50 Questions & Answers About
Buying A New Home
Dear Future Homeowner! :-)
A home is a financial asset and more: it’s a place to live, raise children; it’s a plan for the future; it’s an investment in your community.
Knowledge is said to open doors. This is literally true when it comes to buying a home. To become a first-time home buyer, you need to know where and how to begin the home buying process.
I’ve put together the following questions and answers to give you a foundation of basic knowledge. In addition to helping you begin, it will give you the tools necessary to navigate the entire process - from deciding whether you’re ready to buy, all the way to that final proud step, getting the keys to your new home.
GETTING STARTED
1. HOW DO I KNOW IF I’M READY TO BUY A HOME?
You can find out by asking yourself some questions:
- Do I have a steady source of income (usually a job)?
- Have I been employed on a regular basis for the last 2-3 years?
- Is my current income reliable?
- Do I have a good record of paying my bills?
- Do I have few outstanding long-term debts, like car payments?
- Do I have money saved for a down payment?
- Do I have the ability to pay a mortgage every month, plus additional costs?
Although you don’t have to answer ’yes’ to All of these questions - they’re good to keep in mind.
2. HOW DO I BEGIN THE PROCESS OF BUYING A HOME?
Start by thinking about your situation. Are you ready to buy a home? How much can you afford in a monthly mortgage payment ? How much space do you need? What areas of town do you like? After you answer these questions, make a "To Do" list and start doing casual research. Talk to friends and family, drive through neighborhoods, and look in the "Homes" section of the newspaper, and if you have access to a computer, check the internet under mls.ca.
3. HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity, take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a mortgage payment, you are building equity. And that’s an investment. Although you’re going to have new financial responsibilities- like insurance, real estate taxes, and upkeep- which can be substantial, but given the freedom, stability, and security of owning your own home, they are worth it.
4. HOW DOES THE LENDER DECIDE THE MAXIMUM LOAN AMOUNT THAT YOU CAN AFFORD?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. Typically, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
5. HOW DO I SELECT THE RIGHT REAL ESTATE AGENT?
Look for an agent who listens well and understands your needs, and whose judgment you trust. The ideal agent knows the local area well and has resources and contacts to help you in your search. Overall, you want to choose an agent that makes you feel comfortable and can provide all the knowledge and services you need.
6. HOW CAN I DETERMINE MY HOUSING NEEDS BEFORE I BEGIN THE SEARCH?
Your home should fit the way you live, with spaces and features that appeal to you. Before you begin looking at homes, make a list of your priorities - things like location and size. Should the house be close to certain schools? your job? to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a ’wish list." Minimum requirements are things that a house must have for you to consider it, while a "wish list" covers things that you’d like to have but aren’t essential.
FINDING YOUR HOME
7. WHAT SHOULD I LOOK FOR WHEN DECIDING ON A COMMUNITY?
Select a community that will allow you to best live your daily life. Many people choose communities based on where they work, commuting distance, affordability. Do you want access to shopping and public transportation? Is access to local facilities like libraries and museums important to you? Or do you prefer the peace and quiet of a rural community? When you find places that you like, talk to people that live there. They know the most about the area and will be your future neighbors. More than anything, you want a neighborhood where you feel comfortable in.
8. HOW CAN I FIND OUT ABOUT LOCAL SCHOOLS?
You can get information about school systems by contacting the city school board or the local schools, online or check my Website!
9. HOW CAN I FIND OUT ABOUT COMMUNITY RESOURCES?
Contact the local chamber of commerce for promotional literature, check online or talk to me about, maps, and other information.
10. HOW CAN I FIND OUT HOW MUCH HOMES ARE SELLING FOR IN CERTAIN COMMUNITIES AND NEIGHBORHOODS?
Your Realtor willl be able to provide you with comparable listings and sales, including a Sales History and Assessment values on the properties of Interest.
11. HOW CAN I FIND INFORMATION ON THE PROPERTY TAX LIABILITY?
The total amount of the previous year’s property taxes is usually included in the listing information. Tax rates can change from year to year, so these figures may be approximate.
12. WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?
All homes in B.C. are subject to a Property Transfer Tax. This is calculated at 1% on the first $200,000 PLUS 2% on the balance of your purchase price. There is also GST payable on "NEW Construction"....certain rebates will apply.
13. IS AN OLDER HOME A BETTER VALUE THAN A NEW ONE?
There isn’t a definitive answer to this question. You should look at each home for its individual characteristics. Generally, older homes may be in more established neighborhoods, offer more ambiance,often have larger lots, and sometimes have lower property tax rates. People who buy older homes, however, shouldn’t mind maintaining their home and making some repairs. Newer homes tend to use more modern architecture and systems, are usually easier to maintain, and may be more energy-efficient. People who buy new homes often don’t want to worry initially about upkeep and repairs.
14. WHAT SHOULD I LOOK FOR WHEN WALKING THROUGH A HOME?
In addition to comparing the home to your minimum requirement and wish lists, consider the following:
- Is there enough room for both the present and the future? - Are there enough bedrooms and bathrooms? - Is the house structurally sound? - Do the mechanical systems and appliances work? - Is the yard big enough? - Do you like the floor plan? - Will your furniture fit in the space? Is there enough storage space? (Bring a tape measure to better answer these questions.) - Does anything need to repaired or replaced? Will the seller repair or replace the items? - Imagine the house in good weather and bad, and in each season. Look at the exposure, is it south/west facing and bright, or north/east facing and darker? Will you be happy with it year-round?
Take your time and think carefully about each house you see. Ask your Liz, your real estate agent, to point out the pros and cons of each home from a professional standpoint.
15. WHAT QUESTIONS SHOULD I ASK WHEN LOOKING AT HOMES?
Ask about the house and neighborhood, focusing on quality of life issues. Ask questions until you understand all of the information! Making a list of questions ahead of time will help you organize your thoughts and arrange all of the information you receive.
16. HOW CAN I KEEP TRACK OF ALL THE HOMES I SEE?
If possible, take photographs - of the houses you see that you like, with digital cameras its so easy! Ie: the outside, the major rooms, the yard, and extra features that you like or ones you see as potential problems. And don’t hesitate to return for a second look.
17. HOW MANY HOMES SHOULD I CONSIDER BEFORE CHOOSING ONE?
There isn’t a set number of houses you should see before you decide. Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Its important to communicate often with your real estate agent about your questions, concerns, or if your needs/wants have changed.
YOU’VE FOUND IT
18. WHAT DOES A HOME INSPECTOR DO, AND HOW DOES AN INSPECTION FIGURE IN THE PURCHASE OF A HOME?
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An inspector checks the safety of your potential new home. Home Inspectors focus especially on the structure, construction, and mechanical systems of the house and will make you aware of only repairs,that are needed.
The Inspector does not evaluate whether or not you’re getting good value for your money. Generally, an inspector checks (and gives prices for repairs on): the electrical system, plumbing and waste disposal, the water heater, insulation and Ventilation, the potential presence of pests, the foundation, doors, windows, ceilings, walls, floors, and roof. Be sure to hire a home inspector that is qualified and experienced.
I recommend putting a "subject to an inspection." clause in all offer when negotiating for a home. An inspection t clause gives you an ’out" on buying the house if serious problems are found,or sometimes it gives you the ability to renegotiate the purchase price if repairs are needed.
19. DO I NEED TO BE THERE FOR THE INSPECTION?
It’s not required, but it’s a good idea. Following the inspection, the home inspector will be able to answer questions about the report and any problem areas. This is also an opportunity to hear an objective opinion on the home you’d like to purchase and it is a good time to ask general, maintenance questions.
20. ARE OTHER TYPES OF INSPECTIONS REQUIRED?
If your home inspector discovers a serious problem a more specific Inspection may be recommended. Ie: a roof inspection, septic inspection, water quality etc..
