Buying
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What Do You Want?
It's important to be realistic when you're thinking about
a down payment and setting a price range. You don't want to
be saddled with something you can't afford. At this stage,
it's a good idea to talk things over with a real estate
sales professional.
Begin by listing your needs:
- Living requirements (i.e. how many bedrooms)
- Family size
- What you're bringing with you from your old house
- How close to schools, shopping and other services
- The size of down payment you can afford
- Price range
What's Out There?
- The marketplace offers both resale homes and new
homes. However, since this document deals with resale
homes, we will concentrate on them. (If you're
interested in a new home, talk with your salesperson.)
- Resale homes may be protected by a warranty offered
by the vendor.
- Resale homes are more likely to be in established
neighbourhoods, close to amenities and have mature trees
and gardens.
- Remember, however, a resale home has been lived in.
It has been exposed to the elements for a number of
years. The house may have experienced some degree of
shrinkage and settling.
Quick Service with the MLS® System
Most boards have their MLS® systems on computer. By
sitting down at a keyboard, Ray and Len can key in your
needs, choice of neighbourhoods and price range and
immediately come up with a list of suitable properties. Some
computer systems are more extensive than others. Some even
show a photograph of the house, complete with interior
views. Also common are MLS® catalogues, which provide
additional information about each property, along with its
photograph. Both computer systems and catalogues are updated
regularly.
Touring a House
When you visit a house, consider these points:
What type of wiring does the house have?
Does the electrical panel use fuses or circuit breakers?
What type of heating system does it use?
What about the roof and foundations?
What about the plumbing?
What about power outlets? Different appliances, and power
tools use different types.
There are other things to look at, as well. If you don't
have time or don't feel comfortable doing it, home
inspection services are available for a reasonable fee.
Making an Offer
In the offer, you are suggesting:
- How much you're willing to pay
- A closing date
- A set of conditions
- When the offer expires
At this time you'll present a deposit, along with your
offer. An appropriate deposit will show your good faith to
the seller. The seller's agent is bound by law to bring all
offers to the seller's attention.
After your offer is accepted and all the conditions are met,
the offer becomes binding on both sides. If you walk away
from the deal at that point, you may lose your deposit. You
may also be sued for damages. Therefore, make sure you
understand and agree with all of the terms of the offer
before signing.
Conditions
Most offers carry some kind of conditions which have to
be met before the sale is complete. Some common types of
conditions are:
- you getting a suitable mortgage (include the amount,
interest rates and any other figures you feel
important);
- you selling your current home (the seller may
continue to look for a buyer, but will give you the
right of first refusal);
- the seller providing a current survey, or a "real
property report," showing the location of the house on
the property owned by he seller and that there are no
encroachments;
- the seller having title to the property (your lawyer will
check this out when he or she conducts a title search to see
if there are any liens on the property, easements, rights of
way or height restrictions);
- if there is a septic system, the seller should have a health
inspection certificate, stating the system meets local
standards;
- if you still have any doubts about the home's safety and
construction, you may wish to make the purchase conditional
on an inspection by a qualified engineer; and,
- any inclusions (we've talked about this earlier --
basically, what stays and what goes).
The seller may counter your offer, by changing the
conditions, price or both. Look at the counter offer in
terms of what you're looking for in a new home: how does it
fit in? And you can, of course, always counter the counter
offer.
The Mortgage
A quick way to see how much you can afford is to use the
gross debt-service formula (GDS). Here, the Principal,
Interest and Taxes (PIT) on your mortgage loan should not
exceed 30 per cent of your gross income. Increasingly,
financial institutions will factor energy costs into the PIT
formula, moving the rule of thumb GDS from 30 to 32 per
cent.
You can work it out in reverse: multiply the monthly payment
on principal, interest and taxes (include any condominium
maintenance fees) by 40. So if your monthly payment for
these items is $1,000, you'll need a gross annual income of
at least $40,000. Discuss your mortgage limit and different
types of mortgages with your salesperson before you begin
seriously looking for a new home.
