FIRST-TIME HOME BUYER’S GUIDE
This step-by-step guide includes all the up-to-date information you need to help you make informed decisions and understand the home buying process in Canada. We will also answer some of the commonly asked questions, and explain key concepts that can streamline your journey towards successful homeownership.
Pent-up demand, historically low borrowing costs, and attractive incentives are encouraging first-time homebuyers back into the Canadian housing market. These are exciting times—but once you’ve made the decision to purchase a home, the process can prove to be overwhelming and confusing. It is after all, one of the greatest financial decisions of your life!
Step 1: Is Homeownership Right for You?
Many first-time home buyers have long dreamed about owning a home. In fact, according to the National Association of Realtors about 75% of current non-homeowners and 90% of homeowners believe that home ownership is an essential part of the “Canadian Dream”.
But now that you’re at a point in your financial growth where you can start seriously considering the idea of owning a home, it’s time to ask the question: “Is homeownership truly worth it?” That answer depends almost entirely on your personal situation, so let’s walk through the pros and cons and give you the tools you need to decide for yourself.
When evaluating whether homeownership is right for you, you will have to weigh the total cost of renting vs buying. Start by researching the average home price in your area. Next, prepare a list of the advantages and disadvantages of buying versus renting to see which option best suits your needs.
Here is a list of pros and cons you could use for reference:
|Buying Pros||Buying Cons|
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|Renting Pros||Renting Cons|
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As a first-time home buyer, you might not be aware of the costs that come with owning a home. Here are some of the costs of homeownership:
- Upfront costs. This is the initial amount of money needed to make a home purchase, including the down payment, applicable taxes and closing costs.
- Ongoing costs. This is the continued cost of living in your own home, and it may include property taxes, mortgage payments, utility bills, insurance and routine repairs and maintenance.
- Major repairs. Your home will eventually need huge and expensive repairs and renovations, like foundation repair or roof replacement.
If you feel you’re ready to own a home, these questions can help cement your decision:
- Are you financially stable?
- Are you conversant with all the costs associated with homeownership?
- Are you likely to devote time to regular home maintenance?
Step 2: Determine Your Financial Readiness
The second step towards homeownership is figuring out whether you’re financially ready to own a home. Start by figuring out how much you can afford to spend before house hunting. Of course, buying a house starts with a savings plan to put away enough money to make a minimum down payment on a home.
While your mortgage payment will be the largest expense, there are still other costs to be familiar with. Unpleasant surprises are the last thing you want.
ARE YOU ELIGIBLE?
To make buying your first home more affordable, the government offers numerous incentives— tax benefits, rebates, tax credits, or ways to fund your down payment. Find out if you’re eligible!
The better you understand your current financial situation, the more prepared you will be when you approach a lender. Here are questions that will help bring a clear picture to your current financial situation.
1. How Much Are You Spending?
Start by calculating the amount of money you are spending on a monthly basis. Common expenses include household costs, entertainment expenses, loans you are servicing—and, of course, savings. While household expenses fluctuate from time to time, cutting down any unnecessary expenses will increase the amount of money left at the end of every month. You can grow your savings by:
- Eliminating your credit card debt
- Increasing your income
- Buying in bulk
- Renting in a cheaper neighbourhood
- Putting your luxuries on hold
Ready? Set off on the path to home ownership with a dedicated savings plan!
2. How Much Home Can You Afford?
Your house will likely be your biggest purchase—so determining how much home you can truly afford is the one of the biggest steps in the homebuying process. The good news is that coming up with a budget is pretty straightforward. These two simple rules will help determine affordability.
- Affordability Rule #1: To maintain good financial health, your monthly housing costs shouldn’t be higher than 32% of your average monthly gross income. This percentage is often referred to as gross debt service (GDS) ratio or debt-to-income ratio.
- Affordability Rule #2: Your total debt service (TDS) ratio should not be more than 40% of your average monthly gross income. This could also be defined as your monthly debt load, and it may include car loans or leases, credit card payments and other line of credit payments.
HOW MUCH HOME CAN YOU AFFORD?
While some suggests that you can spend ~32% of your income on housing and still be in good financial standing, not everyone should take this advice. Are you ready to own a home?
There are a number of additional costs tied to buying a home and many first-time homebuyers are surprised to find out how much they have to spend in addition to their down payment. Start by figuring out how much you should save to meet all the upfront costs associated with purchasing a home. For instance, do you have enough money to pay the following upfront costs?
