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.
Part 4: The Offer
You’ve done your research. You know what kind of home you want and where you want to build it. You just need to get things finalized.
It’s time to make an offer.
Offers on brand-new homes are different from offers on resale homes. Pricing is more standardized, and you won’t be able to put out a lowball offer in the hopes of getting a better deal.
Still, there are some things you can do to make sure you’re getting the house you want at a price you can afford.
The Total Cost of Your Home
The cost of a brand-new home depends largely on all of the little decisions you need to make. You may have gotten an initial quote from a builder, but when you’re about to make an offer on the home, it’s smart to get an updated quote.
Some of your dream features and ideas about what you want in a home may have changed since you got the last quote, and this can significantly impact the overall cost of the home. Your initial quote may also have left out some important expenses, such as the final landscaping. You need to get a final quote that encompasses everything.
At this stage, many people are still looking for the best deal and may not have fully committed to working with a particular builder. If this is true for you, make sure to get full quotes from all of the builders you are considering. This way, you’ll be comparing apples to apples.
Free Resource: Home Builder Comparision Checklist
Using Builder Promotions
One of the best ways to reduce the cost of a brand-new home – or get more value for your money – is to take advantage of builder promotions. These can vary widely. You might find things like a free deck or patio, $10,000 in kitchen upgrades, or getting your first year’s property taxes paid.
The key to getting the most out of a builder promotion is to look for things you want to include in your build. A free patio might be nice, but it’s even nicer when you were about to spend $15,000 extra on one.
You also have to be careful about the builder’s stated value of the promotion. For instance, $10,000 in free kitchen upgrades sounds good, but would those upgrades only cost $8,000 if you were to buy them separately? Or could another builder’s overall price be lower because they include these upgrades as standard features?
What we’re saying is that promotions can help you save money, but you also need to be smart when shopping around. In this article, we break down how you can compare builder promotions.
The Formal Offer
When you purchase a resale home, there’s often some back-and-forth haggling on the price or included items. Or you may put a condition on your purchase offer, such as getting and passing a home inspection.
This isn’t the case with brand new homes. You already have gotten a price quote from the builder, and that’s what the price will be. Here’s a good explanation of why we don’t negotiate on price.
Once you’ve decided, you simply sign the purchase agreement with the builder.
Where You Can Negotiate
The above section makes it sound like you have no control over the cost of your home, but this isn’t the case! You do have some control; you get to make selections and decisions that affect the cost.
Want to save money on a 2,000+ square foot home? Consider going with a floor plan that’s 1,500 square feet and finishing the basement. Want all the bells and whistles in your home? Expect to pay a bit more, but you could save some money by building in a location outside the city.
The great news? Home builders can work with you to create a home that fits both your budget and lifestyle. Be upfront about how much you want to spend, and the builder will work with you to achieve your goals.
The Best Time to Make an Offer
It’s natural to wonder if making an offer at a particular time could get you a better deal. This is somewhat complicated.
For example – if you make an offer during the spring, the builder can usually get started on your home right away and you can move in faster. However, in the winter, there are generally fewer people shopping for new homes and you can take advantage of that. You could get a great promotion or feel like you’re getting more personalized attention from your Area Manager, but the builder won’t be able to break ground if it’s frozen.
Essentially, the best time to make an offer is when you’re ready to build a home. The sooner you start the process, the sooner you can move in and the sooner you can start to build up your equity and begin enjoying your new home.
Part 5: After Possession
We’ve moved onto part 5 of this how to buy a house article – after you take possession!
If you’re buying a resale home, you typically have to wait about two months for all the legal paperwork to be finished up before you finally get to possession day. If you’re buying a new construction home, this day will come several months after your purchase offer was approved, as the company has to build the home.
In any case, you’re getting close to the moment you’ve been waiting for: possession day. This is the day you finish things up, sign the final paperwork, and get the keys to your new home.
Learn more about possession day and what you should do after possession so you’re comfortable with the process.
Things You Should Know for Possession Day
Possession day – or closing day – will likely take longer than you expect. It seems like it should be quick and easy (all you need to do is sign some papers, right?) but in reality, it can take a few hours as each person needs to carefully review documentation. In other words, don’t book the moving company for noon on possession day. There’s a good chance you won’t be ready!
