Home Buying Step by Step

Homebuying Step by Step

Buying a home is one of the biggest financial and lifestyle decisions you will make, this guide will help you make an informed decision.

Step 1: Is Homeownership Right for You?
Step 2: Are You Financially Ready?
Step 3: Which Home is Right for You?
Step 4: The Buying Process

Words to Know When Buying a Home
Other Resources

Step 1: Is Homeownership Right for You?

So, you’ve finally decided to fulfill a lifelong dream and buy your own home… how exciting! You are ready to fulfill your dream of having a place to call your own.

Buying a home is one of the biggest emotional and financial decisions you'll ever make. Prepare by learning about the process of homebuying and the responsibilities of homeownership. The differences between renting and buying a home are vast, and there's a long list of pros and cons for both options. And, remember — there is no one best decision for everyone. Before moving forward, though, here are some questions to consider.

• Do you have the necessary financial management skills?
• How financially stable are you?
• Are you ready to take on the responsibility of all the costs involved in homeownership, including mortgage payments, repairs, and maintenance?
• Are you able to devote the time required for home maintenance?

There are pros and cons for both renting and buying. Everyone must make his or her own best decision. Buying a home is not for everyone. Take a moment to think through the advantages and disadvantages of both owning and renting. 

If homeownership is for you, you must be both financially and emotionally ready. Buying a home isn't only about money. You should listen to your heart… and take an honest look at your lifestyle.

Step 2: Are You Financially Ready?

How can you know if you are financially ready to become a homeowner?

This step guides you through some simple calculations to figure out your current financial situation, and the maximum home price that you should consider.

How Much are You Spending Now?

Calculate Your Household Expenses

Start figuring out your financial readiness by evaluating your present household budget How much are you spending each month? Knowing exactly how much, will give you a better idea about whether you can afford to become a homeowner.

Take a realistic look at your current monthly expenses.

Or, use my mortgage calculators to complete your current household budget now.

Calculate Your Monthly Debt Payments

Do you know how much debt you are carrying? You need this information to figure out whether you are financially ready for homeownership. If you decide to buy a home, mortgage lenders will ask for this information.

Use the form below to determine your current monthly debt payments. Fill in all the figures that apply to you, and then press the Calculate button. When you have finished, print the form. If you cannot print, write down the total on a sheet of paper.

 

Step 3: Which Home is Right for You?

Once you have a good idea about your finances, you’ll need to think clearly about the home you’d like to buy.

Your Needs — Now and in the Future

Try to buy a home that meets most of your needs for the next 5 to 10 years, or find a home that can grow and change with your needs.

Here are some things to consider.

Size
How many bedrooms do you need?
How many bathrooms do you need?
Do you need space for a home office?
What kind of parking facilities do you need? For how many cars?

Special features
Do you want air conditioning? If so, what type?
Do you want storage or hobby space?
Is a fireplace or a swimming pool high on your list?
Do you have family members with special needs?
Do you want special features to save energy, enhance indoor air quality, and reduce environmental impact?

Lifestyles and stages
No matter what type of housing you choose, you must have a clear idea of your needs today, as well as your possible future needs. These are some examples of questions homebuyers might ask:
Do I plan to have children?
Do I have teenagers who will be moving away soon?
Am I close to retirement?
Will I need a home that can accommodate different stages of life?
Do I have an older relative who might come to live with me?

The checklist can help you think about what you need today, and what you may need in the future. Complete the worksheet and print it.

 

Step 4: The Buying Process

Starting Your Search

Here are some ways to begin looking for your new home:

• Word-of-mouth
  Tell everyone you know that you are looking for a new home. Surprising things sometimes happen. For example, you might hear about a home that is just becoming available on the market.
• Newspapers and real estate magazines
  Check the new homes section in daily newspapers. Look for the free real estate magazines available at newsstands, convenience stores and other outlets. These publications are free and give pictures and short descriptions of homes for sale.
• The Internet
  Check out real estate websites, such as realtor.ca. These websites give information and pictures of a wide range of properties. Most sites let you search by location, price, number of bedrooms, and other features.
• “For Sale” signs
  Drive, bike or walk around a neighbourhood that interests you and look for “For Sale” signs. This is a good way to find homes that are being sold by the owner and are not listed with an agent.
• Visit new development sites
  If you are looking for a newly built home, you can see available models and get information from builders.
• Work with a realtor
  For most buyers, a realtor is key to finding the right home.
• Keep records
  Whether you have a realtor or are looking by yourself, visit lots of homes before choosing one. Some things to compare are the home’s energy rating, utility costs, property taxes and major repairs. These will affect your monthly housing expenses. You can ask to see copies of utility and other bills. Use the CMHC Home Hunting Comparison Worksheet to make sure you get all the information you need to compare homes.
• Check out the property’s current financing
  If the existing mortgage on the home is favourable, it may be possible to take it over from the vendor. It may even be possible to get a vendor take backmortgage, to help close the deal.
• Think twice
  Even if a home seems perfect, go back and take a closer, more critical look at it. Visit it on different days and different times of the day. Chat with the neighbours. Look deeper — don’t be distracted by attractive surface details.
• Energy Rating
  Some houses and most new homes in Canada have an Energy Rating that describes the energy efficiency of the home. An energy-rated home usually has a sticker with the rating on the electrical panel. The energy rating is on a 0 – 100 scale. The higher the rating, the more energy-efficient is the home, and the less it costs to operate.
• CMHC statistics and analysis
  CMHC has the latest statistical information and analysis of housing trends. Our Market Analysis Centre tracks information for local, provincial and national markets. 