- Down payment: This is the percentage of the home price you pay when you make an offer to buy, typically 20% of the house price.
- Insurance costs: These may include property insurance and mortgage default insurance.
- Home inspection and appraisal fees. Hiring either a home inspector or appraiser typically costs $300 to $415, or $350 on average.
- Prepaid property taxes and utility bills: You might have to reimburse the property seller for any bills paid in advance.
- Land registration fee: This is usually based on a percentage of the property’s purchase price.
- Legal fees. In some provinces, such as Ontario and Alberta, it is mandatory to have a lawyer. Legal fees vary with the amount and difficulty of the work required, but the cost can be anywhere between $500 to $1500 including tax.
- Potential repairs and renovations. The sky can be the limit!
If at this point you can afford your dream home, you’re ready for Step 3. But if you have concerns about your future financial situation or will have trouble making mortgage payments, you can still make adjustments by:
- Assessing your current budget to identify areas you can cut your spending
- Meet with your lender or a credit counsellor and create a plan to boost your credit score or financial health.
- Pay off some of your debts.
- Reduce your price range for a home.
- Save for a longer period to accumulate a larger down payment.
Step 3: Financing Your Home
It’s now time to meet with a mortgage lender to discuss your financing options and confirm that your financial health is sufficient to support a home. They will explain mortgage terms and interest rates as well as explain what you should do to get approved for a mortgage. Here are the steps you will undertake when financing your home.
1. Get Pre-Approved
Don’t start house hunting without getting a mortgage pre-approval. Finding out whether you qualify for a mortgage—and, better yet, how much you qualify for—can completely transform your search for your dream home.
HOW TO GET PRE-APPROVED FOR A MORTGAGE
Mortgage pre-approval is not only easier but faster than the mortgage approval process. It also expedites closing on a mortgage when you’re ready. In other words, a mortgage pre-approval is your true first step to owning a home. Learn how to get pre-approved today.
Check your credit report
Before you consider applying for a pre-approval, order a copy of your credit report and check your credit score. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage.
The easiest way to know about your credit score is by checking it out. And don’t worry—checking your credit score won’t lower it. You can even enjoy unlimited access to your score with TransUnion credit monitoring. Sign-up today and keep on top of your credit with unlimited access to your TransUnion credit report and score.
Mortgage pre-approval lets you know your spending maximum, your interest rate and how much your monthly payments will cost. Getting pre-approved will help you confine your search to a specific neighbourhood, home type and size.
Remember, a pre-approved mortgage isn’t a guaranteed mortgage. Once you make an offer on a property, your lender will take these additional steps before providing their final approval:
- Assess the home’s value to ensure the price isn’t over the fair market value
- Update your application with property-specific details, including the purchase price and the mortgage product you choose.
- Re-verification of your income, employment status and credit score
2. Understand the Mortgage Basics
If you’re going to be responsible for paying a mortgage for the next 15–30 years, it’s best that you know full well what you’re getting into! A typical mortgage has three basic parts: a down payment, monthly (or weekly) payments and associated fees. Since mortgages usually involve a payment plan that will extend over the long term, it’s important to understand how they work.
You will have numerous options when it comes down to choosing a mortgage. Your lender will guide you to obtaining a mortgage that best matches your homeownership needs. Familiarizing with these terms and options will help inform your decision.
- Amortization period: This is the length of time you agree to take to pay off your mortgage, usually 25 years.
- Payment schedule: Your payment schedule is how often you make mortgage payments, could be weekly or monthly.
- Types of interest rates: Your lender will inform you about the different types of interest rates available for mortgage loans. These include:
o Fixed rate interest doesn’t change for the entire mortgage term.
o Variable rate interest fluctuates with the prevailing market rates.
o Protected variable rate interest fluctuates with the market rates but won’t go beyond a preset maximum.
- Mortgage term: A mortgage term is the length of time the interest rate and options you choose are in effect, from 6 months to 10 years. Once the term lapses, you can renegotiate your mortgage and pick the same or different options.
- Open mortgage: An open mortgage allows you to pay your mortgage in part or in full at any time without a penalty.
- Closed mortgage: A closed mortgage offers limited or no options to pay off a mortgage early in part or in full. It typically has a lower interest rate.
- Conventional mortgage: This is a loan that is equal to or less than 80% of a home’s lending value. A conventional mortgage requires a down payment of at least 20%.