A week or two before possession day, you’ll get a list of things you’ll need to bring that day. This usually includes items like the down payment, money for closing costs, the most recent copies of your pay stubs, current photo ID, and so on. If you don’t have any of these items, you’ll have to go and retrieve them, which can significantly slow down the process.
You should have information on the exact amount you will need to bring on possession day. Now, there’s a chance that this amount could change, particularly if the date of possession day changes. This is because your closing payments will include prorated amounts for taxes and fees.
What Happens on Possession Day
On possession day, you’ll have all parties involved: you and your lawyer, the seller and their lawyer, and the mortgage representative. These are just a few of the things you should expect to happen during possession day:
- You’ll transfer the down payment or provide a cheque to the mortgage lender.
- The lender will transfer all funds of the sale to the seller.
- Transfer of funds will be confirmed.
- You’ll sign the paperwork.
- You’ll get the keys to your new home.
Most professionals in the home selling industry have this process down to a science. If you have any questions about the expectations or procedures, simply ask ahead of time.
Things to Do Once You Take Possession
Now that you have the keys to your home, you can start moving in. It’s smart to first think about security. If you’re moving into a resale home, you’ll want to change the locks on the doors. Even though the previous owners gave you the keys, you don’t want to risk the possibility there could be additional keys floating out there somewhere.
You can now hire movers to bring your furniture to the new place. Most people schedule the movers before possession day, but sometimes it is safer to wait. This can be a significant expense, so be sure to plan for the costs so you’re not met with an unpleasant surprise.
There’s a good chance you’ll need (or want!) to go shopping for some new things. First-time homeowners often need to make big purchases, like a lawnmower, a snowblower, and new furniture to fill the space. Even if you’re moving from another house, you might need some items that match the new decor better.
Finally, pay attention to your homeowner’s manuals. They’ll tell you details you need to know about your new home, such as how to clean the counters and floors without harming the material, how often you need to do basic home maintenance and how to request service calls if something needs attention.
What to Do If There Are Problems After Possession
If you purchase a resale home, any issues that come up after possession are your responsibility. Since you have done your due diligence when making the purchase, there shouldn’t be any big surprises, but you never know what might happen. It’s smart to ask friends for referrals for companies when you need repairs done.
If you purchased a brand-new home, though, many of the things in your new home will be covered under the Alberta New Home Warranty. Most things are covered for a year, and some of the major components of the home, such as the foundation, are covered for up to 10 years. Of course, you have to understand that warranties will only cover damages caused by product failure or poor workmanship. Any damage that’s caused by you isn’t covered.
Basic Home Maintenance
A brand-new home is going to be in pristine condition, and resale homes should be in good condition at the time of purchase. Naturally, you want to keep it that way. This is done by keeping up with necessary home maintenance throughout the year.
Maintenance usually needs to be done on a yearly, monthly, or sometimes daily basis. For instance, with any type of countertop you’ll want to wipe up spills immediately and give them a good cleaning at the end of the day. Your floors should be vacuumed or washed at least once a week, with a deeper cleaning scheduled once a year. Some people choose to do these tasks themselves, while others prefer to spend a bit of money to have someone else do the work.
No matter how you choose to do it, many new homeowners don’t always understand all of the maintenance tasks they have to do. Unfortunately, this leads to greater wear and tear. Use the following as a guideline.
Spring Maintenance Tasks
Spring is the perfect time to do some home maintenance because it’s finally warm enough to go outside. We recommend:
- Cleaning up yard debris that may have accumulated at the end of fall and over the winter.
- Checking the gutters on a rainy day to make sure that the water is flowing freely. If not, clear up any blockages.
- Slanting dirt in flower beds away from the home. This directs rainwater away from the home. Your original landscaper would have designed the beds like this, but as homeowners add topsoil and/or mulch each year, it’s important to be aware of this.
- Taking on major cleaning tasks such as rug cleaning and window washing.
- Checking the exterior of the home for places where critters might enter.
- Servicing the HVAC system.
- Getting the garden and landscaping ready.
Summer Maintenance Tasks
With longer days, the summer is the perfect time to take on any big projects you’ve been thinking about, such as building a fence or painting rooms in new colours. But don’t forget to take care of these common tasks during the summer:
- Lawn maintenance, including watering, weeding, and mowing. You have to keep up with this or it could cause damage that’s hard to fix.
- Powerwash the exterior of the home, including siding, decks, and patios.