There are several different types of mortgages:
Pre-approved Mortgages
Pre-approval means that you as a buyer, have qualified in
advance for a mortgage of X dollars, contingent upon the
lender approving the property. Many financial institutions
offer pre-approved mortgages, with your interest rate
guaranteed not to rise for a certain period.
Conventional Mortgages: Most banks and trust companies offer
standard loans using the property as security and require
you to make a monthly blended payment including principal
and interest. Conventional mortgages require at least 25 per
cent of the purchase price as a down payment.
High-ratio Mortgages
If your down payment is less than 25 per cent, you may still
qualify for a mortgage, but you will need mortgage
insurance. Canada Mortgage and Housing Corporation (CMHC), a
federal crown corporation, and GE Capital Mortgage Insurance
Company, a private company, provide insurance for high-ratio
mortgages.
Vendor Take-Back Mortgages
The seller underwrites part of the purchase, as a loan to be
repaid by the buyer. These are often used as second
mortgages, to bridge any gaps or to make the property more
attractive to the buyer. In some provinces, the seller may
also transfer the mortgage to the buyer.
Open and Closed Mortgages
Open mortgages allow you to make extra payments on the
principal, reducing your borrowing costs. Because of this
flexibility, interest rates for open mortgages are a little
higher. Closed mortgages have no flexibility; you must wait
until the term is up to pay your mortgage. However, interest
rates for these mortgages are generally lower. In the
middle, are the partially open mortgages that have some of
the characteristics of both open and closed mortgages.
Just as there is a range of mortgage types, there is also
range of repayment schedules. As well as the traditional
monthly payment plan, there are now semi monthly, biweekly
and even weekly payment schedules. Accelerated repayment
options speed up the process even more, paying down the
mortgage faster and spending less on interest charges. You
may also opt for a shorter amortization period, or mortgage
"life". It raises your monthly payments in the short-term,
but saves you in the long-term, on the interest you pay.
Note: Through our site, browsers can now automatically
calculate their estimated mortgage payments on listings.
Simply find your desired property and click "Calculate Now!"
to find out what your estimated monthly mortgage payment is
on that particular listing.
Those Extra Expenses
You should plan on a few extra expenses. In some provinces,
you may have to pay a land transfer tax (a sales tax on
property). You may also have to pay:
- A mortgage broker's fee (as much as one per cent on the
principal)
- An appraisal fee
- Surveying costs (if the seller couldn't come up with a
current survey); and,
- A high-ratio mortgage insurance premium.
You also face a possible interest adjustment. Mortgages are
normally calculated from the first of each month: if your
closing date is the same as the beginning of your mortgage,
there will be no adjustment. However, if your closing date
is July and you move in on June 15, those last 15 days are
the interest adjustment period. Your lender will expect you
to cover the cost of the interest during that time.
You'll also have to reimburse the seller for the unused
portion of any prepaid property taxes or utility bills. As
well, you must also pay any legal fees, and, if applicable,
realtor fees. Be prepared to furnish proof to your lender
that you have insured your new house... that will cost, as
well.
Closing
Before the house can formally change hands, there are still
a few things to do. Here's what to expect on or before
closing day:
- Your lawyer and the seller's lawyer will arrange to transfer
title of the property from the seller to you;
the mortgage money will be transferred to your lawyer's
trust account, and then to the seller; and,
your lawyer will bill you all additional expenses -- land
transfer taxes and any outstanding legal fees.
At this time, be sure to:
- Check with your lawyer that everything is as stated in the
offer-to-purchase
Make a pre-possession walk-through with the agent. Is
everything in good condition? Is everything you wanted
there?
Once you're satisfied and the keys to the front door are in
your hands, there's nothing else to say...
Except, welcome home.
In addition to what is written here, there are good sources
of information on how to buy/sell a home from the provincial
real estate associations and financial institutions.
The comments contained on this site are for information
purposes only and do not constitute legal advice. Procedures
and laws vary from region to region.
Copyright 2000 The Canadian Real Estate Association
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