WRX Property Group’s Step by Step Buyer’s Guide
Greetings! Welcome to WRX Property Group’s website and blog. As a real estate full-service real estate team, buying and selling homes is at the heart of what we do. And as a Kitchener-based team, we are intimately familiar with Kitchener-Waterloo and the surrounding area. Today, we’d like to share some of our accumulated knowledge and experience with you and provide you with a step-by-step guide to buying a home. We’re going to walk you through the decision of whether to buy, when to buy, and how to buy your home, hopefully alleviating some of the worries tied up in making such an important decision. Leave the worry to WRX Property Group – trust us, we’re professionals!
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Step 1: When’s the Right Time to Buy a Home?
Buying a home – especially if you’re buying your very first home – is a big decision. But that doesn’t have to mean it’s a scary decision. The best way to approach this question is by asking two questions: what are you looking for in a home? and What’s your current (and expected future) financial situation? Let’s break that down even further, and broach the first question first (what are you looking for in a home).
A home, fundamentally, is where you live. And for many adults, that means one of two things: Renting or Buying. There are pros and cons to both. In favour of Renting: you don’t have to worry personally about maintaining or repairing the property, or dealing with unexpected costs. You don’t have to put forward as much money all at once: starting out with first and last month’s rent is likely the most you’ll ever have to pay at one time, which although not cheap, should be less than a down payment. You’ve got more freedom to move to another property – it’s as easy as giving two months’ notice and finding a new home. You’re not affected by potential decreases in property value. And finally, you can spend some time renting while saving up for a larger down payment on a home.
As for the negative side of Renting, your monthly payments can increase every year (provided you have a legitimate contract and a respectable landlord, though, there are limitations set by Ontario’s Landlord and Tenant Board). Your landlord may decide not to renew your lease, or they may decide to sell the property. The money you’re paying as rent is gone – you’re not building your own equity. And finally, you’re limited with what sorts of modifications or decorating you can do with a rental property.
As for Buying, the opposites all hold true, as well as a few other considerations. In favour of buying, you can renovate or remodel your home however you like. You have a secure investment: the money you put into your home builds equity; mortgage payments go toward full, personal ownership. You have the potential to rent out a suite (or suites) in your home. And finally, you have the stability and sense of security that comes from owning the place that you call home – you are in control. The cons of Buying include financial risk with a downturn in the market upon resale, as well as the potential of unexpected costs, repairs, and sometimes expensive maintenance issues.
The second question (what’s your current financial situation) is just as, if not more, important. Are you financially stable – in other words, do you have enough liquid assets (available funds at a given moment) and/or income that buying a home is a safe decision? Are you willing and able to manage the financial side of such a large purchase? Have you looked at all the costs and responsibilities that come with owning a home? And finally, are you willing and able to care for your home?
The two financial factors to keep in mind are the upfront costs, and the ongoing costs. Upfront costs (down payment, closing costs, and taxes) require a significant amount of available funds right away. Being able to cover these is great, but it’s important not to lose sight of the ongoing costs – the mortgage payments, property tax, bills, insurance, and, not to be forgotten, the potential for maintenance and repair fees. You never know when major repairs may be necessary, so it’s important to account for unexpected costs down the line.
Step 2: How to Determine If You’re Financially Ready
To boil it down to the most basic form, you need to be aware of two things: outgoing funds, and incoming funds. The first, of course, is how much money you’re currently spending. This is everything from groceries to clothing, and from student loans to car payments. Next, how much are you making each month? What is your personal (or household) income from work, investments, etc. To move forward with purchasing a home, you’ll ideally want to increase the amount of income left over after your monthly expenses. One thing to bear in mind is that rent payments can be replaced with mortgage payments, but you’ll want more of a financial cushion due for the aforementioned reasons (unexpected costs, especially).