- Touch up or repair any exterior surface. If there’s paint chipping or cracked siding, now is a good time to fix it up.
- Reseal your deck. This keeps the wood lasting longer.
- Watch out for bug infestation. Call an exterminator at the first sign.
Fall Maintenance Tasks
The days start to turn colder during the fall, but you still have time to get a few last-minute maintenance tasks done. Consider the following:
- Leaf management. Whether you rake or mulch the leaves that fall over your yard, it’s best to take care of it before the snow starts falling.
- Clean the gutters. It’s especially important to clean the gutters after the tree branches are bare. Leaves can cause clogging, which is bad news any time of the year, but as you head into winter these blockages are likely to cause ice damming. This can severely damage the roof.
- Check and replace furnace filters if needed.
- Make sure the heater is working well. This is another good time for an HVAC tune-up if you didn’t have one done in the spring.
- Check the windows for air leaks. As the weather gets colder, these will make your home less efficient.
- Buy any snow removal equipment you might need. Shovels and snow blowers tend to sell out soon after the first big snowstorm.
Winter Maintenance Tasks
There aren’t a lot of maintenance tasks that need your attention during the winter, but those that do are important. Make sure you:
- Keep the driveway and walkways clear of snow and ice. It’s often easier to stay on top of this during a snowstorm by doing it halfway through rather than waiting until the end.
- Make sure that vents are not blocked. Check the outside of the home, for places like the dryer vent or attic vents. If these are blocked by snow, it’s not good.
- Open the curtains. Windows typically have some condensation on them. When you open the curtains, this can help the wetness dry up, preventing mould.
Many people think of taking possession as the end of the home buying experience – as you can see, there’s still going to be a lot to do once you get the keys! While this may seem a little daunting at first, by planning ahead, breaking it down into smaller jobs and manageable checklists you’ll soon be on top of everything. You’ll then be ready to settle in and begin enjoying your new life in your dream home.
Part 6 – Buying a Home Vocabulary
Now that you have a deep understanding of everything you need to know to buy a house, we thought we’d sum it up with a comprehensive home buying glossary.
If you’re going to buy a home in the near future, make sure to add this list of words to your vocabulary so you can make sense of it all.
A mortgage where the interest rate changes over time based on market rates. Your monthly payment could go up or down based on these changes. Typically, it will start with a low, attractive rate, but it may increase over time.
The amount of time it takes to pay off your mortgage. If you use an amortization calculator, you can see what percentage of your monthly payment goes toward interest and what percentage goes toward the principal balance. In the early years, a higher percentage goes toward interest, so paying extra can make a big difference.
A type of mortgage that’s typically inflexible with your payments. You may not be able to make additional payments on the mortgage or pay it off early without penalties.
Closing costs are the costs that you pay at the end of the home buying process on “closing day” – your day of possession. They include things like legal fees, property taxes and homeowners’ fees, the down payment, and other such costs. On top of your down payment, you should expect to pay about two to six percent of the home’s value on these costs.
As you’d expect, this is an offer to buy a home that has conditions attached. It gives the buyer an opportunity to back out of the purchase under certain conditions, such as if the home inspection turns up a major problem or the buyer isn’t able to sell their own home.
This is the type of mortgage you get when you have at least a 20 percent down payment. It tends to come with more favourable terms than other types of mortgages.
A style of home that features two separate homes attached to each other on only one side – sharing the middle wall. From the front, duplex homes often look like large single-family homes. Typically, buyers purchase only one side of the home and must coordinate exterior work with the owner of the other side. Investors or multigenerational families will sometimes buy both sides of the duplex.
A path near the home that’s owned by someone else. For instance, when a property is near a beach or a park, there may be an easement next to their property that allows the public to access these features.
An escrow is a trust owned by a third party. Mortgage payments typically include one-twelfth of the home’s property tax and homeowners’ insurance amounts. The bank puts this money into an escrow account, then makes the payments on the homeowner’s behalf. As the buyer, you do not have access to this account, even though it is funded with your money.
First-Time Home Buyers’ Incentives
Buying your first home is a challenge. The Canadian government offers a series of incentives and programs that will help people make this purchase, including ways to borrow the down payment. This makes home buying more affordable, and Canadians can start to build equity in their homes.
