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A Comprehensive Guide to Home Buying for First Time Homebuyers

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For a first time home buyer, buying a new home is an adventure in itself. It’s a financial, personal and long-term commitment that has its own implications. What hasn’t been addressed is what home buying truly entails. Here are some of the questions that most first time home buyers don’t ask:

  1. what research needs to be done before hand?
  2. What should I do before I start a house search?
  3. What is my financial capacity, both to buy a home and to maintain it after that I purchase it?
  4. Are there any resources to support me after I purchase a home?

We at TheRedPin.com strongly believe that home buyers need to be informed about every aspect of home buying before they dive into process. In this guide, we overview some of the most important aspects of home buying, providing the necessary information required to make a sound home purchase.

Do you need a new home?

Some first time home buyers simply want to have a new home, which isn’t a bad thing, as the purchase of a new home gives you a tangible and major asset. However, a purchase of a new home simply shouldn’t be because you want a tangible asset. You will be living in this property and you need to justify the move. Here are some common situations to help you understand the need for a new home:

  1. Mortgage on the new home may not be that much more than the rent your paying?
  2. Intentions to start a family very soon or have a growing family that has outgrown the current space?
  3. Work circumstances have changed and you require a home office/work space at home?
  4. Require outdoor space for kids, pets, etc.

These are just a handful of situations that could dictate the need for a new place, which should provide motivation towards finding the right property. By understanding your current situation, you are able to differentiate between needs and wants, outlining what you truly require, helping you create a sound game plan when searching for your new home.

Get Pre-Approved First

Though not a requirement, it is a good idea to get a mortgage pre-approval before you begin your house search.

A pre-approval does not guarantee the approval of the mortgage loan but it provides first time home buyers with a good idea of how much mortgage they can afford. Having a pre-approved mortgage – which lasts a specific amount of time – will give you a good idea of what price to look at when doing a house search. It is information that will help your REALTOR® to narrow your search to meet your requirements and reach.

When meeting with a lender, he/she will require specific details to be able to provide you with a pre-approval. It is important you bring the following with you when conducting a pre-approval:

  • Personal information, including ID material
  • Employment details,  including confirmation of salary in the form of a letter from your employer
  • List of income sources, details on all bank accounts, loans and other debts
  • Proof of financial assets
  • Source and amount of down payment and deposit
  • Proof of source of funds to cover the closing costs –  Usually 1.5-4% of purchase price

First time home buyers will be presented with many options for mortgages by their lender. The primary elements that vary are the amortization period, payment schedule and interest rate. The key question you need to ask your self is: how fast do you want to pay off your mortgage? By combining the three mentioned elements, first time home buyers will understand what their monthly financial commitment to the home will be, providing a good overview of whether buying a home is right for them.

Managing Your Finances

Understanding The Costs of Home Buying

There are multiple up-front costs that first time home buyers need to account for before they adventure to find their new home. These costs can range from a couple of hundred dollars to a couple of thousand, and if not planned for in advance, can cause a serious dent in one’s finances.

All the costs listed below are either costs incurred during the house search, during the process of buying and post-purchase. It is important that first time home buyers make a note of all these costs and evaluate them before deciding to go and do a house search. These can determine if you have a capacity to buy a home or not.

