Buying your First House

house and keys

Purchasing a house is the single largest investment most of us will make in our lifetime. The decision to make the transition from renter (or freeloader) to homeowner is not one to be taken lightly. The road to home ownership can be complicated. The following article offers a few tips and information that can help de-mystify the process of purchasing your first home.

Know what you can afford

1. Mortgage pre-approval
Most financial institutions will pre-approve you for a mortgage based on your income, debt load and amount of savings. Knowing how much money a lender is willing to provide will give you an idea of how much house you can afford. And when you find your dream home, you can make an offer that is not conditional on financing which can be an advantage during negotiations. A pre-approval will also lock in the current interest rate for a predetermined period of time (usually about 3 months) which can save you some money if mortgage rates go up. And if rates go down, you will qualify for the lower rate.

2. Don't trust the bank's numbers
Just because the bank is willing to lend you, say, $250,000 doesn't mean you should borrow that amount, as tempting as that may be. Banks are only concerned with their level of risk, not with any lifestyle sacrifices you may have to make to repay their loan. Before you max out, consider the following questions:

After the bank runs the numbers to determine how large of a loan you qualify for, you should run your own numbers to determine how comfortable you are with the payments. It is easy to make sacrifices in the short term, but a mortgage is a long-term commitment.

Also, keep in mind that in addition to the purchase price of the house you will have legal expenses to pay out for things like title and other document searches, land transfer taxes (or similar fees), and municipal taxes. Contact a local real estate lawyer's office to find out how much you can expect to pay in your area. There are also expenses associated with utilities such as connection charges and new account deposits for which you will need to budget. You want to have a decent cushion of funds in your bank account to cover these expenses.

3. Other amounts in your mortgage
Your mortgage payments are not limited to just the amount of money you borrowed. The lender will try to sell you mortgage life insurance and sickness and accident insurance. These are optional. You are often better off to buy a term life insurance policy on your own, since the amount of coverage will not decrease during the term. A mortgage life insurance policy will only cover the balance of your mortgage, the amount of coverage decreases with each mortgage payment, while the premiums remain the same.. Sickness and accident insurance will cover your payments if you are unable to work. Read the terms of the coverage carefully to decide if this product is right for you.

You may also have the option of paying your municipal property taxes with your mortgage payments. Rather than paying your taxes six times a year (or whatever it is in your municipality), you can have your mortgage lender handle the payments for you. The tax component is added to your regular mortgage payments and held in an account until payment is required, which can greatly simplify your budget.

If your down payment is less than a certain amount, you will have to pay for mortgage loan insurance which is a percentage of the mortgage amount. Your premium is determined by the percentage of your downpayment. The amount of this insurance is usually rolled into the mortgage.

4. "Forever House" or Property Ladder
It can be very tempting to buy the biggest and best house you can afford with the idea that you can grow into the house and never have to worry about moving again. In fact, if interest rates are low, that may not necessarily be a bad idea. However, a pretty convincing argument can be made for climbing the property ladder. Buying a less expensive house with a shorter loan amortization can help you build equity faster. The following scenarios assume an annual percentage rate of 5%, and are calculated according to Canadian rules (mortgages are calculated differently in Canada and the United States):

The "Forever" House: With a mortgage amount of $400,000 at 5% for 25 years, weekly payments are about $536. After 10 years, the mortgage balance wll be about $295,000.

The first rung of the Property Ladder: Buying a house at half the "Forever" House price means the mortgage payments would be half, or $268 per week based on a $200,000 mortgage. If the other $268 is put into a savings account, after 25 years you would have the equity in the house ($200,000 or more) plus $348,000 in savings.

Moving up the Property Ladder: If you can afford the $536 "Forever" House payments and apply them to the "first rung" house, the $200,000 mortgage would be paid off after 9 years. Being debt-free in less than a decade is a pretty convincing argument for staying in that first house. However, after 9 years, you could move up to the "Forever" house with a $200,000 mortgage (instead of having a $295,000 balance as in the first scenario). After another 9 years, that mortgage would be paid off (seven years earlier than in the first scenario). Then if you put the amount of your mortgage payment into a savings account, you would have over $190,000 after seven years.