21. ARE POWER LINES A HEALTH HAZARD?
There are no definitive research findings that indicate exposure to power lines results in greater instances of disease or illness.
22. DO I NEED A LAWYER TO BUY A HOME?
As long as a qualified real estate professional is involved you do not need a lawyer. However typically either a Lawyer or a Notary is required to assist you with the closing process. Your real estate agent may be able to recommend a lawyer/notary. If not, shop around. Find out what services are provided for what fee. When getting quotes, make sure they are all inclusive; ie. taxes, courier fees and disbursements.
23. DO I REALLY NEED HOMEOWNER’S INSURANCE?
Yes. Typically most mortgage providers will require that you have one. If you are purchasing a Strata property, building insurance will be included in your ’maintenance fees’. However you will still be responsible for getting "contents insurance." .
Typically most mortgage providers will require that you have one. If you are purchasing a Strata property, building insurance will be included in your ’maintenance fees’. However you will still be responsible for getting "contents insurance." .
24. WHAT STEPS COULD I TAKE TO LOWER MY HOMEOWNER’S INSURANCE COSTS?
Be sure to shop around among several insurance companies - get 2 or 3 quotes. Other ways to lower insurance costs, include insuring your home and car(s) with the same company, increasing home security, and seeking group coverage through alumni or business associations. Insurance costs are always lowered by raising your deductibles, but this exposes you to a higher out-of-pocket cost if you have to file a claim
25. IS THE HOME LOCATED IN A FLOOD PLAIN?
Typically this is disclosed on the Listing Agreement. If not ask your Realtor to check for you. Make sure you discuss the flood insurance portion of your policy with your Home Insurance Agent.
26. WHAT OTHER ISSUES SHOULD I CONSIDER BEFORE I BUY MY HOME?
Consider local zoning laws, which could affect remodeling or making an addition in the future. Your offer will be subject to you receive a Copy of the Title Search - which will disclose any ’Right of Ways’ or ’Easements’ that might affect the use of your property. You will also receive a ’Property Disclosure Statement’ which the Seller will have prepared. Check the Strata Section for issues or documents specifically required for Strata Properties.
27. HOW DO I MAKE AN OFFER?
Your real estate agent will assist you in making an offer, which will include the following information:
- Deposit required
- Down payment and financing details
- Completion (date money is transferred); Possession Date (date you move in); Adjustment Date (date your taxes are adjusted).
- Price you are offering
- Length of time the offer is valid
- Details of the deal - Included all "Subject Clauses" (Conditions)
Remember that a sale commitment depends on negotiating a satisfactory contract with the seller, not just Making an offer
28. HOW DO I DETERMINE THE INITIAL OFFER?
Unless you have a buyer’s agent, remember that the agent works for the seller. Listen to your real estate agent’s advice, but follow your own instincts on deciding a fair price. Calculating your offer should involve several factors such as what homes sell for in the area, the home’s condition, how long it’s been on the market, and the seller’s motivation. By the time you’re ready to make an offer, you should have a good idea of what the home is worth and what you can afford. And, be prepared for give-and-take negotiation, which is very common when buying a home. The buyer and seller may often go back and forth until they can agree on a price.
29. HOW MUCH OF A DEPOSIT SHOULD I MAKE?
The ’Deposit’ is money put down to demonstrate your seriousness about buying a home. It must be substantial enough to demonstrate good faith and is usually between 1-5% of the purchase price (though the amount can vary depending on how quick you Complete). Typically the Deposit is not made until All Subjects have been removed. Then it is made "In Trust" to your Realtor’s Agency - and held until Completion date, at which time it is transfered to your Lawyer. When your Lawyer/Notary drafts conveyancing documents - your Deposit will be applied to either your Downpayment or Closing Costs. If you back out of a deal once the deal is Firm, (you have removed all subjects), you may forfeit the entire amount.
GENERAL FINANCING QUESTIONS:THE BASICS
30. WHAT IS A MORTGAGE?
Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.
31. WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF MY LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: If the a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment.
The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, typically if your downpayment is less then 20% your Lender will probably require that you have a mortgage insurance policy. The 2 main providers for mortgage insurance GenCorp and CMHC (Canada Mortgage and Housing). Their fee will be a percentage of your mortgage and could be substantial, however it is typically applied to your Mortgage amount. Make sure you are clear what that fee is when you negotiate your Mortgage.
32. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
Fixed Rate Mortgages: Payments remain the same for the the life of the loan
: Payments remain the same for the the life of the loan
Types
- 10,25,30 and 40 year Amoratizations
- 1-10 year Terms
Advantages
- Predictable - Housing cost remains unaffected by interest rate changes and inflation. WHAT ARE THE ADVANTAGES OF the different LOAN TERMS?
- In the longer term mortgages,during the first years of the loan, more interest is paid off than principal. - As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
- In the longer term mortgages,during the first years of the loan, more interest is paid off than principal. - As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
- In shorter term mortages, the loan is usually made at a lower interest rate. - Equity is built faster because early payments pay more principal.
In shorter term mortages, the loan is usually made at a lower interest rate. - Equity is built faster because early payments pay more principal.
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
(ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
Types
- Balloon Mortgage- Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically) -
Advantages
- Generally offer lower initial interest rates - Monthly payments can be lower - May allow borrower to qualify for a larger loan amount. An Adjustable Rate Mortgage may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.
- Generally offer lower initial interest rates - Monthly payments can be lower - May allow borrower to qualify for a larger loan amount. An Adjustable Rate Mortgage may make sense If you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren’t concerned about potential increases in interest rates.
33. CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Yes, but specific terms and conditions apply depending on your Mortgage Provider. Some allow you to send in extra money each month or allow you to make an extra payment at the end of the year. You can accelerate the process of paying off the loan this way. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.
34. HOW LARGE OF A DOWN PAYMENT DO I NEED?
There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you’ll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you’ll also need money for closing costs, moving expenses, and - possibly -repairs and decorating.
35. WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
The monthly mortgage payment mainly pays off principal and interest. But some lenders also include local real estate taxes, homeowner’s insurance, and mortgage insurance (if applicable).
36. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.
37. HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
A lower interest rate allows you to borrow more money than a high rate with the some monthly payment. Interest rates can fluctuate as you shop for a loan, so ask-lenders if they offer a rate "lock-in"which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.
38. WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE LOAN?
If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus application fees and a Penalty. The penalty is typically 3 months interest.
FIRST STEPS
39. WHAT STEPS NEED TO BE TAKEN TO SECURE A LOAN?
The first step in securing a loan is to complete a loan application. To do so, you’ll need the following information.
- Pay stubs for the past 2-3 months - T-4 forms for the past 2 years - Information on long-term debts - Recent bank statements - tax returns for the past 2 years - Proof of any other income - Address and description of the property you wish to buy - Sales contract
During the application process, the lender will order a report on your credit history and a professional appraisal of the property you want to purchase. The application process typically takes between 1-2 weeks.
40. HOW DO I CHOOSE THE RIGHT LENDER FOR ME?
Choose your lender carefully. Look for financial stability and a reputation for customer satisfaction. Be sure to choose a company that gives helpful advice and that makes you feel comfortable. A lender that has the authority to approve and process your loan locally is preferable, since it will be easier for you to monitor the status of your application and ask questions. Plus, it’s beneficial when the lender knows home values and conditions in the local area. A Mortgage Broker is a popular alternative. A broker shops different Lending options to get you the best rate possible. This is often a popular option when the Buyer has challenging credit or has incomplete work records, because the Broker has more options and is not confined to the specific terms and conditions of only One Lender. Ask family, friends, and your real estate agent for recommendations.
