ESSENTIAL INFORMATION BEFORE BUYING YOUR FIRST HOME
Buying a first home is both exciting and scary, it presents the opportunities to call a place your own and to decorate in your own style. With this, comes a very big financial commitment which can be daunting yet fruitful with the possibility of significant wealth appreciation.
If you are a first time home buyer, regardless if this is the first page you have stumbled upon or have spent hours reading books and online resources, please continue reading, we promise you will learn something new. If you have any questions, just let us know as we have helped many first time home buyers and will be happy to help you.
Where do I start?
Your first step is to get your finances in order and to get mortgage pre-approval. This is crucial; mortgage pre-approval will show you what is the maximum price you can pay for the property. Once this is established, you will need to evaluate how much you are comfortable spending.
During our initial interview with new clients we always ask if they have had a recent pre-approval done, if not, we request it to be done. Doing this will confirm your buying power and will show us and potential sellers that you are serious about buying the property.
We often are asked if it is better to contact a bank or a mortgage broker.
In our opinion, contacting a mortgage broker is a better option. Quite simply, banks will only offer you their own products regardless if they are good or not, the mortgage broker will have access to many lending institutions including big banks, and very often can provide a better rate and a better service since they are running their own business and just like us depend on referrals. We also find that very often mortgage brokers can arrange financing much faster than some banks, and when it comes to real estate transactions, time is of essence.
To get an idea of the current mortgage rates please check our Mortgage Rate Comparison and if you are looking for a reliable and excellent mortgage broker just send us a message, we will provide names of great mortgage brokers who have helped many first time home buyers, just like you.
GOVERNMENT INCENTIVES FOR THE FIRST-TIME HOME BUYERS
As a first time home buyer you are entitled to various government incentives such as a Land Transfer Tax Rebate, Home Buyers RRSP Plan, and First Time Home Buyers Tax Credit which we describe in our First Time Home Buyers Government Incentives Blog. In addition to these, the federal government has introduced in 2019 The First Time Home Buyer Incentive Program, which so far has failed to gain popularity due to restrictions (eliminating many properties in and around GTA due to high prices), in addition to the equity loan the government would have in your property.
Land transfer tax credit is good for any first time home buyer, RRSP Home Buyer withdrawal will fit some but won’t make sense for the others, and the First Time Home Buyer Incentive Program will make sense for only a few. Please don’t hesitate to drop us a line with questions, or to help you figure out if the plans are right for you.
YOUR FIRST HOME WILL NOT BE YOUR FOREVER HOME
Most Canadians will move few a times during their adult life. Your first home will not be your forever home, your first home in most cases will be a starter, entry level property which is perhaps a condo or a townhouse with a small yard, or a detached home further away. Most people buy their forever home later in life when their earning power is at its highest and have built up a significant equity in their starter home.
Your needs and wants will also change, as a 28-year-old buying a downtown condominium may be best for your lifestyle as embracing the nightlife, having access to bars just around the corner, not wanting to cut the grass and just relaxing by the pool is more your style.
10 years later and a family of 4 (plus a dog) your priorities will be a good school, quiet neighbourhood, and a backyard.
COMMUTE, COMMUTE, COMMUTE - ALMOST THERE
When buying real estate, you often hear the phrase "location, location, location"� which we will address below, however the commute is just as important. Long commutes are not only stressful but are also expensive. Per CRA, the cost to use a car is approximately $0.50 per kilometer (car purchase or lease, insurance, gas, maintenance). Add up the cost of commute and see if it’s really worth to purchase a property further away. The cheaper house may be more expensive if you add the cost of commuting.
Nowadays, many can work from home, if not everyday than perhaps 2 or 3 days per week, this can play a significant role in selecting a property. While driving 1.5h each way every day may be too much, doing it twice a week could be manageable. Do not ignore public transit as a means transportation.
LOCATION, LOCATION, LOCATION
Why is location so important? Because it will affect your enjoyment of the property and its investment appreciation.
If you look around the world, the majority of people make a decision to live in crowded places. The most crowded places became even more crowded creating scarce land and expensive real estate. From an investment perspective, the more crowded it is the more expensive it gets. If you think investment, our local real estate mecca is Toronto, you will do better than investing in a rural property (unless down the road the farm you bought is sold to a developer).
The location of the property in relation to its immediate setting is just as important. Pay attention to what is around, look for train tracks, factories, see if the street is well maintained or it has many rental units. All those details will have a very profound effect on how you enjoy the property. It is equally important to be able to verify what the future plans for the building are. Today the house may be backing into a field, tomorrow this field can become a run of the mill subdivision. Once you buy the property you are stuck with location in which it resides. This is where we come in. Very often we see things first-time home buyers do not because they are so impressed with updated kitchen.
