Buying a first property

Tips for First Time Buyers

In spite of rising prices, more first time buyers are able to buy homes today than ever before. Interest rates are still relatively low, which reduces the real cost of buying real estate. The inflation rate is also reasonably low, applying minimal pressure on interest rates for the near future.

Buying your first home is exciting! But it can be overwhelming. You’ll find many new things and people to deal with.

Why buy a home?

You have to live someplace, so why not own the place you live? Paying down your mortgage over time is like a forced savings plan – as you build up equity in your home, along with the usual appreciation in value, you will own a significant asset. In fact, your principal residence (the house you live in) can be sold without having to pay capital gains taxes.

When you rent you are usually limited in what you can do to the property. When you own, however, you can renovate, landscape, and make your home exactly how you would like it.

If you are buying an income property, or perhaps a duplex in which you rent out one half and live in the other, you’ll have someone else help pay the bills.

It can be difficult to know what to do first when buying a home. Here are a few steps that you should take to ensure that your “house hunting” will go smoothly and without surprises.

First things first

To start with, calculate roughly how much mortgage you can afford. There’s no point in looking at properties you could never afford! Use the Maximum Mortgage calculator to find out approximately how much. Add whatever funds you have available for your downpayment, and this represents the most expensive home you could purchase. Buying a home that’s less expensive than this will give you a little more breathing room, so keep this in mind.

From the lenders perspective, the easiest way to qualify for financing is to put down 25% of the price of the home. However, as homes become more expensive it becomes difficult to do. There are lenders and programs that allow you to use a smaller downpayment. Talk to your mortgage broker/agent about this.

Get a pre-approval

Check your own credit and make sure it’s clean. It’s wise to obtain a copy of your own credit report from www.equifax.ca before even looking for a pre-approval. Make sure you purchase the Score Power version of the report ($21.95) – it includes the most important information – your FICO Beacon score. Usually if your score is 680 or greater, you are consider to have very good credit – the higher the better. Learn more about your credit from my free report entitled “About your credit”.

Now you can obtain a mortgage pre-approval from your mortgage broker/agent . With this in hand you will be in a much better position to go out and purchase your dream home with confidence. Most lenders will guarantee the rate for between 90 to 120 days.

Bear in mind that a pre-approval is not a total commitment on either side. When it comes time to actually purchase, your mortgage broker/agent still has the opportunity to find you an even better deal.

On the other hand, be aware that the actual mortgage approval depends on final verification of your credit rating, employment information and other documentation. Even after a lender has committed to the mortgage, it’s subject to verification of your information. If you owe back taxes to the government, child support or other obligations, the lender will likely decline to fund the deal. Make sure your own “house” is in order before looking for a home.

Keep your finances stable while shopping for your property

It’s best to avoid making large purchases such as a new car when shopping for a property. Remember that one of the criteria for mortgage qualifying is the ratio of your income to current debt. The mortgage lender will also require proof of the funds available for your downpayment.

In any real estate transaction, there are several professionals you’ll need to work with:

Real Estate Sales Representative

Most people use a real estate representative to help them locate and purchase a home. The vast majority of properties sold in the Toronto area are listed for sale with a Realtor. Choose one who knows and understands your needs, the type of property you want, the neighbourhood or investment returns you desire, amenities such as schools and transportation and so on.

A good representative will help you understand what you can afford, help you sort out what you need vs. what you want, and even introduce you to areas of the city or country you might not have considered before. There are very few properties that could be considered “perfect” – your rep will help you sort out the best fit for you.

You should keep in mind that your first home is just that: a step in a right direction. It is better to choose a good location than to get a first home that’s “perfect”. In a few years you will likely be ready to look for a larger home.

Your Sales Representative should have access to all MLS listings, and the ability to email you on a daily basis new listings that meet the criteria you are looking for. They should be a good negotiator to assist you in making the offer, and will walk you through the process of buying a home. A good rep will save you time and effort.

Many real estate professionals will strongly recommend you obtain a mortgage pre-approval before actively looking at properties.

Home Inspector

It’s a good idea to have your prospective home inspected before purchasing. You can make your “Offer to Purchase” conditional on your approval of the inspection. In very competitive markets, you may also wish to have the home “pre-inspected”, which means you pay the cost of the inspection before you put in an offer to purchase. This allows you to make an “unconditional” offer, which is more attractive to the seller – but of course there’s still no guarantee your offer will be accepted.

Choose your home inspection company carefully. Anyone can hang a sign on their door and call themselves a home inspector. One of the biggest mistakes most home purchasers make is bringing their brother in-law who is in the renovation business, instead of a reputable home inspection company, who have have engineers who abide by a strict code of conduct and will go through the entire home from top to bottom.

A good real estate representative should be able to recommend some reputable home inspectors to you.

Lawyer

To close (finalize) the deal, you’ll need a real estate lawyer. Make sure you have a lawyer who specializes in real estate law, not a lawyer friend who specializes in wills and family law. Remember, this is one of the biggest investments you will ever make.
Again, most real estate reps will be able to recommend one or two good real estate lawyers to you.

Don’t worry about locating all of these players on your own. Your Real Estate Sales Representative can assist you in connecting you with the right people. Follow these steps and your house hunting should be fun and enjoyable!