How to buy a house is the most complex question that you can come across while house hunting. This not only includes searching for a house but also questions associated with the locality you choose, saving up for a down payment, securing a mortgage, buying mortgage insurance, looking after closing costs, and after all of that, taking care of the house and making the house your home sweet home!
If you are also looking for a house or are planning to buy one in the future then consider this article as your house buying guide.
Buying a House
There is a famous quote by Steve Jobs, “If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it.” While the quote is not related to how to buy a house, it certainly can be applied to the process of finding your dream home.
Buying a house is not limited to you having a realtor, putting on your best clothes, and visiting fancy places. You need to ask a really serious question when considering buying a house such as,
- Are you ready to buy a house?
- Why do you want house ownership?
- How much money can you afford to buy a house?
- What is the real estate market condition of the city you are buying a house in?
- How can you save for a down payment and how much money will you need for it?
- How to apply for a mortgage and get pre-approved?
Purchasing a house can be a challenging task because it’s not easy to buy a house in Canada. Did you know that if you want to buy a house in Vancouver it will require you to save for almost three decades for a down payment? While a house in Toronto would require you to save for 24 years which, too, is a really long period. If you want to buy a Condo house, it can take you around 4 to 5 years. Do you see the difference? And that is why planning for a house is really necessary. So now let me help you with the most rewarding process of our lives and let’s get started to make your dream a reality.
10 Easy Steps to Know How to Buy a House!
If you are finding an answer for how to buy a house you would probably have done some research, may have read articles related, or would probably have gained some experience. This step-by-step guide will help you to make the decisions and guide you to the right path if this is your first time home buying experience.
Step 1: Deciding Whether You Should Rent or Buy a House
Buying a house is a long-term responsibility while renting a house will eliminate any need other than paying rent on time every month. The answer to this question depends on your financial condition, your income, your expenses, and your family’s dependency on you. In some cases, it is also better that you continue to rent a house than buying one.
For example, if you do not have enough money saved for a down payment, it is better that you continue to rent a house and save a larger amount for the down payment. The reasoning behind this lies in the fact that the larger the down payment amount, the more you will save on your mortgage by securing a reasonable deal. This means savings in the long run. Let us now have a look at what is the difference between renting versus buying a house.
Advantages of Buying a House
Provides a Sense of Ownership
Most people have the dream to have their own house. If you buy a house it will give you the ownership of having something you can call your own. It gives you a kind of satisfaction and all in all it is an investment.
Buying a House is an Asset
No doubt that you are investing a really large amount when you buy a house but in the end, it is an investment and it is going to give you a return in the future. In most cases, when you sell your house you get more money than what you originally paid for it.
Employs Personal Finance
Buying a house is not an easy task and you have to plan it in advance to have enough control and save money regularly. In the end, it is going to stop you from incurring unnecessary expenses and force you to save separately for a house. It makes you more responsible and builds equity for you. Buying a house will also create the potential for income when you sell it or you can put it on rent every month. It can help you in paying off your mortgage.
Benefits of Renting a House
It Gives You Mobility
You can change your house or you can opt for a better house when your house contract is over. If you are someone that has to constantly change cities, renting a house makes more sense because you don’t have to invest a lot and your responsibility is limited to paying the rent.
Fixed Expenses and Lesser Responsibilities
Your house rent is going to be fixed for every month until and unless you renew it or the rates are changed. It will also help you create wealth and because you don’t own the house, responsibilities would be lesser. Even the maintenance is taken care of by the homeowners, thus, reducing your daily struggles.
You Can Make Better Investments
Because your living cost is less with fixed rents, you can save your money in various financial instruments and purchase stocks, mutual funds, GICs, etc. to earn returns. You will also save money by not spending it on repairs, insurance, taxes, down payment, closing costs, and more. So, just imagine the money that you can save by renting a house!
You should always consider your needs at the present as well as in the future whether you are going to relocate, other expenses associated with your lifestyle, i.e., whether your kids are going to college, whether you are going to change your job or start your own business. Based on the circumstances, make a decision.
Step 2: All Things Mortgage
A mortgage is one of the most important things that you need to look after when you are buying your home. There are a lot of aspects to getting a mortgage. Let’s dive into it.
As you would know, a mortgage is a loan that you get from a bank or a mortgage lender in order to fulfill your dream of buying a house. 9 out of 10 Canadians opt for a mortgage loan to buy a house. You take a loan on the house for the purchase amount which is called the principal value and on that, you pay monthly EMIs, which includes interest payments along with the principal amount. Once you are done paying your loan you are officially the owner of your house.
There are two types of mortgages: open mortgage and closed mortgage.
This is a flexible mortgage that you can get in which you can pay off your loan amount whenever you want either in full or partial amount. Because it’s an open mortgage, you do not have to pay any charges when you make the payments earlier. But as it provides the flexibility the interest rate can be high here.
