How To Buy A House: What You Need to Know
Trying to figure out how to buy a house can also be one of the most confusing or challenging purchases of your life if you don’t understand the process.
But a home is something everyone needs, somewhere to rest and build memories. To enjoy family and friends, to create something that is uniquely yours.
So, we’re here to help. Over the next few months, we’re going to walk you through the process of how to buy the perfect house for you, step by step.
Let’s start with Part 1…
Part 1: Should You Buy a New House?
To Rent or To Buy?
As you start to think about buying a house, one of the first questions to ask yourself is “Should I rent or buy?”
Make a list of the pros and cons when it comes to renting versus buying, to determine the best option for you. Some things to consider include:
Carefully weigh the things that are important to you to make a clear decision.
Should You Own a House?
Next up on the questions to ask yourself – “Should I own a house?”
Granted, this applies to someone who is a first-timer but it’s important (so if you already own a home, go ahead and skip to the next part; we won’t be hurt!). And at first, that seems like a silly question, but it’s actually quite relevant.
Homeownership is often viewed as a natural goal; one of the stages of life everyone eventually wants to hit, such as getting a job, getting married, or having children. However, it’s not the right move for everyone, and sometimes, it’s just not the right time for you to make a big purchase like this.
It’s important to think about everything associated with homeownership and whether it’s right for you.
Thinking About Your Space
Space – or, more specifically, a lack of space – is often the first reason that people think about buying a home. People simply want more living space to spread out, and it’s hard to find the kind of space you want in an apartment.
People also think about buying a home because they want more outside space, such as a backyard for the kids to play in. And a fair number of people think about buying a home because they want more control over the space that they have. They want to do things like paint the walls or hang photos and art; things that are often forbidden in rental agreements.
If this sounds like you, it’s helpful to start thinking about what you really need in a home. Do you want things like…
- a mudroom by the garage entrance?
- a second-floor laundry?
- a home office?
- a basement suite?
- and more?
When you know these things, you can start looking at homes more seriously and eliminate the homes that definitely don’t meet your criteria. It’s also a good idea to look at various floor plans to quickly assess what’s in a home.
As you look at the homes that have the things that you need and want in your new home, you’ll start to get a sense of what type of costs you’re looking at. This is true whether you’re thinking about buying a resale home or a brand-new home, and knowing those numbers can help you proceed to the next steps.
Related Guide: 9 Signs You’re Ready for a New Home
The Cost of Buying and Owning a New Home
You can see the “sticker price” of a new home, but it’s not always easy to understand what exactly that full cost means, and whether or not it’s something you can afford.
We will dive more into the costs in the next section but a quick overview includes:
Each of these needs to be taken into account when you’re planning to buy a house because you want to be sure you can afford it before you begin the process.
As you can see, there’s a lot that should go into your thinking when you decide to buy a home. If it’s the right time for you, though, it’s time to get serious about your purchase.
Part 2: The Finances
Moving onto the second part of what you need to know about how to buy a house – the financial information. People generally have a lot of questions when it comes to this so read on and hopefully, we can answer a lot of those questions for you!
To get the house of your dreams – and to stay in it long-term – you need to think about the finances. How much does the house cost? What’s your monthly budget going to look like? What are the costs associated with moving?
These are all important things to think about, so let’s get started.
How Does Your Current Budget Look?
Not everyone has a solid idea of how much they can afford to spend on a home. Many people look at their current rental expenses and use that as a starting point. That works up to a certain point, but you have to look at all of your expenses.
Often, a rental payment includes things that you will need to pay on your own as a homeowner: utility costs, garbage removal, internet, repairs and maintenance, etc. You have to factor these costs into your future home budget.
We’ve written an excellent article on how you can get started with setting your home buying budget. Essentially, you have to look at what you can afford to pay on a monthly basis, then use a mortgage calculator to figure out how much that means you can borrow.
When you build a new home, you have some flexibility with the budget because each choice you make changes the cost of the home. Rest assured that there are plenty of ways for you to incorporate the things that you want in your home at a price that’s within your budget.
Free Resource: Monthly Budget Worksheet
Make Sure You Have a Down Payment
Gathering the down payment is one of the first hurdles you’ll face. How much do you need to have? A good rule of thumb is that you’ll need somewhere between 5 and 20 percent at a minimum, depending on your goals.
If the home you’re looking at is under $500K, you can put down as little as 5 percent of the cost of the home but it does mean you’ll have mortgage insurance added to your payment. To avoid mortgage insurance costs, you’ll need a minimum of 20 percent.
There are plenty of ways to save up for your down payment, but if the amount you need to save seems too daunting, the good news is you have some options. Borrowing from your RRSP is a possibility, and Sterling also can help you with other ways to come up with an affordable down payment. A quick talk with one of our Area Managers or mortgage specialists can help you find a path that will work for you.
