First Time Home Buyers

First Time Buyers: A Step-By-Step Guide to help you buy smart

Benefits of Home Ownership

  • First Time Home BuyerBuying your first home is exciting and it is probably the largest financial decision you will ever make. It is important that you do the research necessary to help you make the best decisions, so that the home you purchase will meet and exceed all your expectations. I would like to provide you with a step by step guide that will help you to buy smart.
  • There are many benefits to owning your own home. The Largest measurable Benefit to home ownership is price appreciation. Price appreciation helps build “Home Equity”. Over time the market value of your home normally increases.( there is a lot of variability depending on sustained condition of your home, location, years of ownership and market conditions) The equity you build in your home is the difference between the market price and the remaining mortgage payments. The important factor here is that rather than paying rent which helps build equity for your land lord, your money goes towards building equity for yourself!
  • When you eventually sell your home there will be no income tax payable on the Capital Gains you make from the sale.
  • There are also many intangible benefits of home ownership such as pride of ownership, piece of mind, future security, space and quality of life for your family, and membership in a community.

Steps to Home Ownership

Step 1: Figure Out How Much You Can Afford
The first thing you should do is figure out your budget for your home purchase, and determine the price range you should target before you start looking. It can be heartbreaking to fall in love with the perfect home and then find out you can’t afford it. A common mistake new home buyers make is that sometimes they think they know how much they can afford without checking with the bank. Not having a pre-approved mortgage often leads to unsuccessful offers on a home due to financing falling through, leaving both the buyer and the seller in extremely disappointed. In other situations the buyers become “house rich and cash poor” because most of their income is spent on housing. Once you have a pre-approved mortgage you have an amount in mind to narrow down your search for the perfect home. You can focus your search on the neighbourhoods and homes that fit within your price range. You can compare similarly priced homes and will be better able to gauge the value of each property, and ultimately find the one that’s right for you!

You should obtain a pre-approved mortgage from your lender of choice. The bank or mortgage specialist will determine how much you can afford to borrow, and give you a realistic idea of what your monthly payments will be. Also without a pre-approved mortgage, a sudden increase in mortgage interest rates could mean you no longer qualify for your dream home.

You have the option of choosing a Mortgage Broker who will negotiate on your behalf to compare rates and terms from several financial institutions, or you could choose to meet with a Mortgage Representative from your preferred bank. Regardless of your choice the process of getting approved is fairly straight forward. You will be asked to provide your financial information, including all assets, liabilities and proof of income as well as the amount of money you have available for a down payment.

The lender will review your financial situation and will determine the maximum mortgage amount you qualify for and then lock in a mortgage rate for you. The period of time your prequalification is available for is normally 90-120 days. If you do not find your home in this period of time you can renew your agreement at the going interest rate at the time your guaranteed rate expires.

There are many options available for your choice of Mortgage terms and it can be a bit confusing. Your mortgage specialist will guide you through the process and make sure you pick the terms which are right for you. Here are some decisions you will be required to make as part of the process.

