A Comprehensive Guide to Home Buying for First-Time Home Buyers
A Comprehensive Guide to Home Buying for First-Time Home Buyers
Contents Overview
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Do You Need a New Home?
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Get Pre-Approved First
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Understanding Home Buying Costs
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Define Your Search The Neighbourhood Type of Property Other Factors
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The Offer Process
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Identify Assistance Programs Home Buyers’ Plan for First-Time Home Buyers First-Time Home Buyer’s Tax Credit (HBTC) Land Transfer Tax Refunds for FTHB CMHC Programs
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Post-Purchase Things to Plans
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Conclusion
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Overview For a first-time homebuyer, buying a new home is an adventure in itself. It's a financial, personal and long-term commitment. So what does it truly entail? Here are some of the questions that most first-time home buyers don't think to ask first: 1.
What research needs to be done beforehand?
2.
What should I do before I start a home search?
3.
What is my financial capacity, both to buy a home and maintain it after I purchase it?
4.
Are there any resources to support me after I purchase a home?
We at TheRedPin.com believe that homebuyers need to be educated about every aspect of home buying before they dive into the process. In this guide, we examine some of the most important aspects of home buying, providing the necessary information you need to know to make a sound home purchase.
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Do You Need a New Home?
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As a first-time home buyer, you may simply want to have a new home for the sake of gaining a tangible asset. While having a large-scale investment is a good thing, there is more at stake. You will be living in this property and you need to justify the move. Here are some more justifications to for buying a new home: 1.
Your mortgage on the new home may not be that much more than the rent your paying.
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You have intentions to start a family very soon or have a growing family that has outgrown the current space.
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Your work circumstances have changed and you require a home office/work space at home.
4.
You require outdoor space for your kids, pets, etc.
These are just a handful of situations that could dictate the need for a new place, and motivate you to find the perfect property. By assessing your current situation, you can separate your needs from your wants and outline what you truly require helping you create a sound game plan to begin searching for your new home.
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Get Pre-Approved First Though not a requirement, it’s a good idea to get a mortgage pre-approval before you begin your home search. A pre-approval does not guarantee the final approval of a mortgage loan but it provides you with a good idea of how much mortgage they can afford. Having a preapproved mortgage – which lasts a specific amount of time – gives you a solid price range before beginning your house search. It is also information that will help your sales representative narrow down your search to meet your requirements and reach. When meeting with a lender, he/she will require specific details to be able to provide you with a pre-approval. It is important you bring the following with you: Personal information, including ID Employment details, including confirmation of salary in the form of a letter from your employer List of income sources, details on all bank accounts, loans and other debts Proof of financial assets Source and amount of down payment and deposit Proof of source of funds to cover the closing costs – Usually 1.5-4% of the purchase price You’ll will be presented with many mortgage options by their lender. The three primary variables on the table are the mortgage’s amortization period, payment schedule and interest rate. The key question you need to ask your self is: how fast do you want to pay off your mortgage? After establishing those three variables, you’ll determine what your monthly financial commitment to the home will be.
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Understanding Home Buying Costs There are many additional costs that you need to account for when buying a new home. These costs can range from a couple of hundred dollars to a couple of thousand, and if not planned for in advance, can cause a serious dent in your finances.
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All the costs listed below are incurred during the house search, during the process of buying, and post-purchase. It is important that you make a note of all these costs and evaluate them before deciding to go and search for a new home. These can determine if you really have the financial capacity to buy a home or not. Down Payment – this is required from the homebuyer, and not covered by the mortgage loan. The amount is usually around 20% of the purchase price but could be as low as 5% if you have mortgage loan insurance. Mortgage Loan Insurance Premium – If you make a down payment of less than 20%, creating a high-ratio mortgage, you will need to obtain mortgage loan insurance, with premiums added to monthly payments. Home Inspection – Before committing to a property it is important to put a condition on the Offer of Purchase – that the sale will be final pending a home inspection. A home inspection is an in-depth analysis on the physical condition of a home, and what you are getting into. Fees can range from $400-600 and should be conducted by a qualified home inspector. Do your research. Mortgage Broker’s fee – If you decide to use a mortgage broker to find you a lender with the best terms and rates, rather than go straight to the bank, there is a fee involved. Deposit – When an Offer of Purchase is made, a deposit is made to lock yourself in as a serious buyer. It’s part of the down payment, with the rest paid out at closing. Title insurance – Covers the loss caused by defects of title to the property, and will be recommended by your lawyer. Land Survey – An up-to-date survey or certificate of location will be required by your mortgage lender. It would need to be updated if it is 5 or more years old. This could cost between $1,000 and $2,000.