- High-ratio mortgage: This loan is usually more than 80% of a home’s lending value. The down payment is usually less than 20%, hence mortgage insurance might be required.
- Pre-payment options: This is the ability to increase, make extra payments or pay off your entire mortgage early without incurring a penalty.
3. Know Your Credit Score
Your credit score reflects your financial health at a point in time, and it shows how you consistently clear your debts and bills. A good credit score is of great value in the home-buying process. Lenders will look through your credit history when deciding whether or not to approve your mortgage. Before applying for a mortgage, request a credit report to ensure there are no mistakes.
When it comes to mortgage lenders, low credit scores can prove costlier—in the form of higher lending rates. At the time of writing, the average mortgage interest rate in Canada was ~3.00%. For notable credit scores, most major banks in Canada might offer a discount. A fair credit score holder can obtain a mortgage from trust companies at a slightly higher rate of ~5.00%.
HOW TO GET A MORTGAGE WITH BAD CREDIT
Lower credit scores attract higher rates—sometimes above ~10%. Regardless, you can still pursue your dream without waiting for your credit score to improve. And the financial sages behind MoneyWizard can help you obtain a mortgage—even with ‘bad’ credit.
4. Mortgage Loan Insurance
Bottom line—if you want to buy a home with a down payment of less than 20%, then you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments.The final mortgage won’t be signed off without approval by a mortgage insurer like CMHC and Genworth Canada.
Mortgage insurance premiums are usually a percentage of the total loan amount, and are based on factors like the source and size of down payment. You will pay a higher insurance premium if you make a smaller down payment. You can pay your mortgage insurance premiums upfront or have them added to your loan.
Make sure you bring this information when you meet with your mortgage lender:
- Proof of address and address history
- Government-issued photo IDs
- Your employer’s contact information
- Proof of income
- Proof of down payment (source and amount)
- Details of your current debts
- Proof of savings and investments
Now that you understand the mortgage basics, it’s time to start thinking about the home you want to buy!
HOW TO SAVE FOR A DOWNPAYMENT FOR A HOME
Depending on your strategy, successfully saving up for a down payment can be one of the most important steps in securing your financial future. It’s time to take the first step—we’ll show you how!
Step 4: Finding the Right Home
It’s now time to find the right home.When it comes to choosing—it’e best to think long term. What kind of home do you need now? What will you need in 5 to 10 years? Start by preparing a list of requirements and preferences for the home. Here are some factors to consider:
- Location: Do you want to live in the suburbs, downtown or in a more rural setting? Does the neighbourhood fit your style? Do you want to live close to school, work, public transit and recreational facilities?
- Size: Consider your spatial needs, now and in the next five years. How many bedrooms do you need? Do you need a garage? Do you need space for your home office?
- Special features: Do you want an energy-efficient home? Do you need a gym or swimming pool in the home?
- Lifestyle: Are you approaching retirement? Do you have children who will be moving out soon? How many children do you plan on having?
Take your time to make the best decision. The home you choose will impact your finances and lifestyle for years to come. If you want to live in the suburbs, you might get a larger home but have to deal with longer commute hours to work. Be sure to weigh all aspects carefully.
Forms of Homeownership
When looking for your ideal home, you’ll also have to decide the kind of ownership that suits your needs. Options vary from province to province, but here are the most common home types.
- Freehold: With freehold, you own the house and the land it sits on. You’re responsible for all the maintenance and costs of the property, and you have full control of the property.
- Condominium: You own your unit but share ownership of the common areas with other unit owners. Common shared elements can include walls, gardens, hallways, driveways, elevators and social areas. The condominium corporation is responsible for the maintenance and repair of the common property. It may also regulate the types of changes you may make to your individual unit.
- Leasehold: You own the unit and lease or rent the land it sits on. This form of ownership is common for apartments or townhouses built on city-owned land.
- Co-operatives: Rather than buying a specific unit, you own a share of the whole building and are allocated a unit to live in. If you decide to sell your unit, the co-operative board members may reject buyers they feel won’t be an asset to the community. Mortgage insurance isn’t available for co-operatives.
To Buy or Build?
To find the right home, you’ll need to decide between buying a new home, one that was previously owned or build one yourself. With a previously owned home, you will need to assess its condition. Will you need to perform any major repairs or renovations in the near future or in the long term? Building your own home will help you get the actual size, style, quality and features you desire.
Whatever you choose, be sure to speak to your lender regarding the financing options for building or making major repairs.
