The thought of buying a home, especially your first, can be daunting. After all, where do you start? Should you find an agent first or get pre-approved first, what’s involved in the home buying process, putting in offers and what should you expect during the closing process? Holy overwhelming, Batman.
So, we’ve put together a comprehensive home buying process just for you which goes over the 6 steps involved in the home buying process. Enjoy!
This one is big, and we recommend that you do it first before anything else in the home buying process. We’re always surprised when we come across buyers who have spent hours and hours looking at properties online and going to open houses before having an actual pre-approval in place from a lender.
What if you’ve overestimated what you’ll be pre-approved for and have been looking at homes under your budget? Or even worse, over your budget? We’re not saying there’s no benefit to doing research before starting your search (there is) but when you’re ready to go then – trust us – speak to your bank and a mortgage broker (we recommend doing both) and get a pre-approval in place to eliminate any surprises down the road.
Pre-qualification vs pre-approval?
There’s a big difference. Getting pre-qualified involves supplying a lender with basic information about your income, assets, and debts so that they can give you a general idea of your borrowing power and the maximum amount of mortgage that you can carry. It’s a starting point but typically none of the information you’ve provided is verified at this point.
A pre-approval, however, is a written commitment that’s issued by a lender that’s based on the verification of your employment status, income, assets, debts and your credit score. It’s not an ironclad guarantee and likely will be conditional on something (the property appraising out, mortgage insurance approval if your down payment is less than 20% and that there’s no material change in your financial situation are the most common). They’ll include an interest rate guarantee and are valid for up to 120 days.
There’s a number of mortgage types, and they can be confusing if you’re new to the home buying process so we’ve done our best to explain them below:
Conventional Mortgage vs. High Ratio Mortgage
Whether you end up in a conventional mortgage or a high ratio mortgage all comes down to how big your down payment is, with 20% being something of a magic number that determines which type of mortgage you’ll end up with.
Conventional Mortgage – Conventional mortgages require you to put down 20% or more of the property’s value/purchase price. This type of mortgage doesn’t require mortgage protection insurance. The lender will take the lowest amount of either your purchase price or the appraised value of the home and loan you up to 80% of that amount.
High Ratio Mortgage – For most buyers, the hardest part of the home buying process is saving for the down-payment. With mortgage loan insurance, you can put as little as 5% down. The cost of high ratio mortgage loan insurance is in the form of a premium. The premium is calculated as a percentage of the principal and can be paid in a single lump sum or added to your mortgage and included in your monthly payments.
Closed and Open Mortgages
Closed Mortgage – If you’re not planning to pay off your mortgage in the short term than closed term mortgages are typically a better choice. Pros of closed mortgages is that interest rates for closed term mortgages are typically lower than open term mortgages which helps you save on interest costs and pay off your mortgage faster. Cons are that you’ll pay a pre-payment charge if you want to re-negotiate your interest rate, pay off the balance of your mortgage prior to the end of its term or pre-pay more than your mortgage allows.
Open Mortgage – Open term mortgages may be appealing if you are planning to pay off your mortgage in the near future. They can be repaid either in part or in full at any time without prepayment charges. Open mortgages can be converted to any other term, at any time, without a prepayment charge. Interest rates for open mortgages are generally higher than for closed mortgages because of the added pre-payment flexibility.
Fixed vs Variable Rate Mortgages
One of the first decisions you’ll make once you start shopping for a mortgage is whether to go with a fixed rate or variable rate mortgage. The choice you make will have a huge impact on what you end up paying in your monthly mortgage payments so choose wisely. The two types of basic interest rates are fixed and variable.
Fixed Rate Mortgages – If you’re risk-averse, a fixed rate mortgage – where your rate will be fixed or “locked in” during your mortgage term – may hold more appeal for you but it doesn’t come without its drawbacks. The pros are that you won’t have to worry about interest rate fluctuations during your mortgage term and you’ll know what you expect re: the amount of your regular mortgage payments.