To figure out what you can afford, there are two helpful rules to follow. Your monthly housing costs (mortgage, property tax, bills) should not exceed 32% of your average gross monthly income (the income before deductions). Secondly, your monthly debt load should not exceed 40% of your average gross monthly income (debt load includes the housing costs addressed in Rule 1, and adds credit card payments, lease payments, and all other debt servicing fees). By working backwards from your average monthly income, you can determine what you can afford each month in terms of housing costs.
Upfront costs to take into consideration include the down payment, moving costs, insurance, inspection and appraisal fees, legal fees, potential repairs, and various taxes/utilities. Sometimes it can be helpful to meet with your bank, a credit counsellor, or your lender, to go over these details and come up with a plan to improve your credit and open up more funds. Paying off debts is always a good idea, as is setting aside a certain amount of time to save, save, save.
Step 3: How to Go About Financing Your Home
Now that you’ve worked your way through the previous two steps, and worked out both the viability of purchasing a home and what price range you’d like to be looking in, it’s time to take a big step forward: it’s time to move out of the preliminary work and into the practical process of getting your home! And meeting with your mortgage broker or lender (often a bank, a credit union, or a dedicated mortgage company) is an important first step in that process.
Getting pre-approved is a great idea, as that lets you determine everything from what your precise upper limit is in terms of home prices, what your monthly mortgage payments will be, and more. Do note, however, that getting pre-approved is not a guarantee that you will ultimately attain final approval for your mortgage. Before final approval, your lender will need to assess both the property and the price to determine viability of the loan.
There are a variety of different options when it comes to mortgages, and you will work through what’s best for you with your lender. It’s important to have a good working relationship with your lender or broker, and to familiarize yourself with key terms. Speaking of…
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Amortization period: the agreed length of time to pay your mortgage (typically around 25 years).
Mortgage term: How long your mortgage operates under the agreed options and rates (this can range from months to years). You can renegotiate options and rates at the end of each Mortgage term.
Interest rates: There are Fixed rates (they don’t change over the term of the mortgage); Variable rates (which fluctuate with the market); and Protected/Capped Variable rates (which do fluctuate, but never over a pre-set maximum).
Open vs. Closed Mortgages: You can pay off an Open Mortgage (in full or in part) at any time with no penalties; with a Closed Mortgage, you are limited in your ability to do so, but they often offer lower interest rates.
Pre-payment options: You can pay extra, more often, or the full amount without penalty.
Portability: You can transfer your mortgage to a different home when you sell your current one.
Now that you know some of the terms, there are a few things you need to know and bring with you when meeting your lender or broker: government-issued photo ID with current address; employment information (contact details for current employer, employment history, proof of income [both amount and source]); proof of savings and/or investments; and details of debt. It’s also a good idea – though not essential – to know your credit score; this is a factor in your lender or broker’s decision regarding your mortgage.
Let’s talk about Loan Insurance and down payments for a moment. If your down payment is at least 20% of the home’s total price, you have a Conventional mortgage. If your down payment is less than 20%, you have a High-ratio mortgage, and will likely need loan insurance. Loan insurance is designed to protect creditors for default, and the premiums on mortgage loans (what you’ll pay) is based on the total amount of the loan. Typically, smaller down payments have higher insurance premiums. You can pay the premiums separately, or together with your mortgage payments.
To wrap up the mortgage section, here are a few pointers: don’t necessarily go for the highest mortgage you can afford; picking a smaller mortgage will keep your finances more manageable, and account for unexpected costs. If you have a variable rate, consider the effects a high fluctuation may have (you can consider this a personal Mortgage Stress Test). If it’s possible, or your circumstances change, it’s also a good idea to try to pay off your mortgage sooner rather than later. And last, but certainly not least, don’t be afraid to ask for help! WRX Property Group, for example, is always ready and willing to assist however we can.
Step 4: Which Home Is the Home for Me?
By now, you know your financial situation, and you have an idea of what mortgage is available to you. It’s time to step even closer to the finish line and start looking at the homes themselves! There are, of course, numerous factors to consider, and you need to decide which ones are most important to you. What do you value most? Things to think about are: Location; Size of home (and property); Special features (do you want a large garage, for example); and, most importantly, your future! By that, we mean: don’t just look at what home suits you now; think about what your needs will be a year from now, five years from now, and beyond. Do you want children? That, of course, is one of the biggest considerations, but it’s also important to think about things like parks, places of worship, and where your family/friends live. It boils down to: which home fits your needs now, and is also a place you can grow with?
