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For Buyers
Buying a home is a time of enormous possibilities and intense preparation. Doing
some preliminary planning before you begin your home search will make the entire
process more manageable and less overwhelming.
As part of your initial game plan, you should:
- Fine-tune your credit rating
- Explore mortgage pre-qualification and pre-approval
- Become an educated buyer
- Create a wish list to help you learn what you need, and what you want - or don't
want - in a new home.
Check Your Credit Rating
Even if you're sure you have excellent credit, it's wise to double-check at the
outset. Straightening out any errors or disputed items now will avoid troublesome
holdups down the road when you’re waiting for mortgage approval. You may see disputed
items, in addition to errors caused by a faulty social insurance number, a name
similar to yours, or a court ordered judgment you paid off that hasn't been cleared
from the public records. If such items appear, write a letter to the appropriate
credit bureau. Credit bureaus are required to help you straighten things out in
a reasonable time (usually 30 days).
TIP: Make sure that any outdated derogatory entries are deleted from your credit file. Adverse credit information is not supposed to be reported or included on your
credit report after seven years.
TIP: Officially cancel inactive credit cards. If you have an inactive credit card with a $5,000 limit, even though you owe
nothing on it, some mortgage lenders will consider that a potential future debt.
Too many inactive credit cards with significant credit limits could keep you from
obtaining a mortgage loan. Don't just cut up your extra cards; officially cancel
them, and do it now so there will be time for the news to reach the credit bureaus.
TIP: Hold off on making any major credit card or car purchases while you're waiting
to apply for a mortgage. Monthly payments you're obligated to pay will be counted against you, and reduce
the amount of the mortgage loan you'll be offered. Even if you've been pre-approved
for a mortgage, that approval is subject to last-minute evaluation of your financial
situation, and a spending spree for appliances, furniture and other goodies intended
for your new home may wreck your chances for buying it.
Pre-qualification and Pre-approval on a Mortgage
Any reputable real estate broker will "pre-qualify" you for a mortgage before
you start house-hunting. This process includes analyzing your income, assets and
present debt to estimate what you may be able to afford on a house purchase. Mortgage
brokers or a Banks own mortgage officer can also calculate the same sort of informal
estimate for you.
Obtaining mortgage "pre-approval" is another thing entirely. It means that you
have in hand a lender's written commitment to put together a loan for you (subject
only to the particular house you want to buy passing the lender's appraisal).
Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchasers,
sellers must tie the house up on a contract (financing condition) while waiting
to see if the would-be buyer can really obtain financing.
There is no obligation to actually obtain your mortgage from the lender that
pre-approved you. Once you have a written pre-approval you can shop around for
the best rates and terms but you must decide which lender to obtain your mortgage
from a few weeks prior to the closing date of your purchase so the lender can
draw up the paperwork.
Pre-approval will also speed up the entire mortgage procedure once you've found
the house you want. The only remaining question will be whether the house will
"appraise" for enough to warrant the loan.
Become an Educated Buyer: Research Neighborhoods, Read Ads and Visit Open Houses
If you were changing cities, the standard advice used to be to subscribe to the local newspaper in the new
town and start reading local news and classified ads to get a feeling for different
neighbourhoods. Although that’s still a good idea, you can simplify and streamline
the house-hunting process by using the Internet to Find a Home, Find a Neighbourhood,
and Find Resources.
I have relationships with many other Agents and can refer you to a local Realtor
that specializes in the neighbourhood of your choice, with lots of valuable local
information on schools, shopping, etc.
For local moves, you have the advantage of driving around neighbourhoods that interest you and
looking at lawn signs. If you see listings that you want information on, call
or email me and I will be glad to obtain the information for you. If you would
like listings from the Toronto Real Estate Board emailed to you at home or to your business just click here for my Property Matching System.
Particularly on weekends, you will see "Open House" postings. Check out our local
open houses posted on Torontothegood.com every Friday for the upcoming weekend.
Don't hesitate to walk in, even if you're not ready to buy yet. Visiting open
houses is an excellent way to familiarize yourself with the market and it won't
put you under obligation to anyone.
Your Wish List
Making sure you end up with the right home involves figuring out exactly what
features you need, want and don’t want in a home. Before starting your search,
you should make a "wish list" to decide which features are absolutely essential,
which are nice "extras" if you happen to find them, and which are completely undesirable.
The more specific you can be about what you’re looking for from the outset, the
more effective your home search will be. Also keep in mind, that in the end, every
home purchase is a compromise.
Your next step is to assess your finances.
There's no point wasting time and energy house-hunting before you know what you
can afford. So your next step is to assess your finances:
- Compare buying with renting
- Learn about interest rates
- Research closing costs
- Learn what the lenders consider as income
- Understand the impact of your present debt payments
- Calculate the amount of your down payment
- Figure out how much you can actually afford.