The con is that if interest rates drop during your mortgage term, you may end up paying hundreds or in some cases thousands of dollars more than if you’d gone with a variable rate mortgage. And the only way to adjust this type of mortgage is to refinance your property, which can be costly.
Variable Rate Mortgages – The biggest advantage to variable rate mortgages is that because your proportion of interest to principal changes as the bank’s prime interest rate changes, if you locked in at a higher rate and rates go down you’ll pay off your mortgage faster. Conversely, if rates go up than more of your monthly mortgage payment will be applied to you interest and less to your principal.
Humble Brag: We have our very own kick-ass in-house Mortgage Specialist who has access to over 40 different lenders, executive rates and the ability to fast track approvals and appraisals at lightning speed. What does that mean for you? Lower mortgage payments and less stress.
You never have to worry about your property not appraising out before your closing date or not being able to compete in Toronto’s competitive market because you have a financing condition *We also have relationships with the most qualified representatives at the major banks. You know that if they’re on our list you’ll get 5-Star advice and service including:
- Ensuring that you have financial strategies in place to grow your long-term real estate wealth
- Matching you with not only the best rates but the best terms so that you aren’t locked into a mortgage that doesn’t work for you
- Giving you a comprehensive look at the true costs of homeownership
Once you’ve received your official pre-approval certificate, the next step is to find an agent. And not just any old agent, you want to make sure that whoever you hire has the expertise and resources to give you the best experience possible, throughout the home buying process. Because you deserve it.
Referrals from friends and family is one great way to find candidates for the job, but unless someone blows your socks off to such a degree that you’re certain no one else can come close to doing a better job we recommend interviewing at least two agents before making a final decision.
Why the interview process?
Just because someone has their real estate license or has been in the business for years, it doesn’t mean that they know what they’re doing.
Also, make sure that you’ve sat down for an in-depth Buyer Consultation, like a Needs Analysis, before hiring anyone. Getting a few of your details over the phone doesn’t cut it.
Some questions to ask during your consultation are:
- What type of experience do you have in the property types and neighbourhoods I’m interested in?
- What is your experience and strategy when dealing with multiple offers?
- What is your sales style? (pushy and aggressive is not what you’re looking for we assume)
- Who will show me properties if you’re not available?
- Will you preview properties of interest to save me time?
- Are you full-time or part-time agents and do you have any other jobs?
- Do you have a response time guarantee?
- Can I speak to some of your current and past clients?
You also want to make sure that whoever you choose has a satisfaction guarantee that allows you to cancel your representation agreement with them if they fail to deliver on their service promises. And they should put that in writing.
Humble Brag: We always, ALWAYS, do a thorough Needs Analysis with all of our potential buyers. Why? Because we’d rather ask you 100 questions and show you 10 vetted homes that you’ll love than only ask you 10 questions and end up showing you 100 homes (most of which won’t fit the bill).
If an agent isn’t willing to put this time into you on the front end how hard do you think they’ll work once you hire them?
On our team, saving you time, stress and money is our #1 priority. That’s why we offer all of our buyers:
- Our expertise of hundreds of properties sold (well above the average agent).
- A friendly, no pressure approach. We’ll work on your timeline, whether it’s 30 days or 6 months.
- Prospecting for your new home so that you won’t get caught up in a bidding war
We always recommend that you have an idea of your “Must Haves” and “Would Likes” before you start seeing too many homes in person. Not only does this give us a great starting point for honing in on the best properties for you but it will also help provide clarity to you on the necessary features of your new property that should make your search easier.
Questions to ask yourself during this step in the home buying process are: how many bedrooms and bathrooms do I need, do I need a dedicated parking space, is open concept a must, how far away can my new property be from where I work, do I need parks, amenities or transportation nearby, am I okay to do renovations or do I want something turnkey?