PAY ATTENTION TO THINGS THAT CAN"T BE CHANGED
There are aspects to the property that cannot be changed. There are difficult and expensive things to change and there are very easy things to change.
If the stainless-steel appliances are a must please talk to us. Stainless-steel looks nice, is modern, and everyone wants them. But, they can be easily replaced. If you are not looking for top end brand named appliances (Miele, Sub-Zero) that keep the food cold and cook no better than a typical appliance, then $1500 can go a long way. You can buy a decent fridge for that amount, a gas stove will run you relatively the same, the dishwasher can be about $500. As you can see, these are inexpensive upgrades which can be easily done after you have purchased the house. Painting is another very easy fix, lime-green does not have to stay, and just about anyone can do it.
Moving walls is much more difficult but not impossible. Kitchens can be replaced (inexpensively if you can settle for IKEA) and will add up in expenses but can be done.
An addition of a second floor would be extremely expensive, a busy street can’t be moved, and the factory behind will stay where it is. As you can see, you should research and be aware of major aspects of the property that cannot be changed and compromise on the easier fixes.
RECENTLY UPDATED AND RENOVATED
Majority of people nowadays will want to buy new and modern homes with modern layouts, high ceilings and big windows. This is not always possible due to budget constraints and high prices. You may think that the next best thing are older homes that have been recently updated or renovated. Well, not always.
If you are in this group, you most likely do not want to do any renovations and would prefer move in ready property, and quite frankly, so would we along with everyone else.
That means the nicer it looks the more competition there will be for the home as it will attract many first time home buyers just like yourself.
Renovations, especially when hiring a general contractor, are expensive. From that perspective it makes sense to buy a house that is updated, however, not all renovations are done correctly. We have seen many houses and can spot poor renovations from a mile away. Sometimes just by looking at the photos, other times by walking through the house during the first showing.
House flips, or as we like to call it lipstick on a pig, are the worst (although there may be some exceptions). These are ones that could make a tv show called “real estate funniest renovations. House flips are simply run-down properties purchased for the purpose of making a profit. We have no problem with anyone making a profit by retrofitting run down homes and bringing them back to life, however, the reality is in a vast majority of cases the flippers use the cheapest materials, hire the cheapest labour, rush through the process, and usually the end result is a property that may look good in pictures but still contain major flaws in which is started off as. Hence lipstick on a pig.
With our experience, we can spot such renovations and save you from spending a few hundred dollars on an inspector who would have told you to run, not just walk, away from the house.
Permits – many of the renovations require permits, and this is for the safety of the occupants. Unfortunately, many renovations requiring permits are done without them (electrical, plumbing, structural, etc.), and can be a safety hazard. If you see recent renovations, you should always inquire about the permits. In many instances, we contact proper authorities to see if the house had permits issued and closed (very important).
LOOK BEYOND THE SURFACE
For us this is one of the biggest challenges, which is to convince the first-time home buyers to look beyond the surface. This starts with the listings. Professionally well-lit photographs (the way every listing by a self-respecting agent should be but are not) attract more attention than the ones with poor and crooked photographs. The point we are trying to make is to look beyond these. Time and time again we have first time home buyers who do not even want to see properties which are not listed properly, and that is a mistake. This is how we can find better deals; ugly photographs do not mean ugly homes, they are just not portrayed as so in the photos. Furthermore, the beyond the surface in-depth look applies to how the homes are renovated. Very often too much attention is paid to a sparkly crystal chandelier and not to the bones of the house such as the foundation, roof, mechanical and so on.
FINISHED VS. UNFINISHED BASEMENT
Basements have long become an extension of the house. This is where you can have your TV room, office, gym, rental, you name it. To finish and unfinished basement is pretty expensive. However, as nice as it is to purchase a house with a finished basement, the houses with unfinished basements should not be ignored, and in many cases, it is actually safer to buy a property with an unfinished basement. Simply put, it is easier to inspect the house when you can see the foundation walls, see if there are any cracks, leaks, visible plumbing, electrical and so on. Once this is covered by drywall, the inspector is not able to see much beyond what is visible on the surface.
LIFESTYLE AND GOALS EVALUATION
When we buy our first property, first and foremost, we are buying a place to live, a place we will enjoy coming home to. Yet, at the same time the costs to purchase the property is so significant that the financial aspects cannot be ignored. With the cost associated to purchase the property we will be faced with compromises, decision making, and in just about every case, questioning the decision made.
