First Time Home Buying Guide
Buying a home is an exciting process that many first time home buyers look back with positive feelings. However, the process can be stressful, tearful and grinding. With today’s ultra-competitive real estate market and unprecedented bidding wars, the real estate process is not something to dip your toe in.
This is why our team has put together a first-time home buying guide to help you prepare for this process and a little about what to expect. Naturally, everyone’s experience will be a little different and will vary on your region, the type of home you are looking for, and when you start your home buying process. However, this guide will educate and make you aware of the various steps and consider if buying a home is the best decision for you financially.
Let us jump right into it and chat about if it is the right time for you to buy a home.
First Time Home Buyer Checklist
First Time Home Buyer Incentives
When it comes to breaking into the housing market as a first-time home buyer, the first few weeks can be like drinking out of a firehose. There is a ton of information, and everyone and their dog have an opinion on what you should be doing. However, no one tells you what you should know. Here are a few things that you should know when first starting your home buying journey.
Tax credits are never bad, especially when you are making such a significant investment in your future. There is a First Time Home Buyers’ Tax Credit which is a $5,000 non-refundable tax credit for first time home buyers. When claiming this tax credit, you can land a refund of up to $750 the next time you do your taxes.
Land Transfer Tax Rebates
As a first time home buyer, you might also be eligible for a land transfer tax (LTT) rebate. LTT is a tax paid to the province or the city if you live in Toronto or Montreal and is part of your closing costs. LTT is one of the most expensive parts of your closing costs, so every little bit helps. Each province is slightly different, but the Ontario LTT rebate is equal to a maximum of $4000 on the property. You cannot stack the refund if you are purchasing with another first time home buyer, so the maximum is $4000.
RRSP Home Buyers' Plan
The federal government’s Home Buyers’ Plan allows first time home buyers to dip into a maximum of $35,000 to help with the down payment on a home. For couples, this maximum doubles to $70,000. We should note that the RRSP funds have to be deposited 90 days before you withdraw. As well, repayment starts two years after the first withdrawal, and you must repay your RRSP within 15 years.
CMHC Green Home- Canadians with CMHC-insured homes who build or renovate their home for home efficiency could receive up to 25% off their insurance premium. Genworth has the same program for its clients.
New Housing Rebate- Eligible homeowners can receive up to $1,500 back on GST and HST on new builds.
Ontario Energy and Property Tax Benefit- As part of an Ontario Trillium Benefit, some Ontarians can receive up to $1,187 to help with energy costs.
There is also a ton of municipal grants that are specific to regions that you may be eligible for depending on your location.
How Does a Mortgage Work?
If you have decided that you would like to go down the home buying route, then it is about time that we chatted about mortgages. In this section, we will look at the common types of mortgages, some of the mortgage terms you will need to know, and how to calculate what you can afford.
What is a Mortgage?
A mortgage is a loan from a bank, credit union or another lender tied directly to the purchase of land, a condo or home. The most common mortgage period is 25 years, and the borrower goes into an agreement with a lender for a specified term over that amortization period. The borrower will then agree to pay a monthly payment and renegotiate the term, interest rate and other details at the end of the mortgage term.
Unlike a mortgage, a pre-approved mortgage is an agreement with a specific lender to hold an interest rate, term and mortgage type between 120 days and 160 days. This agreement will help provide you security in-case interest rates start to climb and provide you with valuable information about negotiating your mortgage rate.
A mortgage pre-approval is often a tool used by borrowers and real estate agents to determine the maximum purchase price you can afford and what a potential monthly mortgage payment would look like when buying a home. A pre-approval is not necessary, but it is undoubtedly a tool that is worth looking into when considering a home purchase.
A mortgage broker is a professional who will work with you to negotiate and find the best lender for your specific financial situation. These professionals are free for you to use and have the advantage of working with practically every lender on the market. They are a wealth of information and can help guide you throughout the process. Most realtors will have a mortgage broker they trust and introduce you to someone they have worked with in the past. Mortgage brokers can help secure a pre-approved mortgage, and your mortgage.
Mortgage Term vs Amortization Period
The amortization period of your mortgage is the total time that it will take to pay off. Most mortgages are 25 years for the amortization period. At the same time, the mortgage term is when you are signing with a lender to provide your mortgage payments during the agreement. The term will vary between one and five years.
Your mortgage rate is the interest rate that you are paying during your mortgage term. Your mortgage rate will be slightly different from the advertised rate as the lender will need to look at your specific financial situation for the mortgage. The rate is impacted by things such as your credit score, current debt load (including any loans such as student loans or car loans, credit cards, lines of credit), and your cash on hand.