Keep in mind that were big fans of seeing homes in person instead of vetoing them online. If the listing agent has done a poor job of marketing the property (cell phone pictures anyone?) don’t dismiss it and move on as it could be the home for you. In fact, we’ve had many buyers over the years purchase the home that they dismissed online – so keep an open mind.
Realtor.ca is a great place to start doing preliminary research on homes and areas but keep these two crucial things in mind:
- It’s 24-48 hours behind real time so a lot of the properties listed on the site are already sold (especially in a seller’s market where the best properties could be gone on Day One)
- It’s only giving you the list price, which could be very different than the price that property actually sells for so you may be in for a rude awakening.
Humble Brag: Our home search tool is second to none and alerts you IN REAL TIME the moment a listing is put on the MLS system. In a fast seller’s market this kind of time advantage could mean the different between securing your dream home or not even being able to see the property before it sells.
Are you tired of searching through new listings yourself, since many may not fit the bill? Then take advantage of our Cherry-Picked Properties option. We’ll scour available listings daily and only send you the ones we know you’ll love.
Once you find a house that you love, you’ll prepare offer paperwork. This can definitely be a stressful part of the home buying process. Not sure what to expect? We’ll walk you through everything you need to know, in plain language, so that you aren’t left scrambling when it comes time to submit your offer.
Once your offer is submitted, that’s when the negotiations start. Sellers typically want the most money, the least number of conditions, a healthy deposit and a closing date that works for them.
The strength of your agent and their negotiating ability will mean the difference between compromising, losing your shirt or coming out of the negotiation process with as many of your needs and wants are met as possible and a new home!
Here are the highlights of some Agreement of Purchase and Sale Terms:
Every property in a home buying process requires a deposit (typically around 5% of the purchase price) which is either submitted within 24 hours of an accepted offer or, if you’re in multiple offers, can be brought to the negotiation table (don’t worry – you get it back if you don’t get the property). We recommend having these funds in a liquid account like a bank account or line of credit so that you have easy access to them.
For the offer to be valid, it must contain a number of specific dates and times. Your initial offer will be valid for a specific period of time, after which the offer is deemed null and void. This time frame is called the irrevocable period.
This is the date set for the transfer of ownership of the property negotiated between you and the Seller and can also be referred to as the closing date.
This is the period in which your lawyer must determine if there are any problems with the title of the property.
Fixtures are any item permanently attached to the property. For example, a bathtub, sink or toilet permanently plumbed in would be a fixture. Technically, anything nailed to the building is a fixture while items screwed in (because screws can be removed) are chattels. This is often an area of contention so be aware of the distinction and, if in doubt, put it in the offer.
Chattels, unlike fixtures, are not part of the property and must be specified in the offer if you want them included in the sale. Some items that you’ll want to include in your offer (if the property has them) are ceiling fans, chandeliers and other light fixtures, draperies, microwave ovens, refrigerators, freezers, stove, washer and dryer, storage sheds, BBQ’s, central vacuums and equipment.
Humble Brag: We take the negotiation part of the home buying process very seriously and will go to bat for our clients. Every. Single. Time. We’ll never, ever pressure you to do anything you’re not comfortable with. Is the seller asking too much money? Are the terms unreasonable? We have your back and will always give you our honest advice.
Selecting the right lawyer is as important as choosing your Mortgage Specialist or Agent. You’ll typically find a lawyer once you have an accepted Agreement of Purchase and Sale. If your purchase is not a standard one we’d recommend finding one before submitting your offer.
This is typically what your real estate lawyer will need from you throughout the home buying process:
- A copy of the Agreement of Purchase and Sale.
- The full names of each person to take title to the property and their marital status, and the dates of birth of each person on title.
- Confirm if one or more of the buyers are “First Time Buyers” meaning that this person has NEVER owned property anywhere in the world, and has not been legally married to someone who has owned property anywhere in the world, while they were married.