  • Choose a term that works for you
    The “term” is the period of time from six months to 10+ years during which you pay your mortgage at a specific interest rate. You may decide because interest rates are low now, and you are worried they may go up, that you want to lock in a rate for a “longer term” for 5 or 7 years. You will then have the stability of knowing exactly what you will be paying each month for years to come.You might also choose that a “short term” mortgage is more appealing. If it looks like interest rates are falling than it may for example be a good choice to choose a 6 month variable rate mortgage. This allows you to take advantage of low rates but allows you the flexibility to lock in and convert to a longer term mortgage whenever you want. The key here is that you have to be comfortable with payments that may fluctuate from time to time as the mortgage rates fluctuate.
  • What will your Amortization Period be?
    The Amortization period is the number of years it will take to pay back your loan and could be 15, 20 or 25 years. It is important to realize that the longer the amortization period the more interest you will pay on the loan. However, the longer the period the less your monthly payments will be. You can shorten your amortization time by increasing your payments, paying lump sums towards the principal, or renewing your loan at a lower rate.
  • Will you chose a Fixed or a Variable Rate?
    With a fixed-rate mortgage you pay the same amount every month for the length of time you have the loan. It does not matter if interest rates go up or down your payments will not change. With a variable –rate mortgage, your interest rate will fluctuate with your lender’s prime lending rate. There is more risk here. If rates go up your payment may not be enough to cover interest and principal and you may end up having to pay more.
  • Decide on a Closed versus Open mortgage.
    With an “Open” mortgage you can repay your loan at any time without penalty. This could be advantageous if you know you will soon have some “extra” money that you can put down on the principal of your mortgage. You can pay this whenever you want, and this could drastically reduce the payment time of your loan, thus saving you money in the long term. Something you should be aware of here is that interest rates for open mortgages tend to be a little higher and terms are usually shorter.A “Closed” mortgage is less flexible but the interest rates are generally lower and the terms longer. Closed mortgages also offer prepayment options often up to 20% per year.
  • What will your payment terms be?
    You can pay monthly, bi-weekly or weekly. With monthly payments you make 12 payments a year. With Bi-Weekly you make 26 payments a year.
  • Does your Mortgage deed to be insured?
    This depends on the size of your down payment. A conventional mortgage is a mortgage that covers up to 75% of the purchase price and does not need to be insured against default on payments. A High Ratio mortgage is anything over 75% and must be insured against default by Canada Mortgage and Housing Corporation or GE Capital. This will add an insurance premium to your loan amount.
  • Ready to Go.
    After reviewing your financial situation, the lender will determine the maximum mortgage amount you qualify for and lock in a mortgage and interest rate. Prequalification certificates normally last for 90 to 120 days. If you don’t buy a home within this time frame, you may renew your agreement at the going interest rate when your guaranteed rate expires.
  • The advantage
    Home buyers with a pre approved mortgage have the advantage when they put an offer on the table. The sellers will know you are serious about your offer to purchase, as you have done your homework and are prepared. If you find yourself in competition for a property you will know your limit, and you won’t place a bid that goes beyond what you can afford.Once the offer is accepted all you need to do is send the agreement of purchase and sale, and a copy of the listing off to your mortgage specialist, along with any other info they may need, and your lender will very quickly convert your pre- approved mortgage into your actual mortgage.

Step 2: Be Aware of, and plan for “up front” and “closing” expenses

Deposit: This is part of your down payment and must be paid when you make an Offer to Purchase. Deposits are usually around 1% of the purchase price on the South Shore of Nova Scotia, but can be more or less depending on the situation. Sellers may request that a deposit be increased once all conditions have been met.

Down Payment: At least 5% of the purchase price is required for a high-ratio mortgage and at least 20% of the purchase price for a conventional mortgage.

Mortgage Loan Insurance: If you have a high ratio mortgage(less than 20% down payment), you may need mortgage loan insurance. Your lender may add the mortgage insurance premium to your mortgage or you can pay it in full on closing.

Appraisal Fee: Your mortgage lender may require the property be appraised at your expense. An appraisal is an estimate of the value of your home. The cost is usually between $250 and $350 and must be paid when service is complete.

Home Inspection: A satisfactory home inspection is often an important condition on the agreement of purchase and sale. Most inspectors ask to be paid the day of the inspection and this normally runs between $400and $500.

Water test: Most Rural properties on a well system require a satisfactory water test with a “0” count for Coliform and Fecal bacteria for mortgage purposes. This test will cost $30 for each test. Often purchasers wish to test for mineral content of the well water to ensure there are acceptable levels of iron, arsenic, lead and other minerals, and that the water is safe to drink. These tests can range from $100-$300.

Deed Transfer Tax: While this tax is not paid until closing it is important to plan for this expense. On the South Shore of Nova Scotia this Provincial Tax can range from 1.0% to 1.5% of the purchase price of the home.

Lawyers Fees and Disbursements: These fees are payable at closing and can range from $600 to $1000+ depending on the complexity of the transaction.

