TIPS FOR BUYERS

and

FIRST TIME BUYER'S GUIDE

           A) The Basics of Housing Affordability

           B) Questions you need to ask before purchasing a home

           C) Home Purchase Expenses

           D) Six Common Mistakes to Avoid

Can you afford to purchase a home that meets your needs?

What is the Debt Service Ratio?

How much monthly debt payments can you safely service with existing income?

What is the Debt Equity Ratio?

What percentage of the purchase price is needed for a down payment?

What are your minimum housing needs and maximum affordability?

These basic questions should be addressed at the start of the process of first time home buying.

Understanding these basic points might save you a lot of time, money and stress.

Ownership versus renting builds equity in a normally rising real estate market. There is a pride and joy of ownership that usually pays off if you invest carefully. Real estate is normally an excellent investment over the long term provided you do not overpay at the time of purchase and are actually aware of all the hidden costs, including renovations required, going in.

A) The Basics of Housing Affordability

You will need to meet with a bank lender or mortgage broker if you have not yet completed a mortgage pre-qualification. They will establish how much of a mortgage you will qualify for. There are normally two ratios you need to consider:

1.Debt Service Ratio – the percentage of your monthly gross income that goes to service your total debt payments – try to keep this ratio under 37%. The ratio varies from time to time and your mortgage broker will be able to assess this most accurately based on current bank lending and real estate market conditions. Make sure you totally understand the reasons behind the formula, which are intended to realistically assess your ability to make your total monthly debt payments usually with taxes added in. The general guideline is try to have all your monthly debt payments come in under 37% although this number varies from time to time at different institutions and also depending on your equity, your net worth and your current credit rating Mortgage rates vary considerably and it is important, like anything else, to carefully shop around for the best interest rate, terms and options.

2.Debt Equity Ratio – represents the percentage or ratio of debt to equity in the purchase. For example, if you are putting 20% down payment, the ratio would be 80 – 20, for example 80% debt and 20% equity.  Be sure to tell your mortgage broker all the details of your finances. Sometimes it is may be necessary to reorganize your financial affairs in order to better qualify for a mortgage, such as paying off a car loan or getting rid of other monthly payments which directly affect your debt service ratio and your ability to qualify for the mortgage you need to buy the home you want or need.

First time home buyers can sometimes take advantage of the federal government's Home Buyers' Plan. Under this plan normally you may use up to $20,000 of your RRSP towards the purchase of a home. Ask your accountant for the details he is she is best qualified to answer this question.

Are You Ready to Buy a Home?

Do you have the necessary financial resources to complete the purchase of a home that meets your needs? You should have a minimum of ten to twenty percent of the purchase price of a home for the down payment,  ideally a larger down payment is better and may be required. Check the latest rules with your mortgage broker or bank.

Do you expect to stay in your new home for some time? Moving can be expensive and you will want to build some equity before having to relocate. Your job and home life should be stable. Sometimes it is preferable get pre-qualified. And to keep renting and saving until you are quite certain that you have the resources to get the house you want and need. Be vary careful about all the stories you hear about flipping houses. Very few people actually gain financially from such attempts. You hear about the few winners but never hear about the many losers. Be as realistic and unemotional as you can be when purchasing a house – it is the biggest investment you will normally make in your life time. Get pre qualified - start working with a professional Realtor, be realistic, do all your own due diligence at every stage and carefully consider your needs at the start of the process.
 

B) QUESTIONS TO ASK BEFORE PURCHASING A HOME:

Are immediate renovations required to make the home move-in ready for you?

How many bedrooms, bathrooms, storage, or office space do you need.

Do you need a two-car garage or can you get by with only one or a carport?

Do you want any extras such as air conditioning, storage space, a workshop, a fireplace, a swimming pool? What are the minimum amenities that you must have?

Do you have any special needs to be accommodated that are not already included?

Do you have children that attend school? How close are schools, recreation facilities and work.

Do you need room for pets? Are there any restrictions on pets you need to know?

Is there cable, Internet, telephone, or other services you need are available in the area, and is the house properly pre-wired for each?  

What are the annual property taxes? Will the bank insist that property taxes be paid monthly, along with your mortgage payment and have you budgeted for that and the other monthly expenses?