  • Down Payment – this is the financial part of the purchase that is required from the home buyer, not covered by the mortgage loan. The amount is usually 20% of the purchase price but could be as low as 5% if you have mortgage loan insurance
  • Mortgage Loan Insurance Premium – If you make a down payment of less than 20%, creating a high-ratio mortgage, you will need to obtain mortgage loan insurance, with premiums added to monthly payments.
  • Home Inspection – Before committing to a property  it is important to put a condition on the Offer of Purchase that the sale will be final pending a home inspection. A home inspection lets you find out the condition of the home, and what you are getting into. Fee’s can range from $400-600 and should be conducted by a qualified home inspector. Do your research.
  • Mortgage Broker’s fee – If you decide to use a mortgage broker to find you a lender with the best terms and rates, rather than go straight to the bank, there will be a fee involved.
  • Deposit – When an Offer of Purchase is made, a deposit is made to show you as a serious buyer. It is part of the down payment, with the rest paid out at closing.
  • Title insurance – Covers the loss caused by defects of title to the property, and will be recommended by your lawyer.
  • Land Survey – An up-to-date survey or certificate of location will be required by your mortgage lender. It would need to be updated if it is 5 or more years old. This could cost between $1,000 and $2,000.
  • Land registration fees – Also called Land Transfer Tax in Ontario, this is a fee that must be paid at closing and is usually a percertage of the purchase price. Ask your lawyer for specific figures.
  • Pre-paid property taxes – When you purchase a re-sale property, the previous owner may have paid property taxes for the year. You will have to pay the period he/she has paid for back.
  • Property insurance – Covers the cost of replacing your home and contents if there is a major loss. Important because your home is a direct security against the mortgage. This must be in place at the time of closing.
  • Legal fees – A self-explanatory cost that is paid on closing day. Lawyer will be an additional charge, depending on personal requirements.
  • Condominium Fees – You may have to make initial payments on a condo before moving in. Make sure you communicate with your REALTOR® and find this out.
  • Service connection fees – connecting utilities and everyday services will cost time and money. Make sure you understand the costs of moving your services, installing new services and balancing the costs.
  • Moving-in costs – You will not only have a cost to move your belongings, which could be $200-500 on average, but also take into account the necessary costs to make your home livable such as window treaments, appliances, renovations, repairs, interior-design, etc.
  • Other costs – Other costs could include water tests, gardening, septic tank tests, etc. Communicate with your REALTOR® and ask what costs you should be considering before you consider a property.

 

Define Your Search

As mentioned in the start of this piece, it is important to know what you want. It is not only the catalyst towards finding a new home but also defining what your new home will be.

First time home buyers need to differentiate between needs and wants, prioritizing between items to ensure they find a house that isn’t a compromise but a place where they can grow and establish themselves. No one said that buyers won’t outgrow their home, but careful planning will not only save first time home buyers time, but a lot of money as well.

Here are the elements that first time home buyers need to evaluate:

The Neighbourhood

There is a well known saying that a house can be changed but the location cannot. It is important that first time home buyers evaluate the neighbourhood they would like to live in and find what the cost of living within that neighbourhood would be.

A neighbourhood should be looked at from a broad perspective, profiling its various characters, amenities, conveniences and opportunities. In addition to these, you must look at the growth of the neighbourhood based on current projects, proposed developments and current offerings. Here are some of the things you should look for:

  1. Shopping Options, primarily for essential items – Grocery shopping, pharmacy, etc
  2. Transit Access
  3. Schools and daycares
  4. Housing developments – Types of housing and developments & number of new developments and upcoming developments
  5. Amenities – Banking, gas stations, libraries, community centres, hospitals, facilities
  6. Lifestyle & recreational elements – Coffee shops, restaurants, social hubs, movie theatres, parks, bike trail,

The above factors play a major part in determining the value of a neighbourhood. In addition, make sure your property has a strong walkscore. Walkability affects how you interact with the neighbourhood, defining if amenities and conveniences are located close by to the property, giving residents easy access.

