How difficult can buying a new home really be? People do it every day. Find a house, work-out the financing, move in, and live happily ever after. Where’s the difficult part?
The process does appear simple, but the critical thinking, financial planning, legal analysis, and calculations that inform each step of the process can easily overwhelm, frustrate, and infuriate even the most experienced buyers. If you are about to begin your search for your first home, you soon will discover the process always has one more question than you feel prepared to answer; and by the time you finish the process, you will feel as though you have earned an advanced degree in Economics. Before you travel too far down that garden path, recruit a skilled professional team to guide and assist you, and take time to do all of your homework. If you skip a question, it inevitably will become the one that mystifies you.
Have you carefully compared and contrasted renting and buying?
If you rent from month to month, you enjoy great flexibility; you may pack-up and move almost at a moment’s notice. If a great career move requires relocating, you can tell the human resources director, “No problem.” When your plumbing backs-up, you can think to yourself, “No problem,” as you call the landlord for repairs. If you simply feel a compelling need for a change of view, you can shrug and say, “No problem.” When you buy a house, you inevitably sink deep roots into your community; do you feel prepared to stay in one place for a decade or two? When you own your own home, you must repair and maintain it—inside and out; do you have time, tools, and skills to manage it, or do you have money to hire contractors? When you rent, you need not anticipate property taxes, property owner’s liability, or regional assessments; do you have planning and budgeting skills equal to the demands of home ownership?
Considered from the standpoint of short-term expedience, renting may seem to hold an advantage. In the long-term, however, the balance shifts dramatically. What about improving your tax situation as your income increases? What about laying the foundation for family life? What about building genuine wealth and making satisfactory provision for your retirement? What about seizing an historic opportunity to finance a home at record-low interest rates? What about capitalizing on special incentives that allow first-time buyers to purchase houses with as little as 5% down?
Have you considered how much you can afford?
For the sake of getting oriented in the housing market, take your household’s annual pre-tax income and multiply it times 3.4, a derivative of the formula lenders use to calculate your qualification for a mortgage. Calculating the possibilities with reliable 2010 statistics, a household with one breadwinner earning Canada’s median income can afford a home priced at or below $251,000. If your household has two breadwinners earning median Canadian incomes, you gain purchasing power on homes priced at or below $502,000—more than enough to cover purchase of an average home in Canada.
Have you done some of the math for qualifying?
Anticipating the mortgage qualifying standards, calculate your “gross debt service ratio” and your “total debt service ratio.” The first calculation focuses exclusively on your home expenses; the second looks at all of your monthly obligations. In order to secure a mortgage, your income and expenses must fall within the standards for both. First, calculate 32% of your pre-tax (gross) income, setting the standard for your housing expenses. Then, total your proposed mortgage payment (using an online mortgage calculator), taxes, condo fees if any, and approx 120 for heat costs, holding the sum against your 32% standard. Calculating according to 2010 standards, if you make the median Canadian salary, you can afford monthly home expenses totalling approximately $1980. The second calculation determines how much of your paycheck you can dedicate to all of your credit obligations—home, car, credit cards, and other unsecured debts. Lenders will hold you to their 40%-44% standard, so calculate the standard by multiplying your pre-tax income by 0.40. Using the same numbers we crunched in the first example, your lenders will allow $2460 in total debt service. A closer examination suggests, however, if you maximize your housing costs, you can afford only $492 in other payments. Because the ratios do not change, you must adjust your expectations and budget according to the facts of your situation. There are many small variables that are included alongside the above calculations so please remember to use the above as a rough estimate. A licensed Mortgage Agent has the expertise to take all variables into account and present them to you in an easy to understand evaluation so please consult with one before you go home hunting.
Do you understand the mortgage qualification process?
Before you start shopping, you should complete a mortgage application with your lender of choice or licensed Mortgage Agent. The application simply demands you copy your income and expense information from your budget to the lender’s “official” forms; then, their agents do the same basic math you did, and they grant you a “pre-approval.” Pre-approval does not assure you ultimately will get your loan, but it does give you sufficient assurance to shop in the appropriate price range. More importantly, when they pre-qualify you, the best lenders “lock” your interest rates and give you rate guarantees. In other words, if interest rates fall during the ninety to one hundred and twenty days prior to your closing day your pre-qualification remains in effect, your lender will give you the lower rate; if rates rise, you have the lender’s assurance your rate will remain locked at the pre-qualification numbers. A Mortgage Agent will give you the benefit of the many lenders they have access to, in effect comparing multiple lenders rate and product offerings and reporting back to you. In order to complete the qualification process, your lender will require you to document all of the income and expense information you supplied on your application. Your friends might take your word for it, but your lender demands proof.