What are the total utilities expenses each month. What type of heating is used? Is the home properly insulated.

Does the house use gas or electric heat for the furnace, water heater or the appliances? Has it been maintained?

How old are the major appliances? Which appliances are included with the house?

Have there been any recent major repairs to the house, and if so, when were they completed and at what cost?

 How old is the roof and when was it last replaced? What is the condition and expected remaining life of the roof?

Is there any evidence of water egress or damage in the attic, foundation, basement or are there settling cracks evident in the foundation? What about drains, are they working properly?

Is there evidence of past or current problems with insects, termites, ants, or rodents or other infestations? Look in every nook and cranny as part of your own inspection process.

What is the state of the windows? Is there a need for updated caulking or new trim materials?

Are the bathrooms fixtures in need of immediate repairs and what would the cost be?

Are all the electrical appliances properly wired or in need of any repair?  How old is the hot water tank and what is the expected remaining life?. Is there any rust showing from the tank liner? This is a sign of pending tank failure.

How old is the furnace and when was the last time it was serviced – are there any expected safety issues?

Is there a carbon monoxide alarm and smoke alarm in the home and should you replace or service existing ones?

How far will you be commuting to work and what is the traffic like and what will the monthly fuel bill be?

Where will your children attend school and how will they commute?

Are there parks and recreational facilities near by?

Is safety or crime an issue in the area you are looking in? Talk to the neighbours.

Are there any other negative issues nearby that will affect you uses of the property such as traffic sounds, power lines, railways, airports, trucking routes, gravel pits, or industrial or commercial uses nearby and what affect will they have on you use and enjoyment of the property?

Is the property close to an obstacle or obvious negative influence?

What is the access like to shopping, public transportation, parks, hospitals and medical clinics?

Is there any undeveloped land nearby that could affect your property in future?

Is local traffic a noise factor or is traffic a hazard for children?

What is the general reputation for the area in the community?

Is the future economic climate for the area expected to be good? Are businesses moving in to the area? Is there any recent sign of government investment?

What are the demographics of the area and does it suit your long term housing needs?

Are there plans for the area such as new roads, housing developments, or other construction, such as a fire station, or school, that that might affect you in future?

Consider the proximity to highways, other driveways, playgrounds, bus routes.

Consider existence of elevators, garbage disposal, fire exits, heating and air conditioners.

How well is the building soundproofed?. This can be important in a condo.

Visit at different times to check noise levels and activity relative to the property.

This is just a sampling of questions and should not to be considered to be all inclusive of the questions you need to ask.

 If you have any other questions be sure to check with your Realtor, strata manager, if applicable, your banker, mortgage broker, trades people, your accountant, lawyer and/or other family members.

C)  Home Purchase Expenses

There are many costs and expenses that home buyers must incur. This is not an all inclusive list but covers most costs you will encounter. Be certain to carefully review and budget for these expenses before you consider entering into a firm purchase commitment.

 Be prepared to pay for the many costs and expenses when due including, but not limited to, the following:

 Legal Fees & Disbursements (Get a detailed estimate from the lawyer)

HST, GST or PST (if applicable)

Land Transfer Tax - check the rate based on purchase price.

Property taxes and adjustments

Interest adjustments on interim financing, if any

Unpaid Utility Payments or City levies outstanding

Strata or Condominium Fees or special levies due before or after the close

Certificate fees

Survey fees

Home Inspection fees

Water quality and quantity certificate

Appraisal Fees

Mortgage broker's fee (if applicable)

Mortgage Loan Insurance Premium (if less than 20% down)

Mortgage Loan Insurance Application Fee (if less than 20% down)

Moving Expenses

Renovations and repairs

Furniture, paint, carpeting, window covering.

Service and Utility Hook-up Fees 

Property or Condominium Insurance

Mortgage Application Fees

Deed and Mortgage Registration Fees

Municipal Water, Sewer Payments and Garbage collection

Electricity and Gas Services

Cable, Telephone and Internet Services

Property Taxes

Strata or Condo Fees

Repair and Maintenance Expenses

Homeowner's Insurance

D) SIX COMMON MISTAKES TO AVOID

Mistake #1: Not using an experienced Realtor to advise on the transaction

Your Realtor can help you make a purchase with the lowest risk and the least number of problems. He or she can ensure the price you pay is an accurate market value. Good Realtors can offer expert advice on what to look for, conditions to include, best negotiation strategy, and help you through the process with confidence. An experienced Realtor make all the difference in the transaction

Mistake #2: Not Getting Pre-Qualified by a Lender before Looking of offering to Purchase a House

The FIRST STEP is to GET PRE-QUALIFIED BY THE LENDING INSTITUTION.

