For many Canadians, buying a house is a dream scenario. Not only does owning a home allow you to build equity, but you also have more control compared to renting. That said, there’s also a lot of responsibility that comes with being a homeowner, and not everyone is up to it. If you’re thinking about buying a house, here are the steps you should take.
Decide if home ownership is for you
Since buying a house will likely be one of the most significant decisions of your life, you should not rush it. The first step is to decide if you’re ready to own. Some questions to ask yourself include:
- Are you financially prepared?
- Will you be able to balance your budget with the added housing expenses?
- Are you prepared to take on all the maintenance that comes with home ownership?
Admittedly, some homes are easier to maintain than others, but you need to factor in additional costs such as property taxes, utilities, regular upkeep and repairs. If you’re feeling confident about your budget and you’re ready to buy, then it’s time to prepare yourself for the next step.
Get your finances in order
As you can imagine, buying real estate requires you to get your finances in order. What many people don’t realize is that a down payment is just part of the process. Here are a few things you should consider before you start house hunting.
Have steady employment
Your income is one of the major factors that lenders look, and they’ll ask you to prove it via a letter of employment for your mortgage application. If you have steady employment, lenders will use your income to determine how much they’ll lend you. Freelancers and self-employed individuals can also get a mortgage, but lenders will likely ask you for additional paperwork, such as your last two notices of assessment and tax returns.
Save a down payment
If you’re buying a house in Canada, you need to have a minimum down payment of 5% of the purchase price. Mortgages with a down payment of less than 20% are considered high ratio, so you’d also have to get mortgage loan insurance.
To complicate things further, you may need a higher down payment depending on the purchase price.
- Homes with a purchase price of $500,000 or less need a 5% down payment.
- Homes priced between $500,000 to $999,999 require 5% for the first $500,000 and 10% for the portion above $500,000.
- Homes that cost $1 million or more do not qualify for mortgage loan insurance, so you need a minimum of 20% saved.
Consider government programs and incentives
There are a few government programs and incentives that can help you become a homeowner.
The Home Buyers’ Plan is the most popular program since it allows you to withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP). If you’re buying with your partner, you can each use the program so you could access up to $70,000 combined. These funds will need to be paid back eventually, but you get 15 years to do so.
Alternatively, there’s the First-Time Home Buyer Incentive, where the government will pitch in up to 10% of the purchase price for first-time buyers. This is a shared equity program, so you’re giving up some equity to access additional funds from the government.
» FIRST-TIME HOME BUYER? Check out our guide
Get pre-approved for a mortgage
Mortgage pre-approval will give you a clear picture of how much home you can afford. When applying, lenders will check out your credit score, income, debt and down payment and then decide how much they’ll extend you. They’ll also provide you with a mortgage rate so you can budget accordingly. With this info in hand, you can start searching for homes that you can afford.
It’s worth noting that pre-approved mortgages aren’t a 100% guarantee. Lenders do a final check on all your finances once you’ve purchased a home before they give you a formal mortgage.
Figure out what you can afford
While a pre-approved mortgage is a good affordability estimate, you still want to do your own calculations. Lenders typically use your gross debt service (GDS) ratio to determine affordability. Basically, your GDS ratio covers all things related to housing, including your mortgage, taxes, heating costs, and condo maintenance fees (if applicable). That ratio shouldn’t exceed 32% of your before-tax income.
Lenders also measure your total debt service (TDS) ratio, which covers all the expenses in the GDS ratio, plus your debt service payments on any personal loans, credit cards and lines of credit. This figure should be within 40% of your before-tax income.
What lenders don’t consider are all your other expenses, such as vacations, retirement savings, furniture and the cost of raising kids. If you were to max out your mortgage, your lifestyle could be affected as there might be little money left over. When budgeting, take a look at all your goals to determine what you can actually afford.
» MORE: How much mortgage can I afford?
Start your search
Now that you have all of your finances settled, you can start looking for homes. There’s a good chance you’ve already browsed a few properties online, but you want to hire a realtor since they’ll be able to guide you through the home buying process from start to finish.
Finding a good real estate agent can be tricky, so ask friends and family for a recommendation. Generally speaking, you want someone you have a good connection with and who is familiar with the neighbourhoods you’re interested in. Don’t be afraid to interview multiple realtors before you pick one that works for you.
Once you’ve hired your real estate agent, have a discussion with them about what your needs and wants are. They’ll look at your budget and let you know if your expectations are realistic or not. They’ll also be able to show you recently sold homes to give you an idea of what current market conditions are like.
As you start to browse homes, you’ll eventually come across a property that you’ll want to put an offer on. Your realtor will draw up the paperwork and recommend a price and any conditions. You may not win the first home you bid on, but when your offer is eventually accepted, it’ll be a thrill.
Wrapping up the deal
Even though you’ve signed a purchase agreement, there’s still a lot of things to do before the deal officially closes. Since your offer will have a set timeline, you’ll want to ensure you take care of the following as soon as possible.
- Confirm your financing. Your lender will do one final check to ensure your finances haven’t changed since pre-approval. Once confirmed, you’ll have your mortgage in place.
- Hire a real estate lawyer. A real estate lawyer is essential. They’ll do all the formal paperwork and check to see if there are any liens or outstanding charges on the property that need to be addressed.
- Get your down payment together. You’ll need to provide your lender with your down payment, so now is the time to get your funds together. If you’re going to use the Home Buyers’ Plan, withdraw your funds if you haven’t already. Don’t forget to plan for closing costs.
- Inform your current landlord. If you currently rent, don’t forget to give your landlord notice that you’re leaving.
Once your closing date arrives, all paperwork and funds will be transferred between your real estate lawyer and lender. Congratulations, you’re now a homeowner! The journey to get to this point may have taken a while, but for many people, it’s worth all the effort.