- Does it Pay to Buy a Home or Simply to Rent?
If, like most first-time buyers, you are presently renting, it's easy to calculate
your cost - simply, the monthly rent you pay. (Utilities, phone, cable, and other
costs can be ignored in this comparison because they'll be approximately the same
whether you rent or buy.) Compared to the estimated mortgage, taxes, property
insurance and repair payments you would reasonably expect to incur owning a home.
There is also the uncertainty about how much the value of your home will rise
(or possibly fall) in the coming years.
At the start of a mortgage repayment schedule, when the debt hasn't been reduced
yet, most of your monthly payment goes toward interest. A bit goes toward reducing
principal (the amount borrowed), so that the next month you're borrowing a bit
less, and owe a little less interest. That allows more of your next payment to
go toward reducing principal. However, this process is very slow in the beginning
and the interest portion remains high for many years
Closing Costs
On the day you actually buy your new home, in addition to your down payment and
possibly prepaid property tax and homeowners insurance premiums, you'll need cash
for various fees associated with the purchase. These expenses are known as closing
costs and are paid by both buyers and seller. Other closing costs are possible
and should be considered when evaluating your financial situation. These may include,
but are not limited to:
- Title insurance fee
- Survey charge if a new survey is needed
- CMHC appraisal fee (if putting less than 25% down)
- Legal fees
- Land Transfer Fees ( like sales tax on the price of your house)
- Moving costs, or storage facilities
TIP: Consider closing costs when choosing one mortgage plan over another. The good news is that if your cash is limited, some mortgage plans allow for
cash back from the lender, but remember that you will be paying a higher rate
of interest for this program. Certain closing costs can sometimes be added to
the amount of mortgage loan you're receiving eg: CMHC fees and premiums.
Figuring Out Your Monthly Income
When you apply for a home loan (and even long before that, when you first speak
to a REALTOR) the first question may likely be "How much is your income?" In making
this determination, lenders consider the income of all parties who will be owners
of the property. Be prepared to provide a monthly accounting of all sources of
income on your mortgage application.
Figuring Out Your Monthly Debt
Lenders are interested mainly in your present monthly payments because they want
to be sure you can handle the mortgage payment you'll be applying for. Different
mortgage plans consider payments on any debt that won't be paid off within, for
example, six months, nine months, or a year.
Amount of Your Down Payment
Your down payment is paid in cash and is not included as part of the loan amount.
The bigger your initial down payment, the smaller your loan, which reduces the
amount of your payments. How much you'll put down depends on the cash you have
available and the amounts you'll need for closing costs and prepaid property taxes
and homeowners' insurance.
Mortgage plans have various down payment requirements and they can range from
5% or in some cases 0% down on a CMHC (Canada Mortgage Housing Corporation) loans to 25% down, the traditional down payment for a conventional loan. If you put less than 25% down on most loans, you'll be asked to protect the lender
by carrying mortgage insurance (CMHC). CMHC ensures that the debt is repaid if
you default on the loan. This adds an additional premium paid to CMHC but this
premium can be added to the mortgage amount and paid over the course of your mortgage
included in your monthly payment.
How Much House Can You Afford? How much can you afford to pay? The rule of thumb is that your Total Debt Service
(TDS) ratio should not exceed 40% of your monthly income. You can work this out
by dividing your principal, interest, property tax, heating, half of condo fees
and any other monthly financial obligations such as credit card payments, car
payments, etc against your gross monthly income and multiplying by 100.
Shopping for the right loan is just as important as choosing the right house.
Your challenge is to select the loan terms that are most favorable to your situation.
In selecting the loan that's right for you, you'll need to understand:
- Basic components of a mortgage loan
- Fixed-rate mortgages
- Variable-rate mortgages
- Government programs
Back to the Top
Basic Components of a Mortgage Loan
A mortgage requires you to pledge your home as the lender's security for repayment
of your loan. The lender agrees to hold a lien on your title or deed until you
have paid back your loan plus interest. The following are the basic components
of a mortgage loan:
- Mortgage Amount and Term
The mortgage amount is the amount of money you borrow from a lender to pay for
your house. The term is the number of years over which your lender is lending
you the money. At the end of the term eg: 5yrs you will have to arrange to pay
the lender the remaining balance of the loan or renew your loan for another term
until the loan is paid off in full. There are 1 – 10 year fixed-rate mortgage
terms available.
- Amortization The length of time over which your mortgage repayments have been calculated.
The most popular mortgage amortization period is 25 years. If you can afford higher
monthly payments, you can select a mortgage term that is shorter. The longer your
repayment period is, the lower your monthly payments will be, but the total interest
you pay over the life of the loan will be more.
- Fixed or Adjustable Interest Rates
Interest rates are usually expressed as an annual percentage of the amount borrowed.