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Land registration fees – Also called Land Transfer Tax in Ontario, this is a fee that must be paid at closing and is usually a percentage of the purchase price. Ask your lawyer for specific figures. Pre-paid property taxes – When you purchase a re-sale property, the previous owner may have paid property taxes for the year. You will have to pay the period he/she has paid for back to the previous owner. Property insurance – Covers the cost of replacing your home and contents if there is a major loss. Important because your home is a direct security against the mortgage. This must be in place at the time of closing. Legal fees – A self-explanatory cost that is paid on closing day. Lawyer will be an additional charge, depending on personal requirements. Condominium Fees – You may have to make initial payments on a condo before moving in. Make sure you communicate with your sales representative and find this out. Service connection fees – connecting utilities and everyday services will cost time and money. Make sure you understand the costs of moving your services, installing new services and balancing the costs. Moving-in costs – You will not only have a cost to move your belongings, which could be $200-500 on average, but also take into account the necessary costs to make your home livable such as window treatments, appliances, renovations, repairs, interior-design, etc. Other costs – Other costs could include water tests, gardening, septic tank tests, etc. Communicate with your sales representative and ask what costs you should be considering before you consider a property.
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Define Your Search As mentioned in the start of this piece, it is important to know what you want. You need to differentiate between needs and wants, prioritizing between items to ensure you find a house that isn’t a compromise but a place where you can grow and establish yourself. No one said that you won’t eventually outgrow your home, but careful planning will save you time and money in the long run. We list the elements should evaluate.
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The Neighbourhood There is a well known saying used by industry professionals that a house can be changed, but the location cannot. It’s important that you evaluate and determine the neighbourhood you would like to live in and find what the cost of living in that neighbourhood would be. A neighbourhood should be looked at from a broad perspective, taking into consideration its various characters, amenities, conveniences and opportunities. In addition to these, you must look at the growth of the neighbourhood based on current projects, proposed developments and existing offerings. Here are some of the things you should look for: 1. Shopping options, primarily for essential items - groceries, pharmacies, etc 2. Transit access 3. Schools and daycares 4. Housing developments – The types of housing and developments and the number of new and upcoming developments 5. Amenities - Banking, gas stations, libraries, community centres, hospitals and clinics 6. Lifestyle and recreational elements - coffee shops, restaurants, social hubs, movie theatres, parks, bike trail, and more The above factors play a major part in determining the value of a neighbourhood. In addition, make sure your property has a strong walkscore. Walkability affects how easy it is to navigate your neighbourhood’s amenities on foot.