Other Expenses:

  • Adjustments on the agreement of purchase and sale for interest, fuel, property taxes, utility payments
  • Survey or location certificate
  • Title insurance
  • Moving Expenses
  • Service and Utility hook up fees
  • Renovations and Repairs

Regular Monthly/yearly expenses after home purchase:

  • Mortgage Payment
  • Water and sewer payments
  • Heating and electricity payments
  • Cable and telephone services
  • Property Taxes
  • Home owners Insurance
  • Repair/maintenance expenses

Step 3: Figure out what type of home is right for you

  • Make a list
    Organize your thoughts on paper and come up with a master “house wish list” of what you are looking for in a home keeping in mind your budget. Divide your list into “must haves”, “would be nice” items, and deal breakers. Be realistic, but be clear about the features you can’t live without. How many bedrooms do you need? Bathrooms? Do you want a home office? A garage? How about a large back yard? Hardwood floors? Eat-in kitchen? Consider your life style and your stage in life. Think about what you may need if you are planning children in the next year or two. Carry this list with you so you can compare homes on the basis of your personal wants and needs.
  • Decide where you want to live.
    Living in a neighbourhood you like is as important as finding a house you love. Do you like an urban lifestyle, or a quiet place in the country? How close are the schools, stores and recreation facilities? Are the homes in the neighbourhood well cared for showing pride of ownership? Is the area close to busy highways which could create noise? Are water frontage or water views important? Are there parks and playgrounds close by? All these questions could have an impact on the choices you make for viewing homes.

Step 4: Choose your Realtor.

Your choice of realtor is a personal choice. You should keep in mind the area in which you are looking to buy a home, and work with an expert within that area. Choose a realtor who has sold homes in your area and understands the market well. Read the biography of several realtors, and choose one who reflects your values, and who will work hard for your best interests in finding the home that suits your needs. You can also get advice from family members or friends who could recommend an excellent real estate agent in the area. The key is…. once you have chosen your realtor….be loyal to them. In turn they will be loyal to you, and work tirelessly to search the market (including for sale by owner properties) to find the best home possible for you and your family. Ask me about my background, experience, and high quality service! I am ready to work hard for you, and offer my 10 years of expertise, to find your perfect property.

Step 5: Begin Your Search and set up some viewing appointments with your Realtor

The next step is to contact your Real Estate Agent with your wish list. Ask him/her to do a market search for you, to help develop a list of potential properties that may meet all, or most of your criteria. You can also search the internet at home, and find the properties that appeal to you, and that you would like to view.

Then comes the fun part! Once your list is complete your agent will set up appointments to view the properties. Remember to take your criteria list with you to each viewing, so you can make notes on each property as to how the properties satisfy your needs. Remember to take your time. Don’t try to fit more that 4 or 5 viewings into one day- it can become more confusing than convenient, and you will start to forget the features of each property.

Remember to ask me to set you up on “Prospector”…a nifty feature that enables you to receive by email, new MLS listings that meet your criteria, as soon as they come on the market. That way you won’t run the risk of missing any new homes, or lose out to another buyer, on a new listing that may be perfect for you!

Step 6: Questions to ask yourself when assessing home features

  • Are there the number of bedrooms and bathrooms you need?
  • Do you need a home office, garage, family room, alternate source of heat like a wood stove, and does the home provide these items?
  • Do you plan to have children and does the home adequately provide for this?
  • Do you need a large back yard for children or pets?
  • Is there adequate storage space? Will any repairs or re-modeling be required before you can move in and would these fit within your budget?
  • What service providers are available in the area(cable, high speed internet, telephone….. including cell reception, satellite, Fibre Op) and is the home wired for each?
  • Do you have family members with special needs?
  • How much are the yearly property taxes?
  • How much are the yearly heating and electrical costs? How old are the oil and hot water tank and do they need to be replaced?
  • Are the major appliances included with the purchase?
  • Are any major repairs required in the home…for example roof re-shingling or repairs to the foundation?

How about Home location?

