The Home Buying Journey In Steps
Buying a new home is one of the biggest decisions you can make, and it has the potential to also be one of the most stressful. It might feel like you need all the help you can get, which is why we’ve put together this complete guide for home buyers. By reading ahead and being prepared, you can ensure that your new home purchase goes as smoothly as possible.
The Housing MarketYou should understand the market in your area. This will give you a better understanding of what kind of home is best suited for your current financial position. It will also help you get a better sense of location and which area would be best suited for you.
Housing PricesAlong with the real estate market, there are a variety of contributing factors to the price of a home. The main determination is based on the price per square foot. However, age, quality, features, location and the current economy also play a big role.
How Much House Can I Afford?Naturally, you want a home that’s “affordable”, but what exactly does that mean? Often, the bank has a maximum monthly amount they’ll lend you, but that amount can be high for many families. You need to carefully look at your own budget to determine what you can afford, and then be smart about choosing a home that fits within that budget. An excellent resource for calculating what you can afford is an online mortgage affordability calculator. This tool can take into account all your costs, including living expenses and debt payments. If you’re finding yourself coming up a little short, consider what you need to do to reach your goals. This means thinking hard about what’s important. If you set a monthly budget and stick to it, it can make it much easier to save up for that down payment.
Saving for a Down PaymentIn Canada, the minimum amount required as a down payment for a home purchase is five percent. However, anything less than 20 percent will require mortgage insurance. If you can’t save up that much, don’t let it stop you from building equity and buying a home that fits your budget. Saving up enough for a down payment is a common barrier to homeownership. Fortunately, there are government programs available to first-time buyers that can give you the funds you need right away. The Home Buyers’ Plan allows you to borrow from your RRSP and repay the amount without penalty. There is also the First-Time Home Buyer Incentive that offers five or ten percent of a home’s purchase price to put towards a down payment. Because it is a shared equity loan, the amount you borrow will only need to be repaid after 25 years or if you sell, whichever comes first.
How Much Do You Want to Spend?A common mistake that homebuyers make is taking the maximum amount they were pre-approved for. Just because you’re pre-approved for $500,000, that doesn’t mean you should use the full amount. Overspending can easily result in becoming “house poor“; where you’re spending the majority of your income on your mortgage and little else. That’s why you should try to budget for no more than 32% of your monthly income on monthly housing costs. Location also plays a big part in how much you can afford to spend on a home. This is because home prices vary depending on how far out of the city you are and what type of home you’re looking for. It’s not a stretch to say you can save tens of thousands of dollars by choosing a new home in a suburban bedroom community like Stony Plain or Spruce Grove.
Set Your BudgetNot 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. Once you’ve crunched the numbers and know how much you can afford to pay on a monthly basis, use a mortgage calculator to figure out how much that means you can borrow. One of the best ways to make a mortgage more affordable is by reducing bad debt such as credit card debt, which also helps your credit score.
Qualification vs ApprovalThere are quite a few steps to the mortgage process and one thing many people tend to mix up is the difference between a pre-qualification and a pre-approval. Work with your lender to ensure you know exactly what they’re working on for you.
Make Sure Your Credit Score Is As Good As PossibleYour credit score is one of the most important factors when it comes to determining how much your mortgage lender will be willing to approve, so it’s crucial that you make sure your credit score is as good as it can possibly be before you start your home-buying journey. Scores can range anywhere from 300-900, but you’ll want to have a score in at least the high 600’s to have a solid chance of approval.
AffordabilityWhile you don’t have to do all the calculations yourself, it can be a big help for you to understand the process and where you’re currently at. There are a ton of calculator tools out there. Using this one from RateHub, we figured out that with a $30,000 down payment saved, the maximum price you’d be looking at for a home would be just over $350,000 over a 25-year amortization period and give you a monthly payment of just over $1,800.