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Type of Property Do you want a condo or a house? It's a common question that most first-time homebuyers don’t decide until they are on their search. See both options and understand what fits your lifestyle and needs best. Here's a quick comparison between the two: Houses
Condos
Pros More bang for your buck, with greater living space Potential for growing and renovating the property, especially when you have a growing family Depending on location, some properties come with substantial backyards which can serve for entertainment purposes, gardening and a space for kids to play
Cons You are responsible for maintaining the property, including taking care of the lawn, property maintenance and much more – this can become very expensive and take up a lot of time Utilities are your responsibility You may need to buy a home that is in less convenient locations in the city because of budget issues Unless you are in a gated community or in an area with neighbourhood watch, security may be an issue
Opportunity to live in high-profile neighborhood (areas where houses may be over your budget) Great selection of amenities offered with condominiums: pools, gyms and party spaces No hassles of property ownership – no need to cut the lawn, take care of curb appeal or do any building maintenance – all covered by the maintenance fee Support from building management for repairs and fixes Security and peace of mind Depending on the building, all utilities are covered with the maintenance fee
Maintenance fees, on top of taxes and such, can become expensive Depending on location, living space can limit growth, especially if homebuyer wants to raise a family You need management/builder approval for major property changes, which can be a tedious process
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Other Factors Define Your Priorities - For example, good schools vs. longer commute time; would be dependent on if you will have or have children and school details are very important. Identify costs for all your wants - For example, is having a pool worth the additional maintenance costs? Would you like to make money with your property? – Considering an income property needs careful long-term thinking. If you purchase a property with the intention to rent out some of the space, you must consider any maintenance or renovations involved..
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The Offer Process Once you have found a home that you like, you have to put in an Offer to Purchase to the vendor selling the home. It is highly recommended that this process be done with a sales representative or lawyer, to ensure that the offer covers all the necessary details and factors. It is a legal document and something that should be taken very seriously. Here are some of the details presented within an Offer to Purchase: Names and details – your legal name, vendor details and address of the property Price you are offering to the vendor Things that you think should be included with the sale of the property. An example would be appliances and/or window treatments Your deposit amount Closing day of the sale – 30 or 60 days usually but could be more. Land Survey of property Offer expiration date Conditions of Purchase – this could include items such as home inspection, mortgage approval, etc.
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Once an offer is made, the following three scenarios could arise: The vendor accepts your offer – Hooray, you own a new home! The next steps are conducted to complete the sale. The vendor signs back a counter-offer. This could be a change in price or a change in terms. You can either agree to the changes or make a counter-offer yourself. You receive a counter-offer at a higher price that you cannot afford. You don’t agree to the offer, sale doesn’t go through and deposit is returned. The simple lesson from all three scenarios above: know how much you can afford and keep a cap on it. There are hundreds of houses for sale and unless this is your 100% dream home, it is important to balance the books and expectations when investing in a property as a first time home buyer. Always do your due diligence.
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Identify Assistance Programs The government has created a number of assistance programs for first time homebuyers when they purchase their first property. Below is a list of these programs, providing insight into what they offer to reduce the financial burden of purchasing a new home.
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Home Buyers’ Plan for First-Time Home Buyers The Home Buyer’s Plan by the federal government provides home buyers, especially first time home buyers, the ability to withdraw money from their registered retirement savings plan (RRSPs) tax free to buy or build a qualifying home. Homebuyers are eligible to take up to $25,000. However, contributions must remain in the RRSP for at least 90 days before you can withdraw under the Home Buyers’ Plan, and no deductible can be made for any year. The following requirements must be met to withdraw funds from your RRSP: Qualifying home cannot be owned for more than 30 days before the withdrawal is made, by you or your spouse A maximum of $25,000 can be withdrawn You have to be a resident of Canada You have to complete Form T1036 for each eligible withdrawal You have to receive all withdrawals in the same calendar year It is important to point out that if you are buying a house with a spouse, the spouse is eligible to take out $25,000 as well. Any funds taken out from an RRSP must be repaid within 15 years, with 1/15 being the payment amount per year. Payments begin the second year from which the funds were withdrawn. The home buyers’ plan provides first time homebuyers with the must needed financial flexibility when purchasing a new home. The $25,000 – or $50,000 if taken by the spouse as well – can be used towards the down payment of a first home, a required step towards owning a home for first time homebuyers.