Type of Property

Do you want a condo or a house? It’s a common question that most first time home buyers don’t decide until they are on their search. See both options and understand what fits your lifestyle and needs best. Here’s a quick comparison between the two:

Condominiums

Pros:

  • Opportunity to live in high-profile neighborhood; areas where houses are usually unaffordable, such as the entertainment district
  • Great selection of amenities offered with condominiums; A pool, gym and party space being a few examples
  • No hassles of property ownership; no need to cut the lawn, take care of curb appeal or do any building maintenance – all covered by the maintenance fee
  • Support from building management for repairs and fixes
  • Security and peace of mind, especially when travelling
  • Depending on the building, all utilities are covered with the maintenance fee

Cons:

  • Maintenance fees, on top of taxes and such, can become expensive
  • Depending on location, living space can limit growth, especially if homebuyer wants to raise a family
  • You need management/builder approval for major property changes, which can be a tedious process
  • No real opportunity for an income property

Houses

Pros:

  • More bang for your buck, with greater living space
  • Potential for growing and renovating the property, especially when the homebuyer has a growing family
  • Depending on location, property’s come with great backyards which can serve for entertainment purposes and a space for kids to play
  • Potential for an income property

Cons:

  • Homebuyer is responsible for maintaining the property, including taking care of the lawn, property maintenance and much more – this can become very expensive
  • Utilities are the homebuyers responsibility
  • Purchasing a house in a high-profile neighborhood is very expensive – thus, homebuyers need to move further away, creating the need for everyday transportation
  • Unless a part of a gate community or in an area where local services like neighborhood watch are in effect, security can be a big question.

 

Other Factors

  • Define Your Priorities – For example, good schools vs. longer commute time; would be dependent on if you will have or have children and school details are very important.
  • Identify costs for all your wants – For example, is having a pool worth the additional maintenance cost?
  • Would you like to make money with your property? – considering an income property needs careful long-term thinking. If you purchase a property with an intention for an income property and the space doesn’t allow it, you are investing a property that don’t meet your family goals.

  The Offer

The Offer Process

Once you have found a home that you like, you have to put in an Offer to Purchase to the vendor selling the home. It is highly recommended that this process be done with a REALTOR® or lawyer, to ensure that the offer covers all the necessary details and factors. It is a legal document and something that should be taken very seriously.

Here are some of the details presented within an Offer to Purchase:

  • Names and details – your legal name, vendor details and address of the property
  • Price you are offering to the vendor
  • Things that you think should be included with the sale of the property. An example would be appliances and/or window treatments
  • Your deposit amount
  • Closing day of the sale – 30 or 60 days usually but could be more.
  • Land Survey of property
  • Offer expiration date
  • Conditions of Purchase – this could include items such as home inspection, mortgage approval, etc.

Once an offer is made, the following three scenarios could happen:

  • The vendor accepts your offer – Hooray, you own a new home! The next steps are conducted to complete the sale.
  • The vendor signs back a counter-offer. This could be a change in price or a change in terms. You can either agree to the changes of make a counter-offer yourself.
  • You receive a counter-offer at a higher price that you cannot afford. You don’t agree to the offer, sale doesn’t go through and deposit is returned.

The simple lesson from all three scenarios above: know how much you can afford and keep a cap on it. There are hundreds of houses for sale and unless this is your 100% dream home, it is important to balance the books and expectations when investing in a property as a first time home buyer. Always do your due diligence.

Identify Assistance Programs

The government has created a number of assistance programs for first time home buyers when they purchase their first property. Below is a list of these programs, providing insight into what they offer to reduce the financial burden of purchasing a new home.

Home Buyers’ Plan for First Time Home Buyers

Government of Ontario The Home Buyer’s Plan by the federal government provides home buyers, especially first time home buyers, the ability to withdraw money from their registered retirement savings plan (RRSPs) tax free to buy or build a qualifying home. Home buyers are eligible to take up to $25,000. However, contributions must remain in the RRSP for at least 90 days before you can withdraw under the Home Buyers’ Plan, and no deductible can be made for any year.

The following requirements must be met to withdraw funds from your RRSP:

  • Qualifying home cannot be owned for more than 30 days before the withdrawal is made, by you or your spouse.
  • A maximum of $25,000 can be withdrawn
  • You have to be a resident of Canada.
  • You have to complete Form T1036 for each eligible withdrawal.
  • You have to receive all withdrawals in the same calendar year.