Useful Tips for Your Search

Making an Offer to Purchase

After you have found the home you want to buy, you need to give the vendor anOffer to Purchase (sometimes called an Agreement of Purchase and Sale). It is very helpful to work with a realtor (and/or a lawyer/notary) to prepare your offer. TheOffer to Purchase is a legal document and should be carefully prepared.

These items are typically included:

• Names
  Your legal name, the name of the vendor and the legal civic address of the property.
• Price
  The price you are offering to pay.
• Things included
  Any items in or around the home that you think are included in the sale should be specifically stated in your offer. Some examples might be window coverings and appliances.
• Amount of your deposit
• The closing day
  The closing day is the date you take possession of the home. It is usually 30 – 60 days after the date of agreement. But, it can be 90 days, or even longer.
• Request for a current land survey of the property.
• Date the offer expires
  After this date the offer becomes null and void — that means it’s no longer valid.
• Other conditions
  Other conditions may include a satisfactory home inspection report, a property appraisal, and lender approval of mortgage financing. This means that the contract will become final only when the conditions are met.

What Happens After You Make an Offer to Purchase?

Imagine that your realtor has helped you prepare an Offer to Purchase. This offer includes all the details of the sale. To be extra cautious (since you know an Offer to Purchase is legally binding) ask your lawyer to look at it before showing it to the vendor. The realtor presents the offer to the vendor. What can you expect to happen next? There are three possible responses.

• Response 1
  The vendor accepts your offer. The deal is concluded and you move on to the next steps in the buying process.
• Response 2
  The vendor makes a counter-offer. The counter-offer might ask for a higher price, or different terms. You can sign the offer back to the vendor, offering a higher price than your original offer, but lower than the vendor’s counter-offer. If the vender accepts this counter-offer, the deal is concluded.
• Response 3
  The vendor makes a counter-offer, asking for a higher price or different terms. If a counter-offer is returned to you at a higher price, ensure that you know exactly how much you can afford before you start negotiating. You don’t want to get caught up in the heat of the moment with costs you can’t afford. You reject the counter-offer because the price is still too high, or you can’t agree to the conditions. The sale doesn’t go through, and your deposit is returned.

 

Getting a Mortgage

Once your Offer to Purchase has been accepted, go to see your lender. Your lender will verify (and update, if necessary) your financial information and put together what’s needed to complete the mortgage application. Your lender may ask you to get a property appraisal, a land survey, or both. You may also be asked to get title insurance. Your lender will tell you about the various types of mortgages,terms, interest rates, amortization periods and, payment schedules available.

Depending on your down payment, you may have a conventional mortgage or ahigh-ratio mortgage.

Types of Mortgages

Conventional Mortgage

A conventional mortgage is a mortgage loan that is equal to, or less than, 80% of the lending value of the property. The lending value is the property’s purchase price or market value — whichever is less. For a conventional mortgage, the down payment is at least 20% of the purchase price or market value.

High-ratio Mortgage

If your down payment is less than 20% of the home price, you will typically need a high-ratio mortgage. A high-ratio mortgage usually requires mortgage loan insurance. CMHC is a major provider of mortgage loan insurance. Your lender may add the mortgage loan insurance premium to your mortgage or ask you to pay it in full upon closing.

Mortgage Term

Your lender will tell you about the term options for the mortgage. The term is the length of time that the mortgage contract conditions, including interest rate, will be fixed. The term can be from six months up to ten years. A longer term (for example, five years) lets you plan ahead. It also protects you from interest rate increases. Think carefully about the term that you want, and don’t be afraid to ask your lender to figure out the differences between a one, two, five-year (or longer) term mortgage.

Mortgage Interest Rates

Mortgage interest rates are fixed, variable or adjustable.

Fixed Mortgage Interest Rate

A fixed mortgage interest rate is a locked-in rate that will not increase for the term of the mortgage.

Variable Mortgage Interest Rate

A variable rate fluctuates based on market conditions. The mortgage payment remains unchanged.

Adjustable Mortgage Interest Rate

With an adjustable rate, both the interest rate and the mortgage payment vary, based on market conditions.

Open or Closed Mortgage

Closed Mortgage

A closed mortgage cannot be paid off, in whole or in part, before the end of itsterm. With a closed mortgage you must make only your monthly payments — you cannot pay more than the agreed payment. A closed mortgage is a good choice if you’d like to have a fixed monthly payment. With it you can carefully plan your monthly expenses. But, a closed mortgage is not flexible. There are often penalties, or restrictive conditions, if you want to pay an additional amount. A closed mortgage may be a poor choice if you decide to move before the end of theterm, or if you want to benefit from a decrease of interest rates.

Open Mortgage

An open mortgage is flexible. That means that you can usually pay off part of it, or the entire amount at any time without penalty. An open mortgage can be a good choice if you plan to sell your home in the near future. It can also be a good choice if you want to pay off a large sum of your mortgage loan. Most lenders let you convert an open mortgage to a closed mortgage at any time, although you may have to pay a small fee.

Amortization

Amortization is the length of time the entire mortgage debt will be repaid. Many mortgages are amortized over 25 years, but longer periods are available. The longer the amortization, the lower your scheduled mortgage payments, but the more interest you pay in the long run. If each mortgage term is five years, and the mortgage is amortized over 20 years, you will have to renegotiate the mortgage four times (every five years).

Payment Schedule

A mortgage loan is repaid in regular payments — monthly, biweekly or weekly. More frequent payment schedules (for example weekly) can save some interest costs by reducing the outstanding principal balance more quickly. The more payments you make in a year, the lower the overall interest you have to pay on your mortgage.