How to buy your first home: Your complete 9-step guide
Posted on Friday July 26, 2024
How to buy your first home: Your complete 9-step guide
You have been dreaming of owning your own home for years! Your own home, with a spacious yard, pool, garden or patio. Enough space for your children, your cat AND your dog. A haven of peace where you can relax after a long day at work. Your own cozy little nest...
But how do you go from dream to reality? Have you saved enough to buy a home? What steps do you need to take? We will walk you through this important process.
1. Save for your down payment
One of the biggest challenges of home ownership is putting enough money aside for a down payment.
The down payment is the amount you pay to your mortgage lender to secure the loan they will provide to buy your home. The amount of your mortgage is the difference between the price of your home and the down payment you made at the outset.
For example, for a home worth $500,000, if your down payment is $100,000, your mortgage will be $400,000, to be repaid according to the term and interest rate set by your mortgage lender.
Amount to set aside for your down payment
The minimum down payment depends on the purchase price of your home.
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Please note! If your down payment is less than 20% of the purchase value, you will need to take out insurance with the Canada Mortgage and Housing Corporation (CMHC), Sagen® or Canada Guaranty® . You will be required to pay an insurance premium in addition to your mortgage payments. |
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Our advice: Ideally, your down payment should be at least 20% of the purchase price of your home. That way, you will not have to pay any insurance premiums. |
How to save for your down payment
If you are thinking about buying your first home, you have probably already started saving for your down payment. Good for you!
Want to boost your down payment by saving more? Think FHSA or HBP.
The FHSA is a very useful tool for maximizing your savings for a down payment. You can contribute up to $8,000 a year to this account up to a maximum of $40,000. It is almost a godsend for those who dream of buying a home!
Just as when you put your money into an RRSP account, contributions are tax deductible and investment earnings accumulate tax-free. But that is not all! When you withdraw your money for your down payment, you will not have to pay income tax on the amount you withdraw.
Another solution is the HBP, which allows you to withdraw up to $35,000 from your RRSP ($70,000 if you are a couple!) for a down payment on your first home. The amount withdrawn is tax-free, but must be repaid to the RRSP within the prescribed timeframe.
It is also possible to do this more than once, provided the previous HBP amount has been repaid in full and on time. In short, the HBP lets you borrow interest-free from your RRSP to increase your down payment. The result is a lower mortgage.
Other measures have also been put in place to facilitate the purchase of a first home. Find out more about the various home ownership programs available to you.
2. Evaluate your budget by determining your borrowing capacity
Have you accumulated a good down payment? Now it is time to determine your borrowing capacity to get a good idea of the budget you have available for buying a home.
As a general rule, mortgage debt (commonly referred to as "mortgage") and home-related expenses should not exceed 30% of your total gross income, which is your pre-tax income. To estimate your mortgage payments, you can use UNI’s mortgage calculator.
To estimate the expenses involved in buying your home, consider the purchase price, which includes inspection fees, legal fees and transfer taxes. This amount should correspond to about 2% or 3% of the property's value.
Then think about estimating recurring expenses, such as property taxes, heating, maintenance and planned renovations over time. You can estimate your debt and expenses using the UNI calculator, or consult a mortgage specialist. They will help you establish your budget based on current mortgage interest rates.
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Our advice? Test your projected budget for a few months to see if it suits you. Sometimes, a small house that does not force you to give up restaurants and trips is better than a dream house that will deprive you of outings for the next 10 years! |
3. Check your credit rating
Everyone who has borrowed money, whether through a credit card or any other form of loan (such as a car loan), has a credit rating.
The credit score is a number between 300 and 900. The higher the score, the better the rating. A good credit rating is considered to be 670 or higher. At 800 or more, your credit rating is excellent.
How important is a credit rating when buying your first home? A good credit rating indicates to the lending financial institution that the risk of default on repayment is low. If your rating is good, your mortgage application is more likely to be accepted.
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Our advice? Check your credit file and credit rating before applying for a mortgage pre-approval with the Canadian credit bureau, Equifax Canada. Make sure all information is correct, and ask for corrections if necessary. |
4. Apply for a mortgage pre-authorization
It is the moment of truth! Make an appointment with a UNI advisor to apply for a mortgage. Taking into account your income, debts, credit rating and down payment, they will determine your borrowing capacity. You will then have a clear idea of how much it will cost to buy your home.
Mortgage pre-approval is not mandatory, but it does have several advantages. First, it can guarantee that you will get the interest rate offered by the financial institution, which can be attractive if rates are rising.
When you make an offer to purchase, pre-approval is also a sign of confidence for sellers, as it demonstrates your credibility. In the event of multiple offers on the property you are interested in, it could give you a head start over other buyers.