The fact is, we are not all the same, we have different preferences and goals. We often hear some people wonder why anyone would buy a small condo in a busy downtown core, yet others think north of 401 is northern Ontario and they rarely go there. The main point is this will be your home. Choose something that fits your lifestyle (not uncles Bob, cousins Vinnie, it should fit your lifestyle). Consider how long you plan on staying in this property. If you think it will be a relatively short period of time such as 3-5 years you may want to pay more attention to the investment side of it and compromise on lifestyle choices (i.e. if your main goal is to move to a larger property and rent out the first one).
CAN SOMEONE HELP ME QUALIFY FOR A MORTGAGE?
In a vast majority of cases you should aim to qualify for the mortgage without support of others, and preferably purchase a house that costs less than the max you qualify for. We often get asked this question, “can my parents or someone else help me qualify for the mortgage if I don’t qualify myself”. The answer is yes, and it may make sense to do so in certain situations. Currently, lenders in most cases will require the other person to be on the title, and in majority of cases it is sufficient to be 1% on the title. Please contact us for more details and we will provide you with the names of some fantastic mortgage brokers who can help you in this situation.
HOW MUCH SHOULD I HAVE FOR THE DOWN PAYMENT
By now you are aware in order to purchase your first property you need a down payment, the question is how much down payment is required. In short the more the better (we could go into comparing the return on investments v down payment on your house, but that’s beyond the scope of this article), in Canada there are minimum requirements and with GTA high costing prices
many of us have a difficult time saving even for the bare minimum, so let's start from the bottom:
The absolute minimum down payment for the property is 5% of the cost of the property.
It is advisable to have 20% percent or more saved up for the down payment, and the magic number of 20% is related to CMHC insurance. If you put down less than 20% you will pay significant CMHC insurance premium, how much exactly will depend on the cost of the property and the percentage of the down payment one can afford. To determine your unique scenario please use our
CMHC insurance premium calculator. The costs are very significant, for example if you purchase a $750,000 property with a down payment of 20% or more your CMHC premium will be $0.00, however if you only have the absolute minimum your insurance premium will be $28,000, that is a significant amount of money you will never recover.
It can become more complicated so please let us know if you have any specific questions related to CMHC insurance. Keep in mind that if you are interested in a house that is more than $1,000,000, your down payment must be at least 20% as properties valued more than one million are not insurable by CMHC. For properties under $1,000,000, the minimum required for the first five hundred thousand is 5%, and 10% for any amount above that.
When shopping for a property, there will be a long list of must haves, and as we continue shopping for the properties with the budget and market conditions in mind, the list of compromises will only get longer.
Everyone has to compromise (maybe not Drake) almost regardless of the budget. Make a list of things that are most important for you, not important, and things you could do without but would rather not. We have owned a number of homes, involved in many purchases, and can suggest the importance of certain aspects of the property. As a first time home buyer may not realize certain qualities of a home, for example buying a house in a busy street and how will you feel about trying to back onto a busy street every morning when going to work.
We are all individuals and not two people are alike, what is important to you may not be important to others, your friends, or family. As experienced real estate agents, we will discuss these aspects with you while understanding your needs and requirements.
Make a realistic budget to ensure you do not stretch your finances beyond comfort (become house poor). While adjusting your spending to achieve the goal of home ownership may be one of the compromises to be made, you must ensure you can afford the property. The online mortgage affordability calculators and even the actual mortgage pre-approvals take only certain aspects into consideration.
Take for example two couples both making $150K gross per year, with everything else being equal they will likely qualify for the same amount of mortgage.
Couple A has two children and daycare to pay, has two cars, and for their sanity and rewarding themselves for their hard work will not compromise on the family vacation each year.
Couple B has no children, do not plan on having any, want to buy a condo downtown to continue the car-less lifestyle, enjoy cooking, and don't order take out very often.
Both couples have the same income and are approved for the same mortgage amount according to the general guidelines. But the reality is, they both will have different lifestyles and requirements, and what they can afford, from the perspective of housing, is completely different.
BUYING A HOUSE WITH A RENTAL BASEMENT SUITE
Considering the current state of the Greater Toronto Area real estate market and high real estate prices many first time home buyers are considering buying a property with a basement suite rental to help alleviate expenses associated with buying a house (we took this route many years ago).
What are things to consider when looking for such a property:
- Demand: properties with rental basements are in high demand, and you will likely pay a premium in comparison to similar properties without rental potential.
- Legal v illegal basement: legal basements are registered with the city, have passed safety and regulation inspections (such as fireproof door, number of exits, ceiling height, window size, etc.). Houses with legal basement apartments will sell for more than houses with illegal basement apartments. Most basement apartments in the Greater Toronto Area are not legal. These apartments come with risk. If the neighbour complains to the city or there is a fire in the basement the owner may face significant penalties and consequences.
