Buyers Checklist
The world of real estate can be confusing and rife with pitfalls. Unwary buyers can end up paying more than a property is worth or get saddled with a property that ends up costing a fortune. Education is key to increasing your chances of success and avoiding many of the problems that befall less cautious consumers.
Buy or rent?
How much can you afford?
The Canada Mortgage and Housing Corporation (CMHC)
Strategies for buying real estate
Condominiums and housing cooperatives
Things to remember before you begin hunting for a home
House hunting tips
Questions to ask when visiting a house
Making an offer
Conditions you should include when making an offer
Home inspection
Paperwork you will need when applying for a mortgage
Mortgage brokers
Choosing a broker
Costs associated with buying a home
Buy or rent?
The decision to rent rather than buy is often a question of lifestyle. Some people like to live in an apartment and don't want to worry about household maintenance. Some rent because they cannot afford to buy a home. Others may be able to afford to purchase a home but have not compared the cost of renting to the cost of buying.
If you can come up with a down payment and can afford to make monthly mortgage payments, it may be time to weigh the pros and cons of home ownership.
When you rent, the payments you make each month are gone. When you own, your home acts as a kind of savings plan. Each monthly payment builds equity. The longer you stay in your home, the more equity you own. And now that interest rates are low, mortgage payments on a starter home would not be much more than rent payments, says Will Dunning, senior market analyst with the Canada Mortgage and Housing Corporation.
However, since there are a lot of costs involved in buying and selling a home, if there's a possibility your stay in the home will be a short one, it may make more sense to rent, says Dunning.
Buying real estate is not a surefire way to save money. If you bought a house at the height of the real estate boom in the late 1980s, you are lucky if your property has increased in value. That said, real estate has historically appreciated in value faster than the rate of inflation.
Buying a home is not all roses. Remember that home ownership includes maintenance and repairs. You must do the work yourself or find someone to do it for you. You will also have to pay property taxes.
As a renter, you may not have to worry about upkeep or paying property taxes. That cost is usually buried in your monthly rental payments.
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How much can you afford?
How much you can afford to spend on a home depends on how large a monthly payment you can afford to make and the size of your down payment.
An easy way to find out how much money you can afford is to ask a financial institution to give you a pre-approved mortgage. A pre-approved mortgage establishes exactly how much the bank is willing to loan you.
A pre-approved mortgage costs nothing and usually allows a buyer to negotiate a small break in the posted loan rates, up to about half a percentage point. Once an application is approved, the bank will fix the interest rate for 60 to 90 days. That will be the rate you pay even if rates rise. If rates happen to fall, you can benefit from a lower rate.
Bob McLean, director of public relations for the Ontario Real Estate Association, says pre-approved mortgages save time because they allow real estate agents to target properties that fit into the buyer's price range. "It ends up speeding up the process when [a buyer] makes an offer because they have already gone through the process."
Despite your bank's prearranged approval, you will still have to apply for a mortgage after you have found a property because the bank will want to have the property appraised.
Most lending institutions look at two things in determining how much debt you can safely assume. One is your gross debt service ratio (monthly principal, interest and tax payments as a ratio of your pre-tax monthly income) and the other is your total debt service ratio (mortgage payments, car loans and other debts as a ratio of your gross income).
You can calculate your own gross debt service ratio by adding together the principal, interest and taxes you will pay on your mortgage in one month. Then add together all your sources of income for the month. Next, divide your mortgage costs by your total income and multiply that figure by 100 to give you a percentage.
You can calculate your own total debt service ratio by adding together your monthly payments on all of your outstanding debts. Then add together all your sources of income for the month. Next, divide your total debt costs by your total income and multiply that figure by 100 to give you a percentage.
Most banks will allow your gross debt service ratio to be up to 32 per cent of your income and your total debt service ratio to be up to 40 per cent of your income.
Canadian banks require prospective homeowners to come up with at least 25 per cent of the purchase price as a down payment.
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The Canada Mortgage and Housing Corporation (CMHC)
CMHC is a federal housing agency set up in 1946 to help soldiers returning from the war to find homes. It has expanded since then into several fields, including financing homes for the elderly, finding ways to build environmentally-friendly communities and providing homes for Canada's native population. However, one of the agency's core mandates remains helping Canadians buy homes.
If you do not have 25 per cent of the purchase price to pay as a down payment, all is not lost. The CMHC makes it easier for first-time home owners to get into the game by lowering the down payment required on a house from 25 to 5 per cent of the purchase price.
To be eligible for this program, the home being purchased must be owner-occupied and be the only home the buyer has owned in the previous five years. This second rule is not carved in stone. In recognition of "hardship cases" the CHMC has extended the program to include situations where the prospective homeowner(s):
had to sell their principal home as a result of the dissolution of a marriage (including common-law) or;
sold their principal home as a result of being relocated due to employment or;
sold their principal home and suffered a loss of equity.