In this mortgage type, you pay a penalty if you make any early payments. When you make an early payment it means that the mortgage lender is losing its income and thus they charge a penalty which can range from 5 % to 30% of the total amount of the mortgage.
Mortgage Default Insurance
If you are paying 20% or less than the purchase price as a down payment, by default you are required to buy a mortgage default insurance. You can get this insurance from CMHC (Canada Mortgage and Housing Corporation). It gives a sense of security to the mortgage lender that even if any worst scenario occurs, he will be paid his money back.
Interest rates here can differ; they can be either fixed or variable. If you are opting for a fixed mortgage rate then it means that you will be paying the same interest for a fixed period of time like 1 year to 5 years. While if you are opting for a variable rate, it means that along with the changes in the prime rate of National Bank the interest rate of your mortgage loan will also change.
If you have got a higher interest rate mortgage or have bad credit then you can turn the situation in your favor by making your finances strong by the date of renewal of your mortgage loan. You can also pay a larger amount before renewing your mortgage to get a better interest rate deal.
Step 3: Plan Plan Plan
This is one of the most important answers to how to buy a house! Buying a house is like planning for your future life. You cannot just decide that you want to buy a house and it’s done; it requires careful and meticulous planning to achieve your dreams. The major thing that you have to consider here is personal finance. Ask yourself the following questions before you start on the road of how to buy a house can be helpful.
- Why do you want to buy a house?
- Do you have enough savings to buy a house?
- What is your gross income?
- What are your monthly expenses?
- Do you have a stable job?
- Have you started saving for a down payment?
- Do you have any debt?
- Do you have emergency fund savings?
- How much do you have left every month after you are done paying all the bills and debts?
- Do you save money currently? If yes, in which instruments and what they will yield in the future? Are you comfortable paying your rent after all the expenses are taken care of?
- What is your credit score and will it create an issue when you will apply for a mortgage?
- What can be your closing costs?
Now, these are the questions related to your personal finance but along with that, you have to ask questions related to buying a house. For example,
- How big a home do you want?
- How many bathrooms or bedrooms do you desire?
- Does it need to have a garage?
- Does it need to have a garden?
- Will your family size increase in the future?
- Do you want a brand new house or a previously owned house?
- Do you want a Condo or a non Condo house?
- In which location do you need a house?
- In which neighborhood are you comfortable living in?
- Does your house have schools and general amenities around?
- What is the crime rate?
Based on all these, plan your research for house hunting and also for saving for a house!
Step 4: The Amount You Have for the Down Payment
Your financial position is the most important thing in answering the question of how to buy a house. Even if you apply for a mortgage or a loan, the bank is going to judge your finances. It’s better to have this talk with yourself and then move ahead. The questions include,
- How much savings do you have right now?
- What amount of down payment are you going to save?
- How much money will you be able to afford every month as a mortgage payment?
Here are a few ratios that would help you get an answer.
Gross Debt Service Ratio (GDS)
It will help you to know that based on your income how much monthly mortgage payment you would be able to make. To calculate this you need to include the principal amount and interest amount (which combines and contributes to the total mortgage payment) plus any heading cost or taxes, plus 50% of your charges at Condo if it applies. Then you need to divide it with your monthly gross income. Whatever the answer comes it should not exceed 32% of the overall gross income you earn every month.
Total Debt Service Ratio (TDS)
In addition to the GDS ratio, many lenders also look after the total service ratio. Here, your monthly debts for example your line of credit, child support, student loan, and credit card loans are also included. As per the standard method, it should not increase 44% but it’s better if you have the goal to keep it under 40%. If you want to calculate your GDS and TDS you can do so from this link.
Now that you know how much your monthly mortgage payment should be, it is time to look after the other elements.
The first one is your credit score and history. The average credit score in Canada is 660. There are various ranges of credit scores that you should know and if your credit score is below average, it is time for you to step up and improve it in order to get a better deal for the mortgage.
The below is the list of various credit scores standardized in Canada.
741 – 900 = Excellent
690 – 740 = Good
660 – 689 = Average or Fair
575 – 659 = Below Average
300 – 574 = Poor
300-574 (Poor): If you fall in this category, it suggests that you have a bad credit track and might have declared bankruptcy.
575-659 (Below Average): If you fall in this category, you may be required to pay a higher rate of interest, and also getting more debt can be a challenge.
660- 689 (Average or Fair): This is considered an average credit score range. You can get advantages of lower interest, unsecured credit cards, and more with this score.
690-740 (Good): If you have this credit score, you are set to have many advantages like easy loan access, lower rates, and cashback rewards!
741-900 (Excellent): This probably is the highest credit rating. If you are in this range, you would be getting amazing benefits and easy access to debt when needed at a very low interest rate.