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First-Time Home Buyer’s Tax Credit (HBTC) The first time home buyer’s tax credit is a non-refundable tax credit, based on an amount of $5,000, for certain home buyers that acquire a qualifying home after January 27, 2009 (i.e., generally means that the closing is after this date). By entering $5,000 to one’s personal taxes on line 369, homebuyers receive a rebate of $750. This amount must be the total claimed amount between you and your spouse. The credit is designed to help first time home buyers with various expenses related to home buying, such as closing costs, inspections, legal work, taxes, etc. To qualify for the HBTC, you or your spouse has acquired a qualifying home and you did not live in another home owned by you or your spouse in the year of acquisition or four years prior. A qualifying home is described as “a housing unit located in Canada acquired after January 27, 2009, which can be existing homes or those being constructed”. A share in co-operative would also qualify.
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Land Transfer Tax Refunds for First-Time Home Buyers The Government of Ontario provides a refund program for first-time homebuyers who purchase a home in the province. This interest-free refund is on the land transfer tax in Ontario, with a maximum sum of $2000. Applications for this refund must be made within 18 months after the date of the transfer. To qualify, you must meet the following requirements: You must occupy the home as your principal residence within 9 months of the date of transfer You must be at least 18 years of age You cannot have ever owned a home, or an interest in a home, anywhere in the world. This applies to your spouse during the period which she/he is your spouse In the case of a newly constructed home, where the agreement of purchase and sale was entered into before December 14, 2007, you must be entitled to a Tarion New Home Warranty The City of Toronto provides its own Municipal Land Transfer Tax rebate, which comes into affect on top of the provincial land transfer tax. First-time homebuyers are eligible for this rebate on the purchase of newly constructed or resale property, with a maximum of $3,725 in rebate available.
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Canada Mortgage and Housing Corporation Programs The Canada Mortgage and Housing Corporation – CMHC for short – provides a range of home buying programs that aid both first-time homebuyers and investors when purchasing real estate. Their mortgage insurance program is of particular value to first time home buyers because the program provides home buyers with the option to purchase a new home with as little as 5% down, which is a major financial relief for first-time homebuyers with tight budgets. In addition, the CMHC provides a number of other programs that help take the burden off the cost of buying and ownership. From renovation to simple payment options, the CMHC is a good resource when you need to balance the finances relating to a new home.
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Post-Purchase Things to Plan You have your new home and it's time to move in. Moving costs are self-explanatory but should not be underestimated. Between packaging supplies and the actual cost for moving, you could be in it for hundreds of dollars. Shop around and ask friends and family before choosing a moving company. Try to see if you can move some of your things to save up on return trips. You have to consider all factors of hiring a company: insurance to protect items in transit, hire a large company or a small one, rent the vehicle from the company and do the move yourself, etc. There are a few things that need to be done once the closing details are completed. Change the locks of your new home for security reasons, clean up your new home before you consider moving and purchase new appliances if they were not included in the sale of the home. Consider hiring an interior designer to maximize the potential of your new home.
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Conclusion Purchasing a new home, especially for a first-time homebuyer, should be a well thought-out process. All the major factors including financial and logistical implications must be taken into account before deciding to go on the path of getting a new home. Due diligence and careful planning will help you make a sound home purchase, letting you focus on the more important things such as taking care of your family and work.
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Sources Other Sources: Resources and expertise from various real estate agents and professionals working for TheRedPin.com and a part of the greater Real Estate community. “10 Ways to Increase The Value of Your Home”. HGTV Front Door. 4 March, 2008. Nov, 2012. <http://www.frontdoor.com/sell/10-ways-to-increase-the-value-of-yourhome/1231>. “Comparing Neighbourhoods for Sustainable Features”. Canada Mortgage and Housing Corporation. Nov, 2012. <http://www.cmhc-schl.gc.ca/en/co/buho/sune>. "First-Time Home Buyers' Tax Credit". Canada's Economic Action Plan. Mar 2013. <http://actionplan.gc.ca/en/initiative/first-time-home-buyers-tax-credit> "Home Buyers' Plan (HBP)". Canada Revenue Agency. 3 January 2013. Mar, 2013. < http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/hbp-rap/> "Toronto Neighbourhood Profiles". City of Toronto. Mar, 2013. <http://www.toronto.ca/demographics/neighbourhoods.htm>
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