Keep in mind that interest rates and housing values fluctuate, but it is clear that climbing the property ladder is a better choice. Which would you rather have after 25 years-- a $400,000 house or a $400,000 house plus $190,000 in savings? A little patience pays big dividends.

Know what you want

1. Make your wish list
What are you looking for in a house?. Consider things like number of bedrooms and bathrooms, features like fireplaces, luxuries like a large kitchen, or inground pool in the back yard. Are you looking for a large lot in the country or a small lot in the city? What are your priorities, and where are you willing to make sacrifices?

2. Do the research
Go to open houses. See what is out there in your price range. Search the Multiple Listing Service (mls.ca in Canada or mls.com in the United States). Can you afford the house you want?

3. Talk to a real estate agent
A real estate agent knows the market, has access to the newest listings, has contact with other agents and can advise you if your wish list is realistic. A real estate agent can help you find the house you are looking for. Some listings never see an open house.

4. Location, Location, Location
It is better to have the least expensive house in an upscale neighbourhood than the most expensive house in a less desireable area. Other factors to consider are the proximity to schools, shopping, parks, transit, etc. And remember that things that aren't important to you today may be important to you at some point in the future.

5. See the potential
The perfect house is elusive unless you have a house built to your exact specifications. But shortcomings can be overcome. Let's say, for example, that your budget is $250,000 and you really want a two car garage. You might find a house that meets all of your other criteria for $225,000, but with no garage. If you can have a garage built for $25,000 you will still be within your budget.

6. Don't be distracted by shiny objects
Just as you should look beyond what is in front of you to see the future potential of a house, you should not allow yourself to be distracted by fancy extras. For example, you may really like the classy chandelier in the front entry hall, but the roof needs to be replaced. A new roof may cost $5000, and the chandelier may only be worth $2500. It would be less expensive to upgrade the chandelier later rather than replace the roof.

7. Do the math and be realistic
Okay. You have found a house that meets most of your criteria, but it needs some work. Can you afford to do the work or have the work done? What does that do to your bottom line? It's easy to look at a house and imagine certain upgrades and renovations, but you have to realistically budget for those things. The costs can quickly add up and your dream can turn into a nightmare.

Making the offer

1. Know the comparables
If you have done the research, you should have a pretty good idea of the fairness of the asking price. And a real estate agent will be able to tell you what comparable houses sold for (asking price and selling price are often two different things). How does this house compare to similar houses in terms of features and state of repair? How low can you make your first offer without offending the seller? Can you convince the seller that your offer is fair based on the comparables?

2. Conditional offer (contingencies)
Going in with a clean offer increases the chances of it being accepted. However, conditions provide you with a certain amount of protection. You are entering into a very expensive contract so you will want to be sure that you are making the right move. The two most common clauses for first tme homebuyers are "Conditional on obtaining financing" and "conditional on a satisfactory home inspection report." You can also require the homeowner to make certain repairs or upgrades to the house if you desire.

Just because you are preapproved for a mortgage does not guarantee that you will get the loan. The final decision to loan the money will rely on a satisfactory appraisal. Basically, the lender decides if you are paying a fair price for the house, since they are assuming the risk. If you default on your payments, and the house goes into foreclosure, the lender wants to be sure they can recoup their money.

The home inspection is for your own protection. A home inspector can identify potential problems with the house-- everything from structural to mechanical to general maintenance-- reducing the possibility of nasty surprises down the road. If a home inspector comes back with a list of expensive repairs, you have the option of either taking your offer off the table, or re-negotiating the contract to purchase , either requiring the homeowner to make repairs, or reducing the purchase price, or you can choose to go ahead with the purchase without any re-negotiation at all. The choice is yours.