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Our advice? Be wise! The mortgage pre-approval amount is an approximate figure that should not be exceeded. Every house comes with its share of unexpected expenses. Allowing yourself a little leeway is the best strategy. |
5. Find your home
It is finally time to store! Consult websites, use mobile apps or call on your broker to find the home of your dreams. To be more efficient in your search, gather your criteria into a precise list. Determine what is non-negotiable and what little extras will make your life more enjoyable.
Specify the areas, neighbourhoods or cities you are interested in, the type of property you are looking for and the rooms you would like to have. Also consider short- and medium-term costs, such as repairs and renovations, to bring the home up to your standards.
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Our advice? Be patient and persistent. Like finding love, finding the home that suits your needs and appeals to you can take time. Do not hesitate to make several visits, open your mind to exploring new areas or review your criteria to find the ideal property. |
6. Make your offer to purchase
You have found your dream home! Now, it is time to make your offer.
If you have a broker, this person will take care of completing the necessary paperwork for you. The cost of this work is covered by the seller of the house, so you will not have to pay a thing. Make the most of it!
If you did not use a broker, the seller's broker can help you draw up your offer to purchase. This contractual document must include the purchase price, the property transfer date, the goods included and excluded, and the conditions to be met to formalize the offer to purchase (proof of financing, inspection, etc.).
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Our advice? Read the small print! An offer to purchase is a formal contract. If accepted, both parties must live up to their end of the bargain. Take the time to read each point carefully, and ask questions if you need to, to make sure you understand everything. This is probably the most important transaction of your life, so take the time you need to understand the ins and outs. |
7. Getting your mortgage
Great news! Your offer to purchase has been accepted. One of the conditions for formalizing the transaction is that you show your seller your proof of financing, so it is time to get your official mortgage.
Pre-approval gave you an approximate budget based on your means to buy your home. Now you know the purchase price of your property. We can then determine the terms of your mortgage, according to your needs.
Your mortgage specialist will guide you in choosing the type of interest rate (fixed or variable), the term of your loan (the period of time over which you will repay the loan) and the amortization (the number of years over which your loan repayment is calculated).
Need an example to help you understand?
- You buy a home for $400,000, with a down payment of $100,000. Your mortgage will therefore be $300,000.
- You choose a fixed interest rate of 5% amortized over 25 years.
- The financial institution will calculate your mortgage payments by spreading your mortgage ($300,000) over a 25-year period, at an interest rate of 5%.
After 5 years, you will have to renegotiate your mortgage with the new rates in effect and according to the amount already repaid.
To prepare the loan application, your mortgage specialist will need the following documents:
- your offer to purchase;
- confirmation of your employment and income;
- confirmation of your down payment.
These documents will be reviewed to confirm your ability to repay the loan within the terms and conditions. We will also take into account your estimated expenses, debts (credit card balances, car loans, lines of credit, student loans, alimony, etc.), credit history and rating, and amortization period.
Do you pass the resistance test?
It is the ultimate test of home ownership. No need to worry, you do not have to study to pass.
To preserve the health of the real estate market and avoid a crisis like the subprime mortgage crisis in the U.S., the Canadian government has introduced a stress test. Financial institutions granting mortgage loans must now submit borrowers to a stress test.
This test confirms that, should interest rates rise, you will be able to continue repaying your mortgage at the time of renewal.
The financial institution must use the higher of 5.25% or the interest rate obtained from your lending institution, plus 2%.
For example, if your rate is 6%, you must be able to repay your mortgage at an interest rate of 8%.
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Our advice? Shop around for your mortgage. Each financial institution offers different products with different benefits. For example, UNI allows for penalty-free prepayments in the form of double payments, or one 15% penalty-free principal payment per year. |
8. Comply with all conditions of the offer to purchase
You have your mortgage - mission accomplished! Now all you have to do is comply with the conditions specified in the offer to purchase. Inspection, reading of documents and other conditions must be met before the offer to purchase becomes official.
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Our advice? Have a home inspection carried out by a specialist. During the visit, take the time to check every detail and understand the home’s strengths and weaknesses, so you can adjust your offer if necessary. For example, if the inspection reveals cracks in the foundation that could cause water damage, you can ask the seller to have them repaired at his or her expense, or negotiate a lower purchase price. |
9. Formalize the purchase with a lawyer
The big day has arrived: the appointment with the lawyer who:
- will examine the title deeds, i.e. all old deeds transferring ownership over time;
- will draw up the official deed of sale;
- will split the costs between the seller and the buyer;
- will publish the deed of sale and the mortgage deed in the land registry, providing public proof that you are the new owner;
- will manage the money from the sale through his or her trust account to prevent the seller from taking the money from the sale without paying the debts related to the property. The lawyer pays all the seller's creditors, such as the financial institution that granted the mortgage.
And there you have it – you are handed the keys. You are now a homeowner. Congratulations!
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Our advice? Open a bottle of champagne! It is time to celebrate. Enjoy the achievement of all your hard work and the fulfillment of your dream. You have earned it! |