If you qualify for a CMHC-approved mortgage, you must purchase mortgage insurance. The cost of mortgage insurance is added to your monthly mortgage payments.
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Strategies for buying real estate
When deciding where to buy, any real estate agent will say location should always be your number one concern. But buying in the right location means more than just picking a property that is close to good schools and shopping.
If you want to see your investment grow, buying in the right location can also mean picking an area where you think the overall property values are rising, but have not yet peaked. How can you know?
First off, you can ask your real estate agent. If he or she is good, the agent will know the areas that are undervalued or stand a good chance of raising in value. It pays to be ahead of the crowd, so if you can get into an area before everyone else does, you stand to make a bit of money.
If you do not have an agent you trust, explore neighborhoods on your own. See if there are a lot of renovations going on. Are new cars parked in the area? Is the area close to transportation and away from a lot of high rise buildings? Knock on a few doors and ask people what they think of the area. Asking questions and making these simple observations will tell you if money is being invested in an area.
Bear in mind that if you do buy a house that needs a bit of work, you need to budget money for repairs or renovations in addition to the purchase price.
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Condominiums and housing cooperatives
The nice thing about condominium ownership is you don't have to cut the grass -- exterior maintenance is usually included in a monthly maintenance fee. Unfortunately, you will always have to pay this cost. You will also have next-to-no control over cost increases. And you will have to pay to maintain the interior of your unit.
When looking for a condo, search out buildings that are well-managed. Ask if there is a regular schedule of preventative maintenance. This should include care of the outside of the building, the roof and underground parking, if there is any. If the building is well-managed, it is less likely that you will see large maintenance fee hikes in the future.
With housing cooperatives, you buy shares in the property as a whole. It can be difficult to get a mortgage from the bank for coops, however, because no one person has ownership of the deed. Banks will not give traditional first mortgages on these properties. This makes them harder to sell.
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Things to remember before you begin hunting for a home
After you have decided to buy, but before you start combing the real estate ads, it makes sense to prepare yourself. Doing so will cut down on the time you spend looking and will increase your chances of finding something that you like.
Remember to be practical. Figure out how much you can afford to spend and stick to it.
Make a list of what is important to you -- such as the condition of the house or the proximity to work.
Find out if the area is close to services such as shopping, parks and restaurants?
Take the time to walk around the neighborhood. Remember that a house is not an island; houses around it will influence its property value. If other houses are in disrepair, that will affect the price of the property.
Find out what the area's crime rate.
Insurance companies keep statistics on crime rates of different areas. Buying a house in a high-crime area can increase the cost of home insurance.
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House hunting tips
Once you have figured out where you want to live, how much you can afford and the size and type of house you want, it's time to start looking.
Get into the habit of reading the real estate sections of all the local newspapers in your area.
Pick up the advertisements published by real estate agents.
Check out real estate sites on the Internet providing information on properties across Canada.
Call phone numbers on for-sale signs.
Call real estate agents who work in the areas you are interested in and ask them to recommend properties in your price range.
Go to open houses.
If you want extra help, consider contacting a buyer's broker. They have a list of contacts and listings in particular areas that can speed your search. They may charge a fee or receive part of the commission when you buy your house.
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Questions to ask when visiting a house
Buying a house can be an emotional experience. People often walk into a house, fall in love with it and want to buy it then and there. However, don't let your heart get the better of you. Remember to be a smart consumer and don't be afraid to look around and ask questions.
Turn the lights on and off to make sure they work.
Flush the toilets and check the taps and showers to make sure there is sufficient water pressure.
Check to make sure there is enough closet space.
Open and close all the windows and doors to make sure that they don't stick.
Check to see that the heating and air conditioning systems are in good working order.
Check the stove, dishwasher and other appliances that are included in the sale.
Keep a checklist of things you do and don't like about the house. As you see more and more houses, these checklists will give you a basis of comparison.
After you have left a house, it is easy to forget what it really looked like. Get a Polaroid camera and take pictures to jog your memory later.
If you really like a house, go back several times to see what it is like at different times of the day.
Listen for noise from the street and check if there is any aircraft noise.
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Making an offer
When you have decided which house you want to buy, it is time make an offer. An offer is a bid, usually in writing, of how much you are willing to pay for a property. Before you make an offer, check to see what other properties in the area have sold for; this will give an idea of what the house is worth.
The owner of the house has the option to decline or accept your offer. If they reject the offer, you have the option to make a counter offer or you can walk away and keep searching.