3. Inclusions
Basically, anything that is not nailed down is not included with the house unless otherwise specified. So if you want the window coverings and the appliances to be included, put it in writing in your offer. If you really like the pink flamingos or garden gnomes in the front yard, include them in your offer.

4. Closing
The closing date is the date the seller vacates the premises and you take possession. This is typically at the sellers discretion, but you can negotiate the date in your offer. A longer closing can buy you more time to prepare for your move; a shorter closing can get you into your new house sooner.

5. Prepare for some tension
Any negotiations can become tense. Unless your first offer is for the asking price with no conditions, expect the seller to make a counter offer. Negotiations could potentially go back and forth a few times before an agreement is reached.

6. Competing offers
Unless you go in with an unconditional offer, the seller will usually retain the right to continue marketing the property. That means they have the right to accept a better offer if one comes along, but they may only do so after giving you the opportunity to remove your conditions, within a specific period (typically three days). Once you remove your conditions within the specified period, the seller is obligated to sell to you.

This is the situation we were in: we found a house we liked, but there was already a conditional offer on it. We made a conditional offer, which the seller accepted. The first party was given 72 hours to remove their conditions which they were not able to do. Our offer then became the principal offer. However, the first party later submitted another offer without conditions which the seller accepted and we were given 72 hours to remove our conditions. We were unable to do so and thus the negotiations ended and the other party ended up with the house.

Congratulations, your offer has been accepted. Now what?

1. The lawyer:
There is a LOT of paperwork surrounding any real estate transaction, which is handled by a real estate lawyer. To get the ball rolling, call the lawyer of your choice and let them know that you are purchasing a house. They will walk you through the rest of the process. You will meet with them at least twice-- once to sign the direction for them to act on your behalf and again on closing day, when you will be signing or initialing numerous documents and receiving the keys to your house.

2. The bank
The lawyer will handle the proceeds of the mortgage in finalizing the purchase of the property.

Moving Day

1. Overlap if possible
Moving all you worldly possessions from your current residence to your new home on the same day can be very stressful, overwhelming and exhausting. If it is practical, you should try to maintain your current residence for another month. This will allow you to do any painting or cleaning while gradually moving stuff over to your house, Then you can have your larger things moved whenever you are ready.

I kept my apartment for a month past the closing date of my first house. I had the main floor painted and a new kitchen floor installed while bringing over boxes of stuff and storing them in the basement. Then I called the movers to transport the bigger stuff. The actual move for which I was paying three men an hourly rate took less than three hours.

2. Invest in storage
If you are in a situation where maintaining two residences for a period of time, no matter how brief, is not practical or possible, then consider renting a storage unit for some of your smaller stuff that you won't be needing for a while. You will still save time and money on your actual closing day. It will be much easier to gradually bring some of your stuff out of storage when you are ready for it rather than living among piles of boxes as you are trying to get settled into your new home.

3. Hire professional movers, or split a case of beer with well-meaning friends?
We all have friends that have pickups and minivans and it is tempting to call on them in order to save some money on moving day. You may also consider renting a truck from a rental agency (such as U-Haul) and loading it up yourself. However, hiring professional movers may be the best choice, since they have more experience and know how to load and unload the truck properly to reduce the likelihood of damage to your possessions. With experience comes efficiency and speed. They also carry insurance, so you are covered in the event that your property does get damaged.

4. Prepare for a long, stressful day
Moving is a very stressful event, no matter how well you think you are prepared for it. You will be pulled in many directions at the same time. And at the end of the day, you will be exhausted. But at the end of the day, you will be a homeowner.

Recommended resource

The road to home ownership is complex. I hope this article has answered some of your questions. For further reading, I highly recommend the Canadian Mortgage and Housing Corporation's website, which goes into more detail about many of the topics covered here.

http://www.cmhc-schl.gc.ca/en/index.cfm