You can choose a mortgage with an interest rate that is fixed for the entire term
of the loan (eg: 5yrs.) or one that changes throughout. A fixed-rate loan gives
you the security of knowing that your interest rate will never change during the
term of the loan. A variable-rate mortgage has an interest rate that will vary
during the term of the loan, with the possibility of both increases and decreases
to the interest rate and consequently to your mortgage payments.
- Down Payment
The down payment is the part of the purchase price the buyer pays in cash and
is not financed with a mortgage. Your down payment will reduce the amount you'll
need to borrow. So, the more cash you put down, the smaller the size of your loan,
and the smaller the amount of your mortgage payments.
TIP: Lenders often view mortgages with larger down payments as more secure because
more of your own money is invested in the property. However, there are other loans that require as little as 5% of the purchase
price for a down payment. (these must be insured by CMHC).
- Closing Costs
The closing is the final step, during which ownership of the home is transferred
to you. The purpose of the closing is to make sure the property is ready and able
to be transferred from the seller. Typically you attend at your lawyers’ office
a few days before the closing to view the Statement of Adjustments and to give
the lawyer your payment of the Land Transfer Tax and his fees along with any adjustments
for prepaid taxes. You will also sign the Transfer of Deed which your lawyer will
register with the City on the closing day after which he will receive the keys
to your new house and pass these along to you.
- Government Loans and Programs
You may withdraw up to $ 20,000 from your RRSP which must have been deposited
into the RRSP at least 90 days prior to closing and use this as part of your down
payment or for any related costs of the purchase. Each of the owners can deduct
$ 20,000 from their own RRSP. A form must be filled out at the bank when you are
withdrawing your RRSP money in order to not be charged tax on this withdrawal.
You must agree to replace these RRSP’s over the next 15 yrs starting 2 yrs after
the purchase.
Back to the Top
Choosing the right REALTOR® is a crucial first step in the home buying process.
In making this important decision you should understand:
- Who is a REALTOR
- Using an agent and the obligations that are owed to you
- The difference between a buyer’s and seller's broker
- How to evaluate an agent.
Who is a REALTOR?
The terms agent, broker and REALTOR are often used interchangeably, but have
very different meanings. For example, not all agents (also called salespersons)
or brokers are REALTORS. Learn who is a REALTOR and the reasons why you should
use one.
As a prerequisite to selling real estate, a person must be licensed by the Province
in which they work, either as an agent/salesperson or as a broker. Before a license
is issued, minimum standards for education, examinations and experience, which
are determined on a Province by Province basis, must be met. After receiving a
real estate license, most agents go on to join their local board or association
of REALTORS and the Provincial Real Estate Associate OREA and the Federal Association
CREA. They can then call themselves REALTORS. The term "REALTOR" is a registered
collective membership mark that identifies a real estate professional who is a
member of the Canadian Association of REALTORS and subscribes to its strict Code
of Ethics (which in many cases goes beyond provincial law). In most areas, it
is the REALTOR who shares information on the homes they are marketing, through
a Multiple Listing Service (MLS). Working with a REALTOR who belongs to an MLS
will give you access to the greatest number of homes.
Using an Agent and the Obligations That are Owed to You
An agent is bound by certain legal obligations. Traditionally, these common-law
obligations are to: Put the client's interests above anyone else's; keep the client's
information confidential; obey the client's lawful instructions; report to the
client anything that would be useful. NOTE: A REALTOR is held to an even higher standard of conduct under the RECO (Real
Estate Council of Ontario) Code of Ethics.
The Difference Between a Buyer's and a Seller's Broker
Suppose you sign an offer to buy a home for $350,000. You really want the property
and there's a chance other offers are coming in, so you tell the broker that "We'll
go up to $360,000 if we have to. But of course don't tell that to the seller."
If you're dealing with a seller's agent, he or she is duty-bound to tell the seller
that important fact. The seller's agent doesn't have any duty of confidentiality
toward you. Honest treatment might require that the agent warn you that "I must
convey to the seller anything that would be useful so don't tell me anything you
wouldn't tell the seller."
TIP: If you're dealing with seller's agents, it’s a good idea to keep confidential
information to yourself. These days many home buyers prefer instead to hire a buyer's broker, one who owes the full range of duties, including confidentiality and obedience,
to the buyer. A buyer's broker is often paid by the seller, regardless of the
agency relationship.
How to Evaluate an Agent
In making your decision to work with an agent, there are certain questions you
should ask a potential agent. The first question you should ask is whether the
agent is a REALTOR. You should then ask:
- Does the agent have an active real estate license in good standing?
- Does the agent belong to the Multiple Listing Service (MLS) (Multiple Listing Services are cooperative information networks of REALTORS
that provide descriptions of most of the houses for sale in a particular region.)
- Is real estate their full-time career?
- What real estate designations does the agent hold?