In addition to credit score, lenders also check your employment history in order to know that you are financially equipped to pay the debt in addition to how much down payment you are willing to pay. Even your credit score history will be checked to know where you spend your money and whether you pay back the debt or not.
Now that you know how much would be your monthly obligations, it is time to save for the down payment.
Step 5: Save for the Big Amount – Down Payment
In Canada, you have to pay at least 5% of the total house value as a down payment. The below chart will help you to know about the minimum down payment applicable.
Minimum Down Payment
|$500,000 or less||5% of purchase value|
|$500,000 to $999,999||5% of the first $500,000 of the purchase value|
10% for the portion of the purchase value above $500,000
|$1 Million and more||20% of the purchase value|
Typically people pay around 5% to 20% of the down payment. If you are paying less than 20% then you are required to buy mortgage insurance. The question is how much you need to save for a down payment. Well, follow the below steps.
Plan your goal and start working
This is one of the most common things that people do when they are planning something. Take a pen and a paper and write down what your dream house cost and how much money you want to pay upfront as a down payment. Consider your current income, your future income, and your expenses to reach a conclusion. Once you decide on an amount, make a separate account in your bank to which the money gets credited every month. In this way, you will be forcefully saving money without encouraging any hassle.
Registered Retirement Savings Plan (RRSP)
Do you know that you can borrow around $35,000 from your RRSP account if you are a first-time homebuyer? The Canadian government provides this aid under the name “home buyers plan”. You can also borrow the money jointly for up to $70,000 to pay the down payment. It is a requirement that you will have to pay back the money within 15 years.
Tax Free Savings Account (TFSA)
As soon as you turn 18, you can save into a TFSA. Here the income earned would be tax free and you have the freedom to withdraw any amount anytime you want. In addition to this account, you can also save money into a higher interest bearing savings account, stocks, Guaranteed Investment Certificates (GICs), mutual funds, bonds, etc. Plan well and make sure that you are not taking too much risk but also don’t invest in instruments that won’t even cover the inflation.
Do Side Hustle to Save More Money
This does make sense when you’re buying a house. All you have to do is employ the free time you have into some constructive work. Even if it’s writing a blog or selling your photographs, just do it and create more streams of income. Sometimes regular income is not enough and you have to do side hustle; you can also start a business to increase your income. We have listed these 10 passive income strategies that you can use to generate more money and save more money.
Step 6: It’s All About the Closing Cost
If you are thinking that once you are done with your down payment savings it’s gonna be alright then you need to get a reality check. Definitely, it can get alright if you have saved enough for your closing cost because it is also going to be around 2% to 4 % of your entire house purchase price, which is quite a lot! And that is why you need to plan for this cost as well. Below is the list of closing costs for which you have to manage finances to fulfill your house buying journey.
Legal Expenses: This is a very common form of expense that you have to pay to the lawyers for title search, the drafting of title, and more. It would around cost you $500 excluding GST.
Property Evaluation: This is a big must if you are buying a house. It would help you to know that you are not paying more than the current market value. The cost would be around $300 but the final price depends on the agency you choose and the property type.
The Title Insurance Cost: This protects you from any damage or spurious information related to the property. In short, it saves you from fraud. The approx cost for this would be $400.
Property Insurance or Fire Insurance: You would require to consult a lawyer in order to calculate these charges. Make sure that the insurance cover should be equal to the replacement cost. You need to have this insurance in place when you are closing the deal. The cost for this varies depending on what type of insurance you buy and how frequently you are going to pay for the premium.
House Inspection Charges: This is needed to let you know that the house is in good condition and doesn’t have any issues with the structure. It can also help you to understand the market price. The cost for this can be $500 approx.
Mortgage Default Insurance: As I said earlier if you are paying less than a 20 % down payment, you will need to buy mortgage default insurance. The cost of this would be around 0.6% to 6.5% of the purchase value of your house.
Province or Municipal Taxes: This depends on the city or the province you are living in. Some provinces such as Ontario also impose additional charges based on the city. For instance, if you are going to buy a house in Toronto, you will have to pay double which includes the province taxes in addition to the municipal taxes. In other cities than Ontario, you don’t have to pay municipal tax. In addition to this, there are also other taxes like property transfer tax, land transfer tax, registration fees, etc. Though these other costs are largely applied only to the reselling home.
Estoppel Certificate Fees: If you are buying a Condo except for Quebec, you will need to have this as a must. This certificate ensures the financial statements in consideration with the Condo house. For example, the money that you have kept with the Condo owners, other charges that you have paid or are liable to pay, and more. The cost for this would be around $100.
Other Charges: Along with the above charges, there are optional charges as well. It includes mortgage insurance, moving out charges if you are opting for service (it can be more than $2,000). Other expenses also include buying new tools, painting your house, decorating your house, buying furniture and stuff, etc. which can cause around $1,000 to $2,000. But this depends on how much the requirement is and how much you are willing to spend.