Fixed-Rate Mortgage vs Variable Rate Mortgage
A fixed-rate mortgage is a secured rate that will not change over the mortgage term. Generally, fixed-term mortgages have a higher interest rate but do not fluctuate over the term. Thus, these mortgages are prevalent when the prime rate is low, and borrowers are looking to lock in a low rate.
Variable-rate mortgages change over the mortgage loan term and provide a flexible mortgage option for those who believe the interest rates will continue to go down. The risk is on the borrower, so the lenders offer a more attractive rate for variable-rate mortgages. Most variable-rate mortgages adjust either monthly or yearly, depending on the specific loan and the terms and conditions.
A down payment is a lump sum payment that is made on the home. It is often referred to in a percentage amount, IE I put 10% down for this home. If your down payment is less than 20% of the purchase price of your home, you will need to get mortgage default insurance.
Mortgage Default Insurance
If your down payment is less than 20%, you will need to get mortgage default insurance. Otherwise called an insured mortgage, three companies in Canada are provided with this insurance and will allow you to put down less than 20% for a premium. Lenders prefer working with buyers with this insurance as the lender is protected from the insurer’s default.
What Can You Afford?
The best way to check out what you can afford is to use our affordability calculator. This will help run the numbers and allow you to see what different down payments, mortgage terms and even mortgage types will mean for your dream house. However, the most concrete way to determine how much you can afford is to apply for a pre-approved mortgage. This product will provide you with a maximum purchase price you can then work around in your home search.
Time to Call Your Real Estate Agent!
With a pre-approval in hand and some grit, it is time that you called your real estate agent. Your realtor is going to be the guiding hand throughout the house-hunting process. Most realtors will ask that you get pre-approved as it will make you figure out what your budget is in terms of your maximum purchase price.
During your first meeting, your real estate agent will go over the services they provide and want to get to know where you are looking, what type of home you are looking for, and any timelines you are hoping to meet.
The real estate process is a tough one. You will bid on homes, and you will lose. It sucks. The best advice we can give is to treat the bidding process as a first date. You might like the house, but do not fall in love with it until you win the bid. Otherwise, there will be many nights filled with tears and a bottle of wine.
It is not out of the ordinary to be outbid for homes multiple times. In today’s market, we have seen people be outbid up to 25 times before finding their dream house. It is a process, and a good realtor will be data-driven and will strive to balance what you can afford and what you want in a home for your area.
You Won a Bid… Now What?!
When you finally are selected by a seller, the joy is indescribable. But, as any seasoned home buyer can tell you, the work is just beginning.
First and foremost, you will need to chat with your agent to get the details and the next steps in the process. If you have conditions on the home, you will need to start checking the conditions off. If you have not included conditions, it is still wise to get a house inspection to see if you have any immediate fixes. As well, you will also need to drop off a deposit on your down payment to the selling agent. Typically, $10,000 or less.
Once all the conditions are met, you will need to start a three-pronged process to ensure all the paperwork is taken care of for your first home. You will need to contact your insurance company to have your home insurance start on closing day. Next, you will need to get your mortgage broker or lender and start the process to secure a mortgage. At the same time, you will reach out to your real estate lawyer to begin the process on their end as well. All three of these will need to be finished in the days leading up to the closing date.
You will meet with the mortgage broker to sign the mortgage paperwork and then meet with the lawyer to discuss your purchase package. Your purchase package will include information on property taxes, the specific property you are buying, and your lawyer will check for any previous liens or issues with the property. As well, at this point you will pay all the associated land transfer tax, fees and other costs including the lien searches and title insurance. Your lawyer will let you know if you are eligible for the first time home buyer’s grants or rebates.
Once these meetings are done, you will then wire the remaining down payment to your lawyer and wait for closing day.
On closing day, your lawyer will wire the remaining funds to the other real estate lawyer, and your realtor will be given the keys to your new home. During COVID, realtors use lockboxes and will provide you with the combination once everything transfers. Be prepared for a late afternoon close; it seems to be the new norm in the industry!
Owning a home is a process, and it is not an easy one to navigate by yourself. That is why you surround yourselves with honest professionals like your realtor, mortgage broker and lawyer. Trust them, get to know them, and see that they are looking out for your best interests at the end of the day. From one home buyer to a future one, buying your first home is unique. From open houses to the final bid, enjoy the process and embrace being a first-time home buyer.