A mortgage where the interest rate does not change over time. You can expect the mortgage payment to stay the same for the duration of the loan.
Gross Monthly Income
The money you earn each month before any taxes or other payments are taken out. Lenders may use this amount when determining whether or not to approve your mortgage.
A mortgage for more than 80 percent of the value of the home. If you have less than 20 percent for your down payment, this is the mortgage you’ll have to get. They typically have higher interest rates than conventional mortgages.
The date by which the full mortgage must be paid off. If you have been making all your payments on time, you don’t need to worry about missing the date.
Mortgage Life Insurance
An optional form of insurance that some people get to pay off the balance of the mortgage in the case of the homeowner’s death. It is often affordable, and it gives new homeowners a sense of security.
Mortgage Loan Insurance Premium
If you have less than 20 percent for your down payment, you’ll need to purchase mortgage loan insurance. This benefits the bank if you were to default on your loan. It does not protect you. It can add anywhere from $20 to $100 (or more, depending) to your monthly payment.
Mortgage Stress Test
Lenders use this to determine the affordability of a home for the buyer. It looks to see whether you will still be able to make your monthly payments if the interest rate increases or if your income decreases. If you don’t pass the mortgage stress test, you will need to look for a more affordable home or come up with a larger down payment.
Unlike a closed mortgage, an open mortgage gives you more flexibility in making your payments. Most importantly, you are able to make additional payments or pay off the mortgage without penalty. The downside is that an open mortgage typically has a higher interest rate.
Being pre-approved for a mortgage means that the bank has verified your income, credit history, and assets – this would be where your credit report is checked. They will tell you whether or not you are approved for a mortgage, how much you can borrow, and what your interest rate will be. If you are pre-approved, you are in a strong position to purchase a home.
Closed mortgages come with a prepayment penalty. This is a fee you’ll have to pay if you pay the mortgage off earlier than expected. Those who may sell their homes in a few years will want a mortgage that does not have a prepayment penalty.
Lenders sometimes pre-qualify buyers for the mortgage. They will tell you how much you can borrow and what your interest rate will be, but there is no commitment to this offer and the offer is based on self-reported finances. When the buyer submits official financial documentation, the offer could change, particularly if the buyer has a lower-than-reported credit score and/or non-salary income (e.g. contract work, seasonal work, or large bonuses).
The amount of money that’s borrowed to buy a home with the mortgage. Every month, your payment goes toward the principal balance and interest. The more money you can put toward your principal balance, the sooner you’ll pay off your mortgage and the less interest you’ll pay.
Also called homeowners’ insurance, property insurance protects you and will pay for repairs or replacement if your home is damaged or destroyed. Most lenders will require you to carry property insurance, but it’s a smart move even if not required. You can make your mortgage payment lower by shopping around for property insurance.
All property owners must pay taxes on their property. The actual cost of this depends on the home and the area in which the home is located. Some areas have lower property tax rates, making a larger home more affordable.
A sustainable neighbourhood is consciously planned to give the residents everything they need while still protecting the environment. It may include things like walkable shops and restaurants or protected natural areas that back up onto residential properties.
Total Debt Service Ratio
This ratio compares your income and debt. In this case “debt” refers to your monthly mortgage payment in addition to all other debts (car and/or student loans, credit card payments, etc.). A lender will want your total monthly debt to be less than 40 percent of your monthly income.
Sometimes called a “row home”, townhomes consist of three or more homes connected together. You share walls with your neighbours. Often, townhomes are more affordable and have less exterior maintenance because they don’t have large backyards.
Variable Interest Rate Mortgage
With a variable interest rate mortgage, the interest rate changes based on market conditions. However, the monthly payment does not change. Instead, the portion of the payment that goes toward interest may change. If less money is going toward the principal balance, it could take longer to pay.
At Sterling, we understand how overwhelming the home buying process can be. Should you buy a resale home or a brand-new home? Do you even need to buy a new home at all? How do you decide what you want and how can you get that all at a price you can afford? That’s why we created this comprehensive home-buying guide to help you through the process.
If you’re not ready to take that first step, we encourage you to come and tour some of our show homes. You’ll get a good sense of the type of quality and value that Sterling provides, and you’ll have the opportunity to have our Area Managers answer any questions you might have. Your dream home is just around the corner and we’ll help you find it!
Originally published Jan 7, 2021, updated June 17, 2021