Step 7: Apply for a Mortgage Pre-approval
This is an essential step to know how to buy a house. Majorly two things are involved in this step which can confuse people. The first one is mortgage pre-qualification the second is mortgage pre-approval. You should do thorough research to understand the current market rates and to find the best mortgage lender that can give you favorable terms and conditions. For now, let us remove the conclusion.
What is Mortgage Pre-qualification?
It is a basic step in which you meet a broker or a mortgage advisor and discuss your house buying plan. You will need to provide information about your assets, liabilities, and income. Once you do this, you will get an approximate amount of how much money you will get as a mortgage. This is not a final amount. You will get the final amount after applying for the mortgage approval.
What is Mortgage Pre-approval?
In this step, you would be needing to submit documents related to your assets, liabilities, and income. Based on this, your credit condition and credit score would be examined and you will get the pre-approval for a mortgage.
Once you are pre-approved for a mortgage, you can lock in the interest rate given to you. You can lock in the interest rate for 92-130 days. It will protect you from an interest rate hike. Because you are already pre-approved, even the realtor considers you financially ready to buy the house. You can also negotiate with the seller to get an ideal deal. Applying for a pre-approval and getting one is like no strings attached. Just because you got the pre-approval doesn’t mean that you will have to opt for the same lender.
Documents Needed for Pre-approval
To apply for mortgage approval you will need the following documents.
- Personal information such as your Social Insurance Number and identification proof.
- Your proof of income
- Employment verification which includes a letter from your company or employer that can clarify your current salary, your type of employment, and your position.
- Your financial statements if you are self-employed.
- Your proof of assets like jewelry, property, or vehicles.
- Proof for a down payment which can be your investment account or bank account.
- Details on your liabilities or debt which can be your line of credit, credit card loans, personal loans, child support, current mortgage insurance, student loans, etc.
There will be a hard check once you submit these documents to know your creditworthiness. The entire process can take around one or two days if you have all the documents and paperwork done without any mistakes. It is advisable that till you buy a house, do not change your job profile or do not take a big loan. Because in this way you will create more debt and that would reflect in your credit score which can hamper your mortgage interest deal.
Step 8: It’s Time to Get Some Help from a Professional
Once you complete all these particulars, now is the final stage of your house buying process. It can be quite challenging to do everything on your own and to be frank if it’s not your profession you are going to lack a thing or two. And that is why taking professional help is always advisable.
For a smooth house buying experience, you will need the following professional.
- Land surveyor
- House Appraiser
- Mortgage lender
- Home inspector
- Insurance provider
What each of them does is quite self-explanatory but it is advisable that using their help will make the process faster and easier for you.
Step 9: Find Your Dream House and Seal the Day
Now that you have tracked Everest, it is time to look at the beautiful view. With the help of a realtor, you can easily get houses with your preferred facilities, your desired area, and on your favorable terms. You can also look at various online websites that provide details on available houses and construction sites in Canada.
You should consider various things while searching for a good house. For example, does it fit in with your budget? Is it exactly what you want? Are the neighborhood areas safe? Will you be able to get the necessity around easily? What is the crime rate?
Once you finally get your dream house, it is time that you may refer to the house seller. You can also ask your realtor or broker to negotiate good terms on your behalf. Once you submit an offer, the house seller will compare it with the other offers. If they choose you, you can call for a house inspection to make sure that everything is alright and in good health.
Then comes the final stage of closing the deal. You will require to fulfill the documentation process. This process would include documents related to the offer of buying the house, the purchase of title insurance, title search, property tax payment to the province or municipality, transfer of funds, registering the house, and finally taking the keys. Once you have done this, congratulations, you are finally the owner of your house!
Step 10: Set Up and Enjoy
Now that you have your own house, it is time to decorate it and make it your home. Anyone can buy a house but a home is made with passion, love, and hard work that you put in. Buying a house is just the starting process, now that you own it you will have to look after various expenses that come with buying a house. It includes monthly mortgage payment, mortgage default insurance, monthly bills, maintenance, repairing charges, etc.
That the house that you have bought with so much hard work, you need to maintain it to the level that you enjoy the living and ravish the experience each day. If you have bought a house that has a room or two extra, you can always list them on Airbnb. You will not only earn, but that would help you to pay your monthly mortgage payments.
The Bottom Line
Buying a house is an experience on its own. It can be exhaustive but it is worth it, right? It is an asset that you can hold and count on your tough days. All you have to do is make sure that you follow the steps mentioned, prepare yourself mentally physically, and financially to invest in the house, and get support from your family members. If you are a first-time homebuyer, make sure that you take all the advantages available to you.
I hope that you enjoy reading this guide for house buying. Remember to save every day if house buying is your dream because slowly and steadily you can win big! All the best!