- Which party is he or she representing--you or the seller? The discussion is supposed
to occur early on, at "first serious contact" with you. The agent should discuss
your province's particular definitions of agency, so you'll know where you stand.
- In exchange for your commitment, how will the agent help you accomplish your
goals? Will (s)he show you homes that meet your requirements, and provide you
with the list of the properties he or she is showing you?
With so many homes on the market you'll never get anywhere unless you narrow
your choices. You can begin this process by first identifying one or a few neighborhoods
that are right for you by:
- Considering local factors
- Using neighborhood strategies.
Back to the Top
Factors to Consider When Evaluating a Neighborhood
When evaluating a neighborhood, you should investigate local conditions. Depending
on your own particular needs and tastes, some of the following factors may be
more important considerations than others:
- Quality of schools
- Property values
- Traffic
- Crime rate
- Future construction
- Proximity to: Schools, Employment, Hospitals, Shops, Public transportation, Places
of Worship, Cultural Activities (museums, concerts, theaters, etc.), Prisons,
Freeways, Airports, Beaches, Parks, Stadiums
Neighborhood Search Strategies
If you’re a first time-buyer with limited financial resources, it’s a wise purchasing
strategy to buy a home that meets your primary needs in the best neighborhood
that fits within your price range. You can maximize your home purchase location
by incorporating some of the following strategies into your neighborhood search:
- Look for communities that are likely to become "hot neighborhoods" in the coming
years. They can often be discovered on the periphery of the most continuously
desirable areas.
- Look for a home in a good neighborhood that is a bit farther out of the city.
If commuting is a concern, purchase a home that is close to public transportation.
- Look at the neighborhood demand by asking your REALTOR whether multiple offers
are being made, whether the gap between the list price and sale price is decreasing,
and whether there is active community involvement. You can also drive around neighborhoods
and see how many "sold" signs there are in a particular area.
- Look into purchasing a condominium, rather than a house, in a desirable neighborhood.
This way you still may be able to purchase in a prime area that you otherwise
could not afford.
Once you've settled on a couple of neighborhoods for your search, it's time to
pick out a few homes to view. Refer back to your Wish List and see which features
are absolute requirements and those amenities you'd like to have if possible.
When narrowing down your home search, consider:
- Types of homes
- Home purchase considerations
- What to do when you’ve found the right home for you.
Back to the Top
Types of Homes
In addition to single family homes (one home per lot), there are other forms
of homeownership:
- Multi-Family Homes: Some buyers, particularly first-timers, start with multiple
family dwellings, so they'll have rental income to help with their costs. Many
residential mortgage plans, are available for buildings with up to four units,
if the buyer intends to occupy one of them.
- Condominiums: With a condo, you own "from the plaster in" just as you would a
single house. You also own a certain percentage of the "common elements"--staircases,
sidewalks, roofs and the like. Monthly charges pay your share of taxes and insurance
on those elements, as well as repairs and maintenance. A Board of Directors administers
the development.
- Co-ops: In a few cities, cooperative apartments are common. With those, you purchase
shares in a corporation that owns the whole building, and you receive shares to
your own apartment. A board of directors supervises management. Monthly charges
include your share of an overall mortgage on the building.
Home Purchase Considerations
Most buyers' first consideration, after neighborhoods are chosen, is the number
of bedrooms. As you begin to view homes, keep the following purchase and resale
considerations in mind:
- Weigh your needs, purchase/maintenance budgets, and personal tastes in deciding
what type of home you wish to purchase: a newly constructed home, an older home,
or a home that requires some work (a "fixer-upper"). One-bedroom condos are more
difficult to resell than two-bedroom condos. Homes with "curb appeal" (a well-maintained,
attractive, and charming view-from the street appearance) are the easiest to resell
- when resale is a possibility, don't buy the most expensive house on the street,
or anything that is unusual or unique. And, the biggest, most expensive house
on the block is not usually considered to be the best investment. The best investment
potential is traditionally found in a lesser expensive, more moderately sized
home on the street.
What to do When You’ve Found the Right Home
Before you begin the home buying process, resolve to act promptly when you find
the right house. Every REALTOR has stories to tell about a couple who looked far
and wide for their dream home, finally found it, and then revealed that "we always
promised my Dad we'd sleep on it, so we'll make an offer tomorrow." Many times
the story has a sad ending--someone else came in that evening with an offer that
was accepted. TIP: Resolve at this point that you will act decisively when you find the house that’s
clearly right for you. This is particularly important, after a long search or if the house is newly
listed and/or under-priced.
Hopefully you've gained some important info and tips from our Buying Guide. If
you think you're ready to find your dream house today, call Barb Berrie at (416)
694-3336 ext 231, or E-mail her at bberrie@torontothegood.com or sign up for my Property Match and start getting listing information, that meets your criteria, emailed to
you directly from the TorontoMLS database.
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