- Rental income: income from basement apartments is a taxable income which must be reported on your income tax. The good news is that you can write off a portion, proportionate to the rental operation, of the expenses you would have paid anyways (interest of the mortgage, property tax, insurance, etc.). For example: if the basement is approximately 1/3 of the house, 1/3 of the expenses can be written off against the rental income and likely the tax liability due to the rental income will be quite small.
- Inconvenience: you will have strangers living in your house with you. The houses are not built like high rise condo buildings and in a vast majority of cases do not have sufficient soundproofing. The bottom line is you hear everything, and I mean everything. This solution is more appropriate for people who are more investor minded, privacy is not a huge issue, or want this property to be temporary.
- Limited choice: most new builds do not offer separate basement units and in all likelihood, you will be limited to older construction if you want rental basement options
CHOOSING THE RIGHT AGENT
When purchasing the property, it is very important to choose the right people working for you. Once you have the pre-approval from the lending institution it is time to select the real estate agent to represent you. It needs to be a person you feel comfortable with and a person that has enough experience to lead you through all the aspects of purchasing your first property. It is always advised to interview at least a couple of agents before deciding.
Do not necessarily go for someone who is the busiest in the area, and if you do, ask yourself if the agent will have enough time represent you properly.
We work with many first-time home buyers and offer full services and advice. In some cases, it takes our clients only a few weeks to purchase the property and a year in others (we do not employ any pressure tactics). We have many informative blogs on the subject of real estate and offer free no obligation advice online, through email, and via telephone. With each home we show, we make sure to point out all the negatives of the property, so you can make the most informed decision. If we do not think it is the right property, you will hear it from us first.
CASH BACK FOR BUYERS
While we do offer full services, we also compensate our buyers with very significant cash back. Think of it as thousands of dollars in your pocket. The commission in real estate is paid by the sellers. We offer cash back rebate from our commission to our first-time home buyers, shortly after the transaction closes and buyers receive thousands of dollars in commission rebate. Please contact us for more details.
Buying a home is not just visiting homes and signing on the dotted line. Apart from your real estate agent, you will need a mortgage broker, a lawyer, possibly an inspector, moving company, handy man for minor repairs, etc. We, as part of our services, can make your home buying experience as easy as possible and can refer you to tested and proven professionals we trust and use to cater to your needs.
House hunting (How it works)
You have saved for down payment and got a mortgage pre-approval in your hands, the excitement begins, you have interviewed real estate agent and found one you like, you have done a research, are checking for new listings in your preferred area, found the house you want to see, or your real estate agent sent you a listing that meets most of your criteria.
What happens next?
The agent will book the showing time.
In today's reality there are some safety steps before entering the property, signing the Covid -19 release forms, using gloves, face mask and hands sanitizer is a must for our safety.
In today very busy market properties are selling sometimes within a day (some would think the process slowed down because of Covid -19, but in Toronto this is not the case!), you need to be prepared to act fast.
When you find the ONE, your agent will prepare and explain to you all necessary documents before submitting the offer, among them: the Agreement of Purchase and Sale.
Very often in today's market the agent selling the property asks for offers to be made by a certain date to attract more buyers to buy the property (listing price usually much lower than the market value and the eventual selling price). It is called a bidding war, where people can unfortunately overpay for the subject property. The best you can do is to stay calm, positive and stick to your budget.
If you do not win the bidding war, there is always another property for you, the key is to be patient, and not to get emotionally attached to any house you don’t yet own.
The offer to purchase will include multiple clauses protecting you as a buyer and conditions, most common conditions are financing and inspection, but no offer is ever the same and we will explain all aspects of the agreements in details.
If your offer is accepted, usually you need to submit your documents to your mortgage provider and arrange for home inspection. If everything is clear, you have got the mortgage, and the inspection went without any surprises you can relax a little bit. Your agent will forward the documents to your lawyer, who will take on the legal aspects of the transaction (title search, etc.)
Before the closing day you will need to arrange for home insurance, switch all utilities to your name, book a moving company, pay all your legal fees.
On the closing day the buyer usually gets the keys to the property no later than 6pm assuming everything went as planned.
You can officially call yourself a homeowner!!!
As we mentioned at the beginning, the whole process might seem scary and overwhelming, but this guide can help you to get closer to become a proud homeowner, and to get you the keys to your new home.
By doing your homework, the process could be less stressful, and the dream of owning your first home can become very real.
We can help make that dream a reality.