Most of us know buying a house is a major purchase. In fact, it’s likely the most major purchase we will make in our lives. (Unless your job description includes the words “baron” or “tycoon,” in which case maybe you’ll buy a basketball team or something.) It’s understandable that people find the process of buying a home a little daunting. There’s a lot for a first-time buyer to consider if they want to avoid any common pitfalls. According to one recent survey, only 29% of first-time buyers found the home-buying process easy to understand, which is why you should take it one step at a time. If you’re thinking of taking the plunge, these are 5 steps you should take — before attending an open house or comparing mortgage rates.
1. Decide if you really want to buy a house
Guess what? While it certainly feels like home ownership gets harder every day, recent statistics show Canadian millennials are becoming homeowners earlier than their parents did. According to TD Bank, more than 50% of Canadians aged 18 to 35 are homeowners.
So what? That doesn't mean you should own a home. There’s a lot of pressure coming from all sides (family, friends, age-old financial advice) to get in the market A.S.A.P. But homeownership may not be your thing. For example, if you live to travel, owning a pricey home might only hold you back.
Now what? You should only consider buying a house if you are financially stable and have the means to do so. Even then, renting is still a very reasonable option for most people. Before you take the plunge, make sure your lifestyle aligns with homeownership.
2. Get pre-approved
Guess what? According to a 2016 survey by the Bank of Montreal, Canadian millennials can expect to spend an average of $350,000 on their first home. Have you got that kind of cash lying around? If not, you're going to need a mortgage.
So what? A mortgage is just a loan to buy a house. Certain factors — like your income, your credit score and how much you’re able to pay up front — tell lenders whether you’re a safe bet or not.
Now what? Get pre-approved from a bank or mortgage broker. This will get you officially started on your house-hunting journey, as well as provide a higher-end estimate of how much house the bank thinks you can afford.
3. Figure out how much you can really afford
Guess what? Ever heard the term house poor? It describes the scenario in which homeowners find themselves spending too much of their income paying their mortgage, leaving nothing behind for vacations, decent food or non-cardboard furniture.
So what? Whether it’s wanting to keep up with our Facebook friends or just feeling the effects of a really awesome open house, wishful thinking can lead us to believe our wallets are much heftier than they are.
Now what? Just because a lender is willing to give you $500,000 doesn't mean you should spend that much. As dreamy as your dream home may be, follow this basic rule of thumb: Your monthly living expenses (utilities and maintenance included) should consume no more than one-third of your income. Do your own math and adjust your expectations accordingly.
4. Count your down payment pennies
Guess what? In Canada, the minimum down payment for a first-time homebuyer is 5%, so long as the house costs less than $500,000.* You may need as much as $25,000 available to secure your home.
So what? The money has to come from somewhere. About 15% of first-time buyers get help from the Bank of Mom and Dad, which is perfectly reasonable if they can afford it. If that's not an option, you'll need to start saving.
Now what? If you have money tucked away in a Registered Retirement Savings Plan (RRSP), you can withdraw up to $25,000 from it under the Canadian Home Buyers Plan. This federal program that allows first-time buyers to withdraw from their RRSP without penalty. There’s one big caveat: You have to pay back the money within 15 years.
* For all first-time home purchases over $500,000, the down payment requirement is 5% and 10% for any portion above that. Also note that buyers who pay less than 20% down payment are required to have their loans insured. This is a cost the Canadian Mortgage and Housing Corporation (CMHC) charges your lender to protect them in case you default, but most lenders pass the cost on to you by adding it to your mortgage payment.
5. Get ready for a wild ride
Guess what? In a hot housing market — which includes most major cities these days — you may find yourself in a bidding war against other prospective buyers. At the very least, it’s common for houses to sell for more than the asking price.
So what? It can be really frustrating. Depending on where you’re looking, this may be the reality for your entire search. The hotter the housing market, the hotter the water.
Now what? When you’re ready to start house-hunting — like, for real — ask around for a recommended real estate agent. They can act as your guide through the home-buying process: both an advocate and lead negotiator. They receive a commission for their services, usually around 2.5%, which is paid to them by the seller, not the buyer. Most homebuyers go this route.
Well, do you feel ready to embark on your home-buying journey? If you start with these five steps, you'll be well on your way.