Only when you know what you are qualified for can you know the price range to look to purchase in.

This will normally save you many hours searching and negotiating on properties that you may not qualify for.

Pre-qualifying provides confidence, flexibility and peace of mind. It helps narrow the search criteria and provides your agent with a negotiating edge by being able to alleviate the sellers concern over financing and the ability to complete the transaction.

This is especially important when there are competing offers and time and certainty is of the essence. The pre-qualified buyer has the buying “edge” going into this process, by far. 

In a multiple offer situation, the qualified buyer will normally come out on top, or at least the chance for success is significantly improved for the pre-qualified buyer.

Mistake #3: Not Obtaining Professional Inspections and/or not addressing Deficiencies before completion

Not getting an independent inspection before purchasing a home is possibly the biggest single mistake you can make as a new buyer. I always suggest to my clients not to rely totally on the inspection report but also to do their own careful due diligence inspection, with the help of qualified trades people if necessary. Always carefully review the report with the inspector as a condition of the deal. Make sure you get references on which inspector to use because as with any trade, inspector skills range widely. Note also there is a built in legal disclaimer in the Inspection Agreement that prevents you from seeking costs later from the inspector for undisclosed damages, often even in the event of a serious mistake. It is a terribly disheartening lesson to purchase a home only to find out later there are major defects or hidden problems that might be very expensive to repair if they were overlooked at the time of purchase.

Try to maintain alertness and an unemotional disposition during the purchase process to try avoid such mistakes. Sometimes it is helpful to have an experienced home buyer or trades person attend with you at your own inspection for extra advice and another set of eyes. Insure that you obtain inspections where needed, e.g. home inspection, structural engineer, any infestations, questionable air quality or the quality of water well tests if necessary, etc. If the inspection report identifies significantly costly deficiencies, you may be able to negotiate an adjustment in the purchase price to cover required repairs or make your satisfaction of the inspection subject to the homeowner remedying the problem. You should also review your inspection report with your Realtor. These inspection reports often become the focal point of last minute negotiations on price. Like it or not, they are an important reality in the buying and selling process whenever you are buying or selling a pre-owned home.

On new homes there is the limited protection of the new required home warranty program but again BE CAREFUL to make certain that all deficiency inspections are completed as provided in the written contract.

Make certain the deficiency lists with values are made and agreed to in writing and preferably dealt with before the completion.

More than anything else on a new home, It makes a big difference dealing with a reputable builder who has a track record of satisfied customers and a valuable reputation to uphold. There is no substitute for the ethics, integrity and skill of the builder.

Always check out any builder carefully before making a new home purchase. Seek references from other purchasers.

Mistake #4: Buying a house Before Selling your existing home

If price is important you should always try to sell your present home before unconditionally buying another. It has the advantage in letting you know exactly how much money you will have available for your next purchase. Selling your home first allows you to place fewer conditions on your purchase which makes your offer more attractive to a seller. Sellers normally demand more money to take a "subject to" offer which essentially takes their home “off the market”. The other advantage is if you find a suitable house, chances are others will also find it attractive and you might lose out it if you can't make an unconditional offer.

Mistake #5: Not Shopping around for Mortgage Terms

Mortgage lending rates are negotiable and vary from institution to institution. Banks will often improve rates to get good clients, particularly if you have a good credit rating and might bring other business to them such as bank accounts, retirement accounts, savings accounts or other assets. Posted rates are a starting point. Always seek out the best rate by obtaining competitive quotes. An experienced mortgage broker can make a world of difference. Be certain to carefully check ALL the main terms of the mortgage, such as penalties on early payout or transfer, the portability of mortgage to a new property if you move, and other discounts that may be available on fees, if any.

Mistake #6: Not Knowing the Full Costs and expenses of Buying a Property