It is important to point out that if you are buying a house with a spouse, the spouse is eligible to take out $25,000 as well. Any funds taken out from an RRSP must be repaid within 15 years, with 1/15 being the payment amount per year. Payments begin the second year from which the funds were withdrawn.

The home buyers’ plan provides first time home buyers with the must needed financial flexibility when purchasing a new home. The $25,000 – or $50,000 if taken by the spouse as well – can be used towards the down-payment of a first home, a required step towards owning a home for first time home buyers.

First Time Home Buyer’s Tax Credit (HBTC)

The first time home buyer’s tax credit is a non-refundable tax credit, based on an amount of $5,000, for certain home buyers that acquire a qualifying home after January 27, 2009 (i.e., generally means that the closing is after this date). By entering $5,000 to one’s personal taxes on line 369, home buyers receive a rebate of $750. This amount must be the total claimed amount between you and your spouse.

The credit is designed to help first time home buyers with various expenses related to home buying, such as closing costs, inspections, legal work, taxes, etc. To qualify for the HBTC, you or your spouse has acquired a qualifying home and you did not live in another home owned by you or your spouse in the year of acquisition or four years prior. A qualifying home is described as “a housing unit located in Canada acquired after January 27, 2009, which can be existing homes or those being constructed”. A share in co-operative would also qualify.

Land Transfer Tax Refunds for First Time Home Buyers

The Government of Ontario provides a refund program for first time home buyers who purchase a home in the province. This interest-free refund is on the land transfer tax in Ontario, with a maximum sum of $2000. Applications for this refund must be made within 18 months after the date of the transfer. To qualify, home buyers must meet the following requirements:

  • must occupy the home as your principal residence within 9 months of the date of transfer
  • must be at least 18 years of age
  • you cannot have ever owned a home, or an interest in a home, anywhere in the world. This applies to your spouse during the period which she/he is your spouse
  • in the case of a newly constructed home, where the agreement of purchase and sale was entered into before December 14, 2007, you must be entitled to a Tarion New Home Warranty

The City of Toronto provides its own Municipal Land Transfer Tax rebate, which comes into affect on top of the provincial land transfer tax. First time home buyers are eligible for this rebate on the purchase of newly constructed or resale property, with a maximum of $3,725 in rebate available.

Canada Mortgage and Housing Corporation Programs

CMHC The Canada Mortgage and Housing Corporation – CMHC for short – provides a range of home buying programs that aid both first time home buyers and investors when purchasing real estate. Their mortgage insurance program is of particular value to first time home buyers because the program provides home buyers with the option to purchase a new home with as little as 5% down, which is a major financial relief for first time home buyers with tight budgets.

In addition, the CMHC provides a number of other programs that help take the burden off the cost of buying and ownership. From renovation to simple payment options, the CMHC is a good resource when one needs to the balance the finances relating to a new home.

 

Post Purchase Things to Plan

You have your new home and it’s time to move in. Moving costs are self explanatory but should not be underestimated. Between packaging supplies and the actual cost for moving, you could be in it for hundreds of dollars. Shop around, ask friends and family, before choosing a moving company. Try to see if you can move some of your things to save up on return trips. You have to consider all factors of hiring a company: insurance to protect items in transit, hire a large company or a small one, rent the vehicle from the company and do the move yourself, etc.

There are a few things that need to be done once the closing details are completed. Change the locks of your new home for security reasons, clean up your new home before you consider moving and purchase new appliances if they were not included in the sale of the home. Consider hiring an interior designer to maximize the potential of your new home.

First Time Home Buyers

Conclusion 

Purchasing a new home, especially for a first time home buyer, should be a well thought-out process. All the major factors including financial and logistical implications must be taken into account before deciding to go on the path of getting a new home. Due diligence and careful planning will all you to make a sound home purchase, letting you focus on the more important things such as taking care of your family and work.

 

 

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