So you have decided it’s time to stop paying “the man” and you are ready to invest in yourself and get a property of your own. This is a very exciting time for first time home buyers but it can also be stressful. When you first start out it seems so euphoric and straightforward. You browse your local mls real estate listings, find all the places that could be yours and start calling. You soon find out that it’s simply not just a game of “find a house and buy it”; there are so many things to consider in the process. There is no cookie-cutter process as each person has different goals when looking for a home but there are some essential pre-planning steps that will make the process as enjoyable as you want it to be.
Let’s take a look at those steps now…
1) Mortgage Pre-approval
This is by far the most important first step for so many reasons. How can you find a home if you don’t know what you can afford? What if you find the perfect home only to realize you can’t afford it? This is a terrible situation that can lead to great disappointment. If you looked at a bunch of houses on mls in the $300,000 range and then find out your maximum allowance is $250,000 you may end up comparing every house you can afford to the ones you can’t afford. Bottom line, stick to viewing homes you can afford and get that knowledge by getting pre-approved.
Another great advantage to getting pre-approved for a mortgage in Canada is that you can generally hold the rate of your pre-approved mortgage up to 120 days. This means that if the rates ever rise in that 120 day timeframe you are protected and get the rate you were quoted at. Even better, if rates go down you get the lower rate for the term you selected when you received your pre-approval. It’s a win-win situation!
2) Cost of Living Considerations
Now that you know what your maximum mortgage allowance is, it’s time to consider what you can actually afford. Just because you are pre-approved for a certain amount doesn’t mean you want to spend that or can even afford it. The banks have systematic ways of calculating your mortgage allowance but everyone lives differently so you need to tailor your shopping to your lifestyle. For example, the cost of living in Toronto is much different than in a city like London, Ontario.
Write down what your take-home pay is and what you can comfortably spend on a mortgage so that you can maintain the lifestyle you are accustomed to. Include mortgage payment, property taxes, condo fees (if applicable), home insurance, potential utility increase, and leave some room for possible home maintenance. Don’t stretch yourself right to the penny.
If you aren’t sure how much you can afford then you will have to work backwards. This involves writing down all your current expenses like car insurance, social expenses, planned travel, groceries, cell phone bill, hobbies, clothing, entertainment, and any additional expenses you can think of. From this you can deduce what you can afford to spend on your mortgage. Read our article on “How much home can you afford” to learn more on calculating these items.
Ask yourself some additional questions like:
Is my car payment accurate? Will it possibly increase in the future maybe because it’s time for a new vehicle? Are there any additional things like entertainment, travel, memberships, that you want to add to your lifestyle in the near future?
Being organized and well-prepared ahead of time may save you from being regretful of your purchase. Being house-poor is no fun, be proactive and plan for the future you want.
Location is another factor you must consider while searching for a home. Depending on your mortgage allowance you may be limited to certain areas of the city you live in. Find out what these locations are and then consider the following criteria before searching mls listings.
What are your main drives behind location? Being close to friends, work, family, restaurants and entertainment, environment, schools…etc.? These are important factors to consider when choosing a home. After all, you want to buy a home that fits your lifestyle and be near the things that make you happy, so choose wisely.
At this point it’s time to look at your budget. Maybe you are choosing to move closer to work? Or further away? For example, at 4% interest over 25 years amortization every $10,000 increase in mortgage may cost you approx. $50/month more. If your new area of interest is closer to work and may save you $100/month on gas well there’s $20,000 more available for a mortgage. If further away, then $20,000 less. I advise you to talk to your mortgage broker as the terms of your interest may change the approximated values but the principle clearly shows that location to work can be a very important factor depending on what city you live in.
4) Type of Property and Features
Now we get into some of the more fun details. What kind of home are you looking for? If the locations you may be limited to have multiple types of properties then you are in luck and get to choose what you want.
Make a list of the absolute necessities: # of bedrooms you need, maybe you need a home office, if someone in the family has mobility issues there are things to consider. Maybe you only want a 2-storey or you are open to anything as long as it has the features you need.
When you compile that list then make another column of features you would like to see. Maybe an updated kitchen, additional bedroom for guests, large backyard for the kids or pets, the list goes on. As you view more properties the list may change, but you should have a good idea ahead of time.
More than likely you won’t get everything you want, most people don’t. There will be compromises when you find the right home. If you plan to stay in that home for a while you can always add some of the features you want overtime. The most important thing is to make sure you fulfill your “needs” category so that you can function as needed to fit your lifestyle.
6) Get a Buyer’s Representative
This is by no means the last step. Sometimes this is the first thing buyers do before even starting the whole process, others wait too long. Why is having representation so important? Well first off, if the buyer’s agreement is signed correctly, it’s a free service to you. The seller pays all the commission and it is split up between all agents involved. If the selling agent sells the property on their own, they get all the commission.
You need someone looking out for your best interests when searching for a home. It is the listing agent’s legal responsibility to get the best price possible for their client, the seller. They have to disclose certain information to the buyer but overall the information may be limited to all the great things the property has to offer and you may not be getting the full picture. Having representation helps to ensure that you have someone on your side looking out for defects or point out aspects about the property/area that may not coincide with your needs and wants. Find someone who is knowledgeable of the market in your area and someone you feel can get you what you want while looking out for your interests. The decision to buy a home can become very emotional and sometimes causes buyers to overlook some of the important details when they find a home they love. Having an impartial representative at your side can help tremendously because he/she will point out such pros and cons.
I know this seems like a lot and may be overwhelming but take the time to go through these steps and your home buying process will be much more pleasurable. After all, it will likely be the most expensive investment so far in your life. You might as well be well-prepared so that you can enjoy the process.
A blog helping people understand more about Real Estate in Ontario and Canada