  • Have you checked the school system? How will your children commute to school?
  • Are there recreation facilities or parks and playgrounds nearby?
  • Are you close to family and friends?
  • Do you have access to work, shopping centres, libraries, churches, and hospitals?
  • Is there a busy road which may cause traffic noise or a hazard for children?
  • Does the neighbourhood have a poor reputation for any reason?
  • Are there any plans for the neighbourhood that you may be unaware of?
  • Is the home close to any obstacle that may have a negative influence on property values eg: apartment building, power lines, cell tower, airport, Shopping Center or railway lines?

Step 7: The Offer

So you’ve searched the market and found the perfect Property! Now it’s time to make the Offer. Your Real Estate Agent will have a formal Agreement of Purchase and Sale for you to fill out, and will explain each clause in the agreement as you progress through completion.

This agreement will include several clauses or conditions, to protect you in your purchase. You will be required to fill in a purchase price, Deposit amount, Closing date, as well as a time and date to have your financing, and House Insurance approval in place. You will also have clauses to cover acceptable water test (where required), House Inspection, fixtures and chattels included in the purchase and several other conditions.

Once the agreement is completed to your satisfaction your Real Estate Agent will present your offer to the Seller’s Agent. There is always a possibility of a counter offer from the Seller, and the offer/counter offers could go back and forth between Buyer and Seller a number of times until both parties come to an agreement.

Remember, your Real Estate Agent will be representing your interests and negotiating on your behalf to get the best possible price and terms for you!

Once the Offer is accepted and the Agreement is signed it is sent to your Lawyer for review, and to your bank for final Mortgage approval. If you do not have a lawyer, your Real Estate agent will refer you to several professionals in your area.

It is then time to work on completing all the conditions on the Agreement within the time frame allotted on the Agreement of Purchase and Sale. One of the key components of the Agreement is the “Home Inspection.”

The Importance of the Home Inspection

So you have an accepted offer on the home you love. It has everything you wanted, a great back yard, beautiful hardwood floors, and the kitchen of your dreams. What about the furnace, wiring, or basement foundation? A house inspection will give you the information you need to make an informed decision on the overall condition of the home. The inspector’s job is to let you know if there are any problems with the home. Remember, the inspector does not care if you buy the house or not, so you can be assured he or she is being objective, even if you’re can’t be!

What happens during a House Inspection?

The Inspector meets you and your Real Estate Agent at the house you are thinking of buying, and takes about 3 or 4 hours to carefully inspect the entire house for structural, mechanical or other issues. He/she examines everything from the roof to the foundation and everything in between, including heating and air conditioning, plumbing, electrical, insulation, roof windows and doors, walls, ceiling, attic and basement. You can accompany your inspector as he/she goes through the home asking questions as you go. It is a great way to get to know the home quickly, and will give you a head start in learning about the home.

The Inspector then prepares a written inspection report that outlines problems , breaking them down into major repairs that need to be done right away, and areas that will need to monitored or may need attention in the future. He /She also high lights good points and gives you an idea of what kind of maintenance you’ll need to do to keep the home in good condition. Some Inspectors give you the report immediately while others provide it for you the next day.

What do I do if problems are found with the home by the inspector?

You basically have 3 options:

  • Use the results to negotiate a better price
  • Give the seller a chance to fix the problem to your satisfaction
  • Terminate the agreement and walk away.

How do I find a good inspector?

Look for a reputable, qualified company that has been in business for a while, can provide references from previous customers, is fully insured, and offers guaranteed inspections. Inspectors who have worked in or are licensed in building-related fields such as contracting, and engineering, are preferable, and who have industry designations such as CAPI ( Canadian Association of Home & Property Inspections) or are WETT Certified. Your Realtor can recommend a reputable, objective inspector at your request, or you can find one by asking friends or by looking on line, or in the phone book.

Step 8: The Closing Inspection or walk through:

Once all the conditions on the Agreement of Purchase and Sale have been satisfied, all you have to do is wait for the closing day, to take possession of your new home. On the morning of the closing day you and your Real Estate Agent will walk through the home just to make sure it is in the condition expected, and that all inclusions agreed upon (fixtures and Chattels) are present on the property, and are in good working order.