Mortgage InsuranceMortgage insurance only applies to high-ratio mortages - this is where the buyer has less than 20% for the down payment. The amount is added to your mortgage amount but you do have two options: pay out the full amount or add it your mortgage payments, spreading it out over the term of your mortgage. The amount is calculated based on a percentage of the total purchase price of the home and it does vary, depending on how much you’ve put down. It can range from 1 - 4% of the purchase price.
Stress Test RulesIn 2018, the government made some new stress test rules for Canadian mortgages. And they’ve made more adjustments since then. It used to only apply to high-ratio mortgages but it's been adjusted to apply to all mortgages. When you apply for a mortgage, your lender gives you an interest rate that’s based on your credit score, income, and so on. However, to qualify for the mortgage, you’ll need to be approved at a higher rate, which is one of two options. It’s either your approved rate plus 2% or the current benchmark, whichever is higher. The current benchmark is 5.25%, which for most people is higher than what they’re approved for and adding 2%. Sterling Suggestion: the higher your down payment, the better chance you have of being approved for your mortgage. If you can do 20% or more, you’ll also avoid the cost of mortgage insurance which increases your approval rating more.
Know Your Wants and NeedsBefore you start house shopping, one of the most important things to think about is what you need from your new home. It’s important to consider not only your current needs but also what you might need in the future - there’s no point in moving to a brand-new home only to have to move again in a year or two because you’ve outgrown it. In order to help visualize what your ideal new home looks like and narrow down your search, create a checklist of your needs and your wants.
Choosing a CommunityThe home itself isn’t the only thing you need to consider - the community you live in can make as much difference to your lifestyle as your home. It’s important to think about where in the city you want to be, as well as any services and amenities you’ll need. Get out and explore some up-and-coming communities around the city to get a real idea of what it would be like to live there.
Finding the Right HomeOnce your financing is in order, it’s time for the fun part - shopping for a home! If you’ve already chosen a home model and a builder, this part should be easy. If you opt for a quick possession home, you could be moving in sooner than you think. However, if you’re buying a resale home then it might take a little more searching to find the right fit. This is where the expertise of a Realtor® and other professionals can help you make the right choices in the home buying process..
Deciding Your Home StyleOnce you know what you need and how much you can afford, it’s time to find the perfect style of home that fits you and your family. Most builders offer a wide selection of home styles and models, so you’ll have plenty of options to choose from! Think about how a new home can fit around your lifestyle. There is a home for each stage in your life so it’s important to look at what you want now and in the future. Duplexes and townhomes are great starter home styles, and there are single-family detached homes if you want more space to grow into.
The Advantages of Specific Home StylesTo help you decide on a home style, we’ve put together a series of in-depth guides which explain the advantages of the specific home styles you’re likely to encounter when trying to find the right builder. Whether you’re a first-time buyer, a move-up buyer, a downsizer or an investor there’s a home style that's perfect for you, and we’re here to help you find the one that’s a perfect fit. In these guides, you’ll learn all about the advantages of new single family homes, duplexes, townhomes, and laned homes in Edmonton.
Finding a Floor PlanIf you’re building a brand-new home from scratch, you’ll also have the opportunity to customize the floor plan to your specific needs. While this may not be the first thing many people think of, it can make a big difference depending on your lifestyle. First, you’ll want to understand your floor plan options and what makes sense for you and your family. These tips will help you choose the right floor plan for your new home. If you’re looking for specific floor plan ideas, here are some popular family-friendly layouts.
Consider an Evolve HomeTwo of the most important considerations for new home buyers are quality and affordability. That’s why Sterling has created the Evolve Home Model Line. As one of the biggest home builders in Edmonton, we’re able to use our experience in the industry to build a range of homes which combines our outstanding build quality with an affordable price tag, making them the perfect choice for new home buyers, young families and downsizers. Here is a more detailed look at some of our best home designs in the Evolve series. Our goal is always to provide affordable homeownership without compromise and with the Evolve line we can deliver more new homes at a faster rate. So many happy homeowners have already chosen this option because it made owning a brand-new home easier and more affordable.