- Arrange the mortgage well in advance of closing so that they are provided mortgage instructions with sufficient time to arrange for signing.
- When going to sign your closing documents, you’ll need two pieces of ID acceptable to the Canadian lender (usually a Canadian driver’s license and passport or SIN card).
- Obtain home insurance prior to closing and ensure that your Mortgage Lender is listed as the mortgagee on the policy. They will require an “insurance binder” from the insurer to be faxed to them just prior to closing.
- Your real estate lawyer may require a blank cheque from a Canadian Bank Account for the mortgage lender to make withdrawals of your mortgage payments.
- Your real estate lawyer will ask you to bring to your appointment a certified cheque or bank draft payable to their company, ‘in trust’ for the amount they require to complete your transaction. Typically, they won’t know this final number until shortly before closing. Once they know your mortgage amount and they receive the Statement of Adjustments from the Seller’s lawyer.
For their fee your lawyer should:
- Obtain and review the title search to ensure that you will be obtaining good and valid title to the property.
- Obtain a tax certificate from the municipality to confirm that there are no tax arrears.
- Prepare closing documentation and mortgage documentation (based on mortgage instructions provided by the lender).
- Obtain the mortgage funds and, together with the balance of the down payment provided by you, pay the Seller’s solicitor for the property and pay your land transfer taxes.
- Register title to your property on the day of closing, as well as your mortgage.
- On the day of closing, the keys to the property are delivered to your real estate lawyer’s offices for pick up.
Humble Brag: We work with the best real estate lawyers in the business and are happy to introduce you. They have an eagle eye for detail, years of experience and treat our clients like gold. What does that mean for you? That you can rest easy knowing that you’re working with the best. We’ve even organized for them to courier your keys to you on closing to save you a trip to their office.
The last thing you want is to find your dream home and then be hit with unexpected closing costs because you haven’t been given the right advice or done your due diligence.
Here’s a list of the closing costs that you should expect in the home buying process:
Your lawyer’s job is to certify good and marketable title to the property, free of encumbrances, liens, and judgments. The costs of a lawyer will vary but will typically range from $1,400-$1,600.
Title insurance provides insurance against the future costs of remedying most problems with the title on your property and is typically included in your lawyer’s fees.
A home inspection is strongly recommended for most residential properties and will usually be a condition in the offer. We can assist you in choosing a home inspector. The cost will vary depending on the value, age and use of the property but will usually range from $350 to $500.
You may wish to hire a termite inspector as well as a home inspector if you are buying in an area where termites are known to be a problem. This could add another $200 to $300 to the cost of your inspection.
Land Transfer Tax
Properties purchased in the Metro Toronto Area will have a municipal land transfer tax that will be levied on top of the Provincial Land Transfer Tax. First-time Buyers may be eligible for a tax rebate.
CMHC Insurance + HST
Mortgage loan insurance is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. It helps protect lenders against mortgage default and enables consumers to purchase homes with a minimum down payment of 5% — with interest rates comparable to those with a 20% down payment. Speak to your lender about this fee.
When you apply for a mortgage, the lender may want to see an appraisal of the property to ensure that the price you are paying falls within the accepted range of value for that type of property and that area of the city. The fee for this is usually between $250 and $350. Speak to your lender to see if you’ll have to pay this fee.
The statement of adjustments is a system of credits and debits where amounts are added to or subtracted from the balance to be paid to the seller depending on whether or not the seller has paid certain items in advance i.e. property tax, hot water tank rental, etc.
Total Home Buying Process Costs
Approximately 1.5% to 2.5% of the purchase price.
Humble Brag: There’s a lot to do between the date that your Agreement of Purchase & Sale firms up and your closing date. That’s why all of our clients receive a comprehensive closing checklist so they can keep track of it all. We also offer kick-ass move management services courtesy of our Client Care Specialist to make your move that much easier.
Do you have any other questions about the home buying process?
Contact us anytime, we’d love to help.