Start Your Search
Once you decide on the kind of home you want, how much you can afford to pay, and get your mortgage pre-approved, you are ready to start looking for a home This can be done through:
- Word of mouth
- Internet searches and real estate website
- A real estate agent
- Social media
- “For sale” signs
As a first-time homebuyer, here are a few professionals you want to bring on board as you search for your new home.
- Real estate agent: A real estate agent will guide your search for a home, tell you about the community, negotiate the best deal and make an offer.
- Insurance broker: An insurance broker will provide property insurance to cover the cost of repairing your home after water damage.
- Home inspector. This is a professional who will assess the condition of the house to establish whether major repairs are needed.
- Appraiser: An appraiser will ensure you don’t overpay for your home by telling you how much it’s worth before you can proceed to make an offer.
- Lawyer: A lawyer will protect all your legal interests. They will ensure your home is free of any charges, liens and work orders. A lawyer will also review all contracts before you sign them, particularly the offer to buy.
Step 5: Making an Offer and Closing
Finding the right place can take a few weeks or a few months. But what happens when you do set your sights on the house of your dreams? How and when do you make an offer? Congratulations, you’re almost there. You’ve chosen a mortgage that matches your finances, assembled your homebuying team and found the right home. It’s now time to make an offer and proceed to closing.
1. Making an Offer
If you’ve found the right home, it’s now time to give the seller an offer to purchase, also known as an agreement of purchase and sale. This legal contract should be carefully prepared by your lawyer and real estate agent to include:
- Your name, seller’s name and the property’s address
- The purchase price
- Amount of deposit
- The closing date
- A request for a current land survey of the property
- The date the offer expires
- Other conditions that must be met
Be prepared to negotiate since this process is about creating the best deal for you and the seller.
2. Getting Your Mortgage
Once the offer to purchase is accepted, visit your lender to finalize the fine print of your mortgage. Make sure you review any conditions that were part of the offer. Your lender may advise on the information you will need to have during the meeting, but these details will probably be required:
- An appraisal
- The property’s legal description
- The building specifications
- Most recent property tax assessment
- Home inspection report
- The signed offer to purchase
Closing is always exciting. It is when you finally gain legal possession of your new home. The final signing typically happens at your lawyer’s office along with these events:
- The lender gives your mortgage money to your lawyer
- You give your down payment to the lawyer along with the closing fees. Closing costs may include home inspection fees, legal fees, provincial land transfer tax, provincial land title transfer fee, mortgage insurance, title insurance and home insurance
- Your lawyer pays the seller, registers the property in your name and gives you the deed and keys to your new home
Step 6: After You Buy
After completing the purchase, you are now ready to move into your new home. You will want to get your home deep cleaned, change the locks, apply a coat of paint, freshen the floors and add a personal touch to your new house.
Homeownership is a huge responsibility, so it is upon you to maintain your home and protect your investment. Always make your mortgage payments on time, live within your budget and save money for emergencies.
Buying your first home can be an exciting but sometimes confusing. Long before the fun part of actually searching for your ice place—you have to figure out your finances, identify savings opportunities and strategies, get pre-approved for a mortgage, and hire a real estate agent, lawyer—and other professionals. We hope this step-by-step guide has broken down the fine print of the home-purchasing process. Homeownership is a huge accomplishment, and we wish you all the best in the life-changing journey to your first home.
Additional Resources for First-Time Home Buyers
First-time home buyer? You probably have a lot on your mind. Thankfully, the financial sages behind MoneyWizard have got the resources, tips and financial support to help you on your journey!
- To make buying your first home more affordable, the government offers numerous incentives— tax benefits, rebates, tax credits, or ways to fund your down payment. Find out if you’re eligible… [Read more]
- Mortgage pre-approval is not only easier but faster than the mortgage approval process. It also expedites closing on a mortgage when you’re ready. In other words, a mortgage pre-approval is your true first step to owning a home. Learn how to get pre-approved today… [Read more]
- While some suggests that you can spend ~32% of your income on housing and still be in good financial standing, not everyone should take this advice. Are you ready to own a home… [Read more]
- Depending on your strategy, successfully saving up for a down payment can be one of the most important steps in securing your financial future. It’s time to take the first step—we’ll show you how… [Read more]
- Lower credit scores attract higher rates—sometimes above ~10%. Regardless, you can still pursue your dream without waiting for your credit score to improve. And the financial sages behind MoneyWizard can help you obtain a mortgage—even with ‘bad’ credit…. [Read more]