Mortgage SpecialistWhether you go with a bank or mortgage broker, you want to make sure you have someone who’s on your side. They should look out for your interests and find the best mortgage for you. Ensure your mortgage specialist has experience with the type of home you want, whether that’s a resale or new build home.
Sales Rep / Realtor®If you’ve decided to build new, you’ll be working with a sales representative, also known as an Area Manager. They are a solid resource and will be able to help you find the perfect floor plan and options for your family. A good Realtor® should have plenty of knowledge about the market and the real estate industry in general. They can do a lot of the background research for you, saving you a lot of time. Sterling Suggestion: you can use a real estate agent if you’re building a new home as well! Make sure to check with your preferred home builder and see if they have programs set up to work with Realtors®, like Sterling does.
Interior DesignerIf you’re not comfortable with picking all the finishes and design elements for your new home, a professional interior designer can be your best friend!
Home InspectorIf you’re going with a resale home, do NOT skip the inspection! Solid professionals are trained to look for all sorts of things you might not think of like mould, foundation cracks and so on. Investing in a home inspection can help save a lot of heartache and money, ensuring you don’t buy a home that will have problems that you’re not prepared for. Home builders are required to hire inspectors throughout the building process at key stages. They aren’t able to move on to the next phase of construction if it doesn’t pass inspection. However, you are able to hire your own inspectors if you’d like.
Financial PlannerThis one is a personal preference, but if you want to make sure your finances stay solid, having a financial planner on your team is a great way to ensure that. They can offer ways to improve your credit score, explain tax situations and for people who have a more complex financial situation (i.e: the self-employed) they’re able to help navigate the differences in the process.
Real Estate LawyerHaving a lawyer who specializes in real estate means they understand the ins and outs of real estate contracts. They can answer any questions you may have, review purchase agreements and contracts, and make suggestions on conditions or clauses you want to keep a close eye on. Sterling Suggestion: no matter who you decide to put on your team, make sure they’re reputable and experienced. Ask each of them what they will bring to the team and what type of services they provide, if they go above and beyond the “standard” care. Talk to friends and family, check out online reviews - it’s very important to do your research so you can feel confident in the team you’ve put together.
Financing Your Home
Terms, Amortization, and Payment SchedulesWhen you’re working out your mortgage application, you want to take a close look at different aspects. You don’t always have to make a monthly payment, for example. When you decide the term of your mortgage, you’re setting the rate and conditions as agreed upon by the lender. Terms can range anywhere from six months to ten years. The most common term is five years. Now, the amortization schedule/period is the total length of time for your mortgage. The longer the amortization, the smaller the payments. However, that also means you’ll pay more in interest. General, most people go with a 25-year amortization. You also need to decide on what your payment schedule is going to be. This is a key factor and you do have options. While monthly payments is the default, you don’t have to choose it. Take a look at why you might want to choose a different option. The following numbers are based on a $450,000 home with a 5% down payment, a 4.64% interest rate and a 25-year amortization (rounded):
Going Through the Process
- New Build: your deposit puts a hold on the home and lot you’ve chosen. Your Area Manager will provide the details on the time frame and what needs to be completed (ie: design choices, etc.) This amount will be applied to your total down payment once the deal is finalized.
- Resale: your deposit is negotiated between buyer and seller, along with the terms of how much and other details. Normally, you need to provide your deposit when you sign an agreement to purchase the home. Your deposit will be counted towards your total down payment.
Finalizing Your MortgageAs discussed above, you should have your mortgage info in place before shopping. Once approve, most mortgages have a 90 - 120 day window in which you can shop around and find a home. Once you’ve made your offer and it’s been accepted with conditions removed., you can then go through with finishing the paperwork on your mortgage. Sterling Suggestion: don’t make any big financial decisions or changes while you’re shopping for a home. If you decide to buy a car after you’ve been approved for a mortgage but haven’t finalized your mortgage, you could end up being declined when it’s time to finish the paperwork.
- Review purchase agreements
- Check into property tax information
- Review title and land transfer documents
- Transfer of funds to the builder or seller