Beyond personal preferences, there are the details of each home to consider, and types of ownership. Freehold properties are those in which you own both the home and the land on which it stands, and you’re responsible for the maintenance of both. Leaseholds, conversely, are properties in which you own the building or unit, but rent or lease the land on which it stands (townhouses are a common example of this). Condominiums are a setup in which you own a specific unit (your home) and share common areas with other owners (such as shared hallways and/or gardens). The condominium corporation handles maintenance costs for the common property, and they control the extent to which you can change your unit (you’ll want to research the condominium unit). Finally, Co-operatives are a setup in which you purchase a share in the building and are assigned a unit in which to live; loan insurance is not available for Co-operative properties.
There’s also the question of purchasing a brand new home, purchasing a previously owned home (a resale home), or simply building your own from scratch. There are, as usual, pros and cons to each option. Construction on new homes can sometimes be delayed, for example, and previously owned homes may be in need of renovation. Building your own can be a major cost in terms of time, money, and effort, but on the other hand, you control the final product. Talking to your lender or broker about these options is helpful.
The search itself can take on many forms: word of mouth, social media, real estate websites (such as WRX Property Group’s), newspapers and real estate magazines, real estate agents, and simply driving around looking for signs are all valid options. And once you find a place you like, it’s time to assemble your team. Real estate agents help you throughout the process, negotiating on your behalf and answering your questions. Insurance brokers cover your home insurance questions. Home inspectors assess the home, land surveyors assess the land, and appraisers can give you an idea of how much a property is worth. Lawyers, finally, protect your interests.
One final note is that you need to protect yourself from mortgage fraud: fill out all the forms truthfully, never accept money or a loan until you’re sure you want to purchase a property, use accredited real estate professionals that you trust, make use of your lawyer, read every document before signing, look into the history of a property through provincial records, and beware of any deal that sounds ‘too good to be true.’
Step 5: Make an Offer, and Close the Deal
Once you’ve gone through each of the previous steps, it’s finally time to make your offer! You’ve got your mortgage, you have a team you trust, and you’ve found the right home for you – congratulations! Your offer to purchase is a legal contract that should include your legal name, the name of the seller, and the property’s address. It should have the purchase price (your offer), the amount of your deposit, any extras you want (such as appliances), the closing date (the date you take possession of the home – usually a month to 2 months after signing the agreement, an expiration date for the deal, and any additional conditions. Remember, though, that your offer is just that: an offer. Negotiation is a part of the process.
If and when your offer is accepted, the next step is to meet with your lender or broker to finalize the mortgage details. You’ll want to bring all the relevant documents to this meeting (all the details and appraisals of the property, the signed offer to purchase, and legal documents). On Closing Day, the mortgage money goes from your lender or broker to your lawyer; you provide your lawyer with the down payment (as well as closing costs, which is often 1.5 – 4% of the purchase price, to cover legal fees); and your lawyer pays the seller and registers the home in your name. Finally, you get handed the keys, and your home is your home!
Once your home is your home, it’s all about protecting your investment responsibly. Your home is the place you live, but it’s also a major investment. Make sure you make your mortgage payments on time (not doing so can result in penalties), set aside money for all necessary repairs and upkeep (make a budget and stick with it!), and try to always have some money set aside in case of unexpected costs. Read up on safety procedures and make your home as safe as can be – plan for fires and keep your valuables somewhere safe. Also, it can be a good decision to make improvements to your home – this can increase your comfort, and potentially increase resale value.
The final point? Enjoy your new life in your new home! And as always, if you have any questions about buying a home in Kitchener-Waterloo (or elsewhere), please don’t hesitate to contact WRX Property Group – we’re happy to help!
Written by Will Kummer