, you do pay for the flexibility. For example, open mortgages are usually available only for short terms, and the interest rate is often higher. The benefit is you have the freedom to make a large payment when you can.
Closed mortgages, on the other hand, often have lower rates, but you don’t offer the flexibility to make large one-time payments.
This is the period over which your mortgage is paid in installments. In June 2012, the Canadian government outlined new rules limiting the maximum amortization period at 25 years. For many first-time buyers, the period is usually 25 years. Generally speaking, the shorter your amortization, the less interest you have to pay, but the larger your monthly payments will be. Most first-timers go for a long amortization to keep payments as low as possible, since it’s their first experience with a mortgage.
With all of the above mortgage considerations, what you choose really depends on your own personal circumstances, preferences, and comfort level. Your mortgage specialist can walk you through a number of different scenarios with these variables, so you can see exactly what each change will cost you.
There are many products and services available in the industry today, so be sure to take your time and explore all your options.
Making an offer you can afford
This is where the rubber meets the road — and where your agent earns his or her stripes. After weeks or months of planning, preparing and searching, you’ve finally found a home on which you’re ready to make an offer.
It’s an exciting time, to be sure, but also one where emotions can easily come into play; particularly if you’ve found a home you love and really want.
Your agent will help you keep your emotions in check, balancing against the realities of the market. Think of it as a game of poker — you don’t want to be so excited that you tip your hand to the seller. Nor do you want to be too conservative and bid so low that you lose out.
If you’ve taken the important step of getting pre-approved for a mortgage, you know exactly how much you can afford, and are less likely to get caught up in a bidding war that will carry you above your price point.
Keeping your emotions in check
If you’ve done your research, received mortgage pre-approval, and looked at a good selection of houses with your agent, you’re going to feel well prepared and in control. Sure, you may really love this one house and desperately want it, but you should also remember that there are likely others just like it, or better, out there. And if that voice of reason doesn’t pop into your head at negotiation time, your agent will help caution you against letting your emotions get carried away.
Of course, the interest and potential competition for a property depends on market conditions. If it’s a buyer’s market, you hold the cards and you’ll be confident in knowing there are other options out there. If, however, it’s a seller’s market, acting fast to make an offer that you can afford and is acceptable to the seller is a combination of instinct, preparation, and the experience of your agent.
Avoiding bidding wars
Several factors are at play come offer time: price, which speaks for itself; inclusions, which cover exactly what is included in the deal, such as appliances; and other conditions such as closing date. You want the best combination of those items that suit you, as does the seller.
Then there are human relations. If you make an offer the seller deems insultingly low, for example, there may be nothing you can do to bring them to the negotiating table. After all, this is their home you’re buying, and quite often sellers still have emotional attachments to their home, even though they’ve decided to sell. It’s the job of your agent — as well as the seller’s agent — to navigate these often complex issues for both parties.
One of the most important tools you have when it comes time to make an offer is the comparables your agent generates from the Multiple Listings Service. These are excellent snapshot reports into the recent sales activity of similar — comparable — properties in the same neighbourhood. You can see important information such as original and adjusted asking prices, number of days properties were on the market, listing agent history, and actual selling prices.
Once you have this information, weighed against the details of the home you’re making an offer for, you will feel tremendously empowered to make an informed decision, and less likely to enter into a bidding war.
Acceptance of offer
So you’ve made a successful offer to purchase with your agent on the home of your dreams — or at least taken that important first step toward home ownership. Now what?
Well, now there’s usually a bit of waiting, as closing periods typically take anywhere from several weeks to a few months. But there are some important things that need to happen right away.
Once your offer has been accepted, there’s usually a 10-day conditional period, during which you take all the necessary steps with regard to financing, home inspection, and everything else that needs to happen before you officially seal the deal.
Your mortgage lender will need a copy of the offer to make sure everything is still in order and in keeping with your pre-approved level of financing.
And as discussed, this is when the home inspection takes place. You should accompany the inspector throughout this process, which takes about three hours, so you can learn as much as you can about the various systems in the home, from heating and plumbing to electrical and roofing. Importantly, the inspection may identify some repairs that need to be made, which may allow your agent to negotiate a lower purchase price or insist that the repairs be made at the seller’s expense before you proceed with the deal.
At the completion of the conditional period, with any adjustments or repairs made to your satisfaction, your agent will finalize the deal and your lawyer will process the paperwork, including the mortgage documents with your lender.
All of this would point to a final date of actual legal possession — the real closing day, when:
- Your mortgage lender will provide the funds to your lawyer
- You pay all the remaining closing costs
- Your lawyer pays the seller and registers the home in your name
- You have all your insurance in place
Whether it’s weeks or months between finalizing the deal and actually moving in, it’s just a matter of planning your move: hiring a mover or renting a truck and doing it yourself; arranging services such as electricity and cable; rerouting your mail; and other moving essentials.
You’ve done it! Welcome home!