If they accept and sign the offer, then you have a deal. An offer to buy is generally accompanied by a deposit, usually five per cent of the purchase price.
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Conditions you should include when making an offer
If you walk away from an offer after it has been accepted, you may be sued for damages. For this reason, it is prudent to make an offer contingent on a number of conditions. In this way, you can protect yourself from becoming financially responsible for something you cannot buy. Conditions you should include when making an offer include:
Finding suitable financing.
Selling your current home.
The seller providing you with a current survey which shows the location of the house on the property.
The seller proving that they have title to the property.
Any inclusions. This states what stays in the house and includes things such as stoves, washers and dryers.
If there is a septic tank, it must meet local health standards.
Passing a home inspection.
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Home inspection
Since offers to buy can be legally binding, it's a good idea to make the offer contingent on the house passing a home inspection.
A home inspection is a visual examination of the house by a professional who is trained to spot potential problems.
There are plenty of things that can be wrong with a house that are not obvious to the untrained eye. These things can be costly to fix. The last thing you want after you've broken the bank to come up with your down payment is to find that your new home is riddled with termites or has faulty wiring.
The home inspector should examine the heating and cooling systems, the electrical system, the roof, the attic, the windows and doors, the foundation, the basement, the walls and ceilings and the exterior cladding. After the inspection is complete, the home inspector should provide you with a detailed report of his findings. Harry Janssen, president of the Canadian Association of Home Inspectors, says you can expect to pay $250 to $350 for a home inspection.
It is a good idea to be present during an inspection, says Janssen. That will give the inspector a chance to explain how to fix any problems that they find.
When searching for someone to perform a home inspection, make sure that they are licensed by either the Canadian Association of Home Inspectors or by a provincial equivalent. Doing so will ensure that you get a top quality inspection from someone who is trained to give one.
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Paperwork you will need when applying for a mortgage
Before heading off to your lender of choice to apply for a mortgage, save yourself some time by making sure you have all the paperwork they will need to process your application. This may vary slightly from institution to institution, but in general you are going to need:
A copy of the offer to purchase.
A letter from your employer stating length of employment, your position and your income.
A copy of at least two years of your tax assessment to prove your income if you are self-employed.
Confirmation of your down payment.
A list of your assets and debts.
A copy of the real estate listing if you're buying a new home or builder specifications if you're buying from a builder.
Your lawyer's name and address.
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Mortgage brokers
Rather than going to a bank for a mortgage, you might try going to a mortgage broker. A broker acts as a professional advocate who shops around to various financial institutions looking for the best rate.
Brokers have relationships with a large number of institutions. If one lender turns you down, the broker can continue the search elsewhere. It is often easier to get a mortgage from brokers because they have access to lenders whose lending guidelines are not as strict as you would find at a bank.
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Choosing a broker
When selecting a broker, apply the same rules you would to choosing any other professional - they should have a good reputation and a sound knowledge of their product.
Check your local Better Business Bureau to make sure that no complaints have been filed against either the broker or the company. Since brokers are licensed in most provinces and territories, contact your provincial ministry of finance to obtain more information.
Ask about the broker's background and experience and what trade organizations the broker belongs to. Ask about fees and charges, how long the rate is guaranteed for and how long it will take to process the loan.
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Costs associated with buying a home
You will have to budget for more than the purchase price and the interest you will pay on your mortgage. The amount of extras will vary from place to place and, in part, will depend on the value of your property. In general, you should budget between $2,000 and $4,000 to cover the cost of extras.
An appraisal is an estimate of a property's value. To get a mortgage, banks require buyers to pay for an appraisal. Prices vary, but expect to pay about $250 for this service.
In some provinces, you must pay land transfer tax. Depending on the cost of the property, this tax can run into thousands of dollars.
Legal (or, in Quebec, notary) fees. Expect to pay $500 to $1,500.
If an up-to-date survey of the house is not available, the buyer might be required to obtain one. This can cost as much as $900.
If you obtained a mortgage through a broker, you might have to pay a broker's fee. This can be as much as one per cent of the principal.
If you used a real estate agent to help find a house, you may have to pay realtor fees.
If the seller prepaid their property taxes or their utility bills, you will have to reimburse them for these costs.
You will have to buy insurance for the home. This cost will vary according to the value of the property and the insurer you choose.
If you have a CMHC-approved mortgage, you will have to pay a $235 administration charge. You will also have to buy mortgage insurance. This can be as much as three per cent of the value of the property.
If you are buying a new home, you may have to pay for water, gas and electrical hookup.
If you are buying an older home, you may have to pay to have the utilities reconnected.
On some of these fees, you will have to pay GST and PST.
You will have to pay GST if you are buying a new house. However, the rate is only 4.5 per cent.
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