Do you know how to choose the right house?
First, have you weighed the pros and cons of condominiums? Condominium complexes are not known as kid-friendly places; many are not especially pet-friendly either. For a professional couple laying the foundation for wealth and upward mobility, however, a well-appointed condominium may represent the best vehicle for both saving and building equity. Especially in one of Canada’s super-heated markets—Vancouver or Toronto, for example—a condo may appreciate faster than any other investment; it certainly will build value faster than any conventional savings instrument. Experts stress the importance of factoring your monthly condo fees in your 32% qualifying numbers.
Second, if you have decided on a house, have you compared and contrasted the benefits of new and older homes? A new home, of course, has the distinct advantage of being…well, new. You may have the privilege of choosing exactly the options and upgrades you like, and you can relish the excitement of watching it rise from the ground like a growing thing. More practically, you may also cash-in on builders’ pre-opening incentives and first-time buyer programs. If yours is a young and growing family, you almost inevitably will discover the new development will fill-up with other families like yours. Most importantly, a new home will have energy efficient appliances and other conservation features, so that you may save up to 50% on your monthly utilities. Existing homes, however, typically offer slightly more value-per dollar, because owners already have done the landscaping, installed some of the upgrades, and generally made the house a home. In an older home, you also will enjoy the benefits of living in an established neighbourhood, where the various sport leagues are up and running and the recreational facilities are complete, where the bus routes are established and the schools have high-quality reputations to maintain.
Regardless of your preference, you must consider the key variables; do you know what they are? First and by far most importantly, does the home really have sufficient space to meet your needs? Do you need a home office? Do you need lots of open space for young children to play? Can each child have his or her own bedroom? Would you benefit from having a finished basement—a rec-room or workshop? Second, does the house have some attractive extras? What about an indoor “endless” pool or luxurious bathroom fixtures including a Jacuzzi? Does the neighbourhood have good schools, and does the school district provide transportation for the kids? Will your new home be close to shopping, and do the local mini-malls include your favourite stores? Will you save money or at least break-even on your commute; or can you use public transportation to meet your commuting needs? What about the property taxes?
Have you put together a good team?
More comparison and contrast: Should you work with a realtor, or should you focus on properties for sale by owner? Similarly, should you work with your regular banker, or should you enlist the help of a Mortgage Agent? Will you need a professional home inspector? If this is your first venture into treacherous home-sales territory, build a good team of trustworthy, experienced professionals to guide you safely from shopping to closing. The experts suggest you shop carefully and interview aggressively for the three key positions on your team—your real estate attorney, your Lender/Mortgage Agent, and your appraiser.
Your attorney stands out as by far your most important ally, because she will complete your title search, draw-up your purchase offer, review the sales contract, and manage all the details of the property transfer. The attorney with the biggest website is not automatically the best; the one with the greatest word-of-mouth in your new neighbourhood probably is the one you want. As you search, do not be shy about asking for detailed information about fees or hourly rates. Your Lender/Mortgage Agent will help you get your financing in order and make sure you can close on that dream property. An experienced Mortgage Agent will also have many options for you when it comes to Lenders, rates and mortgage programs so make sure you take advantage. You are signing a mortgage agreement at the end of all this so make sure that agreement carries the lowest rate and mortgage terms and conditions that co-inside with your future plans for the property. Your appraiser brings assurance you are paying a fair price for your new home—that its price matches the prices of comparable homes in the neighbourhood and that square-foot by square-foot you are getting the best value. More importantly, your appraiser assures your lender that your purchase price and your qualifications align as they should.
Most first time home-buyers are inclined to overlook one other key player on the team—an experienced insurance agent. You will need homeowner’s insurance with adequate coverage and manageable deductibles; and you should seriously consider either mortgage life insurance or whole life insurance that builds cash value. Many of Canada’s major insurers offer substantial discounts for families who carry all of their policies—home, auto, and life—with them.
Do you understand how to consummate the deal?
Your real estate attorney plays a crucial role in this process, checking and certifying the details at each step. First, when you find the house you want, you tender an official purchase offer. Naturally, your offer specifies the price you feel willing to pay, and it also sets out other terms and conditions you want attached to your purchase. Be prepared to negotiate, and make your wishes clear even as your realtor or attorney represents you. You may go through several rounds of offers and counter-offers before you reach accord with the seller. Once you and the seller have endorsed your purchase agreement, your attorney reviews its compliance with the laws and goes on to manage all the technical details of funding your loan, transferring the money, paying applicable fees and taxes, and presenting you with your keys.
Now, really, how hard can it really be to purchase a home? People do it every day.
Centum One Financial Corp
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