What’s Your Affordability?
Naturally, you want a home that’s “affordable”, but what exactly does that mean?
Once you start applying for mortgages, you’ll find that the bank has an idea of what’s affordable for you. This is found using your “debt to income ratio”. Usually, banks want your mortgage payment to be less than 30 percent of your income, and your total debt payments (including mortgage, student loans, car payments, and credit card payments) to be less than around 40 percent of your income.
Using these calculations, the bank will determine what’s affordable for you in their eyes.
You also need to think about what’s affordable on your own, though. The bank’s calculation doesn’t include things like private school tuition for your children, vacations and entertainment costs, utilities, or paying more than the minimum on your credit cards. Often, this means that the bank’s estimate of affordability is higher than the amount that might be actually affordable for you.
Check Your Credit Score
Your credit score plays a big role in how much you pay for your mortgage. The higher the score, the lower your interest rate. Over the term of your mortgage, this can mean a difference of tens of thousands of dollars. You’re likely going to need a credit score of at least 650 to qualify, but the higher the better.
If your credit score is less than ideal, you can work to improve it before you apply for a mortgage. The two biggest factors are on-time payments and having a low debt-to-credit ratio.
There are a variety of things that play into your credit score, including:
- Late payments
- High or at-limit on credit accounts
- Short amount of time in having the account (i.e.: a brand new credit card)
- Too many accounts
- A large amount of hard inquires in a short period of time
- Collections or bankruptcy
- Bureau reporting errors
- On-time payments
- Keeping credit balances low
- Established credit history
- Good variety of account types (but not too many!)
You can dramatically improve your score by paying down debt, and there are many ways to approach this. A key thing to start with would be getting your credit report and checking for any errors. If you find any, report them right away.
Mortgages for New Construction
Pretty much everyone out there needs to get a mortgage to pay for their home, and it’s slightly trickier when you’re building a brand-new home.
The mortgage for your new home starts when you make the purchase, not when you take possession of the home, and this could mean that you’ll be paying two mortgages at the same time. When you use the builder’s preferred lenders, you can reduce your costs by paying only for parts of it along the way. Lenders who specialize in new construction are ready to offer the funding needed at just the right time.
There are two options: a draw or completion mortgage.
Most people end up going with a draw mortgage, which means the builder is able to take money from that mortgage at certain times during the building process. As the buyer, you’re responsible for making payments as soon as the builder does this.
These are quite similar to a traditional mortgage. As the buyer, you take out the full mortgage amount at the time of completion. These types are generally reserved for quick possession homes with not much (if any) build time left.
Keep in mind that your monthly mortgage payment is going to include more than just the payment on the loan. It will also have prorated amounts for the homeowners’ insurance and property tax, along with a mortgage insurance payment if you put less than 20 percent down. With the right lender, you’ll get the best deal.
Home Buying Costs
When buying a new home, people are often so focused on the down payment and purchase price that they don’t think of all the other little things that can add up. Don’t let yourself fall into that trap!
Things you’ll want to think about include:
- Closing fees
- Legal fees
- Property taxes
- Homeowner’s insurance
And once you are ready to take possession of your new home, you might also want to pay someone to move all of your belongings.
Free Resource: Your Complete Moving Checklist
As you can see, the finances of how to buy a house can be extensive, but that doesn’t mean they have to be complicated. Do your research and you’ll be all set.
Part 3: Find the Right House
It’s time to get into Part 3 of how to buy a house – finding the right one. Everyone is looking for their “Goldilocks” home – the home that just fits their family’s needs perfectly.
Surprisingly, some home buyers don’t always think consciously about what exactly that means. And without careful planning, they can make some pretty big mistakes.
When you’re building a home, you have a unique opportunity to choose something that better meets your needs. There is less compromising than if you were buying a resale home. But you need to think carefully and consciously about what types of features you want in your home.
Let us explain how you can do that.
What’s Your Lifestyle?
Ideally, the first thing you’ll think about is the kind of lifestyle you lead. Many dream of owning their own home, but as we mentioned in Part 1, it isn’t always the best choice for everyone. For instance, if you won’t live in the home for more than 5 years, it probably makes more sense – financially – to continue to rent.
Some people do better with the maintenance-free lifestyle of renting, especially when it comes to things like paying for repairs and maintenance or doing the yard work. When people are ready to put down their roots, though, they want to buy a house and start building up some equity. It’s important to look at the pros and cons of renting vs. buying to come up with a decision that makes sense for your lifestyle.
If you’re certain homeownership is right for you, you then need to think about what type of floor plan would best work for your family.
- Are you looking for something with a lot of space for the family to spread out or do you prefer something that’s smaller so there’s less housework?
- Do you need things like a home office or a guest bedroom?
- Do you want your laundry in the basement or on the second floor next to the bedrooms?