41. HOW ARE PRE-QUALIFYING AND PRE-APPROVAL DIFFERENT?
Pre-qualification is an informal way to see how much you maybe able to borrow. You can be ’pre-qualified’ over the phone with no paperwork by telling a lender/broker your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
is an informal way to see how much you maybe able to borrow. You can be over the phone with no paperwork by telling a lender/broker your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house.
Pre-approval is a lender’s actual commitment to lend to you. It involves assembling the financial records (Without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.
is a lender’s actual commitment to lend to you. It involves assembling the financial records (Without the property description and sales contract) and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.
42. HOW CAN I FIND OUT INFORMATION ABOUT MY CREDIT HISTORY?
You can obtain your credit report as easy as calling and requesting one. Once you receive the report, it’s important to verify its accuracy. Double check the "high credit limit,"’total loan," and ’past due" columns. Equifax 1-800-685-1111
43. WHAT IF I FIND A MISTAKE IN MY CREDIT HISTORY?
Simple mistakes are easily corrected by writing to the reporting company, pointing out the error, and providing proof of the mistake. You can also request to have your own comments added to explain problems. For example, if you made a payment late due to illness, explain that for the record. Lenders are usually understanding about legitimate problems.
44. WHAT IS A CREDIT BUREAU SCORE AND HOW DO LENDERS USE THEM?
A credit bureau score is a number, based upon your credit history, that represents the possibility that you will be unable to repay a loan. Lenders use it to determine your ability to qualify for a mortgage loan. The better the score, the better your chances are of getting a loan. Ask your lender for details.
45. HOW CAN I IMPROVE MY SCORE?
There are no easy ways to improve your credit score, but you can work to keep it acceptable by maintaining a good credit history. This means paying your bills on time and not overextending yourself by buying more than you can afford.
FINDING the RIGHT LOAN for YOU
46. HOW DO I CHOOSE THE BEST LOAN - PROGRAM FOR ME?
Your personal situation will determine the best kind of loan for you. By asking yourself a few questions, you can help narrow your search among the many options available and discover which loan suits you best.
- Do you expect your finances to changeover the next few years? - Are you planning to live in this home for a long period of time? - Are you comfortable with the idea of a changing mortgage payment amount? - Do you wish to be free of mortgage debt as your children approach college age or as you prepare for retirement?
Your lender can help you use your answers to questions such as these to decide which loan best fits your needs.
47. WHAT IS THE BEST WAY TO COMPARE LOAN TERMS BETWEEN LENDERS?
First, devise a checklist for the information from each lending institution. You should include the company’s name and basic information, the type of mortgage, minimum down payment required, interest rate and points, closing costs, loan processing time, and whether prepayment is allowed.
Speak with companies by phone or in person. Be sure to call every lender on the list the same day, as interest rates can fluctuate daily. Your Realtor also may be able to suggest a variety of different lender options to you.
48. ARE THERE ANY COSTS OR FEES ASSOCIATED WITH THE LOAN ORIGINATION PROCESS?
Yes. When you turn in your application, you’ll be required to pay a loan application fee to cover the costs of underwriting the loan. This fee pays for the home appraisal, a copy of your credit report, and any additional charges that may be necessary. The application fee is generally non-refundable.
49. WHAT RESPONSIBILITIES DO I HAVE DURING THE LENDING PROCESS?
- Be sure to read and understand everything before you sign. - Refuse to sign any blank documents. - Do not buy property for someone else. - Do not overstate your income. - Do not overstate how long you have been employed. - Do not overstate your assets. - Accurately report your debts. - Do not change your income tax returns for any reason. Tell the whole truth about gifts. Do not list fake co-borrowers on your loan application. - Be truthful about your credit problems, past and present. - Be honest about your intention to occupy the house - Do not provide false supporting documents.
50. WHAT HAPPENS AFTER I’VE APPLIED FOR MY LOAN?
It usually takes a lender between 1-2 weeks to complete the evaluation of your application. Its not unusual for the lender to ask for more information once the application has been submitted. The sooner you can provide the information, the faster your application will be processed. Once all the information has been verified the lender will call you to let you know the outcome of your application.
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