These are all important things to consider, as they can’t be easily changed later on.
What Type of Home Is The Best Fit For You?
Everyone has their own vision of a dream home, but are you aware of all of your options? Sterling builds homes in a variety of styles to suit the needs of different people – for instance, first-time homebuyers are usually looking for something that fits a tight budget. They want to start building equity, and they don’t often need or want a lot of excess square footage.
If you aren’t necessarily in the market for a “starter home”, though, you can still get a great deal on a front-attached or laned home. Both of these styles are a great choice for family homes where a bit more space is required.
Downsizers, on the other hand, may be looking for specific features, such as a main floor master suite or a maintenance-free lifestyle.
Finally, we’re also seeing a lot of multi-generational families looking for homes. Some families are choosing homes with basement suites or are opting for things like duplexes and townhomes where they can be close to each but still have their own space.
Not sure about the difference between a duplex and a townhome? You can learn more here.
A Resale or a Newly-Built Home?
You’ll also think about whether a resale home or a new construction home is right for you. Resale homes tend to be less expensive, but they have more maintenance and repairs. You also may have to make some compromises on size or style, especially if you don’t want to spend a lot on renovations. On the plus side, you’ll get to see the exact home you’re purchasing, and you’ll be able to move in quite quickly.
New construction, on the other hand, allows you to build your dream home to your specifications. It sometimes costs a bit more, but you don’t have to worry about repairs or maintenance right after you move in. Most builders are also able to work within your budget.
Those who don’t mind giving up some of the control of the design can move into their home almost as quickly as they’d be able to if buying a resale home by choosing a quick possession home.
Free Resource: New vs. Resale: the Pros & Cons
The Perfect Location
You’ve heard that in real estate, it’s all about the location. New communities are popping up all over Edmonton, and it’s never been easier to find a community that has things like playgrounds for the kids, easy access to amenities, and short commutes. Think about the types of things that your family wants in a community, and explore some of the options in Edmonton and the surrounding communities.
One thing to double-check before you make your decision is whether or not they will allow you to build the home style you want. You’ll find the answer to this in the community guidelines.
How Big Should My Home Be?
Whether looking to move up into a bigger place for their family or thinking about downsizing in their retirement years, the size of the home is at the forefront of most people’s minds. Square footage can give you a basic idea of how big a home is, but it’s smart to tour some showhomes to get a better sense of what you really want.
Often, we’ve seen that people have a general idea, but once they’re in an actual showhome, they might find that, say, a 2,400+ square foot home feels way too big or that a 1,400 square foot home doesn’t give them everything they need.
This is why you need to carefully think about all of the things you want in a home. Remember that you can sometimes save on the cost of a home by selecting a smaller home and increasing the liveable square footage by finishing the basement. We offer some tips for move-up buyers and downsizers as well.
Selecting Finishes and Features
This is definitely the fun part! With a brand-new home, you’re able to select the finishes and features that work best for your family. This will include things like the layout as well as design features, the material used for the flooring and countertops, and colours used on the walls.
First and foremost, you need to understand that all new construction homes come with standard features – these are included in the “starting from” price. High-end materials or exceptional configurations will be considered upgrades, and not every model can have every upgrade.
If you’re not sure about the difference, we’ve put together a handy guide for you.
Everyone’s different, and we frequently talk about some of the must-have finishes for a new home. There are even special options that appeal to those who love entertaining or for those who have kids.
Deciding whether or not you want to upgrade can be complicated. On one hand, you want to get all of the features in your new home, and that likely includes a few luxuries. On the other hand, you don’t want a home with so many upgrades that it could negatively impact the resale value of the home down the road.
For an easier, more cost effective solution, you could always look into Sterling’s Evolve line of homes. These are designed from the ground up to feature all of the same high-quality finishes as a regular Sterling home, such as vinyl flooring, quartz countertops and tile backsplashes, but offered in pre-planned packages and with colour boards chosen by our experts at DesignQ. If you’re looking for a high-end package of finishes and fixtures that needs to ‘just work’, the Evolve series is a perfect choice.
Free Resource: Your New Home: A Needs Versus Wants Checklist
If In Doubt, Talk To A Professional
When you’re building a home for yourself it’s helpful to have a team of people at your side every step of the way. In addition to the home builder you choose, you may also need a real estate agent (if you’re selling your current home), a lawyer, a mortgage specialist, and an inspector (if you choose).
Clearly, the help these people bring will enhance the home building experience, making sure that you get into the home of your dreams and that the process goes smoothly.
Of all of these professionals, though, the builder you choose is the most important. This is generally the stage of the home buying process where you’ll spend the most time. It’s incredibly important to find a home that has everything your family is looking for. It can be a time-consuming process, but we’re here to tell you that it’s doable. You just have to know what you’re looking for.
Originally published Jan 7, 2021, updated Mar 11, 2021