Over the course of your lifetime buying a home is one of the most important decisions you may ever make which means you want to be aware and prepared for all the steps involved. After guiding many clients through this journey, I’ve summarized the top 10 steps to buying a home, in order, to help you get ready for your purchase. Let’s dive in!
Step 1: Build a Budget
To buy a home means you first have to understand your current monthly cash flow. Start by determining your monthly income and expenses. These can include:
- Monthly take home pay
- Rent/mortgage payment
- Utilities (hydro, water)
- Gym membership
- Credit card or loan payments
Your total expenses and take-home pay will give you an idea to what you can afford to make for mortgage payments and carrying costs (i.e. property taxes, hydro, gas bill, emergencies, etc).
***TIP: If you have outstanding debt prioritize paying down your debt before you buy a home as the amount of outstanding credit you have will affect your mortgage amount.
If you cannot pay off the balances of your loans or credit cards in full, then the general rule to maintaining a good credit score is to keep your credit utilization ratio at 30% or below. For example, if your credit limit is $3000.00, then try not to exceed a balance of $900 on that credit card. Having a good credit score is integral to getting your mortgage approved.
Step 2: Save for a Down Payment
Once you’ve figured out your budget, start setting aside money for your down payment. As home prices steadily increase, so does the amount you need for a down payment. A down payment on a home can be as little as 5%, however the less you put towards a down payment, means the more your mortgage payments will end up being.
If you have a down payment of 20% or more, you can get a conventional mortgage. This is a loan that is equal to or less than 80% of the lending value of the home and does not require mortgage loan insurance.
If you have a less than 20% down payment, then your mortgage will be a high-ratio mortgage – your loan is over 80% of the lending value of the home. This type of mortgage is combined with a mortgage default insurance, which allows for a smaller down payment.
Step 3: Get Pre-approved
Go to a mortgage representative at your bank or find a reputable mortgage broker and start the pre-approval process. A pre-approval will require you to fill out an application and provide documentation regarding your income and your assets. You lender will also be required to check your debt ratios.
A pre-approval will determine your interest rate, how much you can afford and outlines what to expect from your monthly mortgage payments. It’s important to know that a pre-approval does not ensure a final approval of your mortgage. Your property of interest will still need to be evaluated to determine if it meets the lender’s standards.
Step 4: Choose a Realtor
The next step in the home buying process is unarguably also the most important. It’s time to choose a realtor! You’re realtor plays a key role in guiding you through the entire home buying process. As your agent, a realtor’s top priority is to represent your best interests. He/she will show you properties that align with your purchasing standards and will also negotiate on your behalf in order to get you the best deal.
Step 5: Time to Start Shopping!
Here comes the fun part! It’s time to start shopping for your new house. The first thing you’ll want to ask yourself before diving into all those listing is, ‘what qualities am I looking for in my perfect home?’ With your agent, put together a list of must have priorities that will suit the needs of you and your family not only now, but also in the years to come.
You may consider some of the following:
What does location mean to you? Are you a more rural or urban dweller? How close do you want to be to any major shopping centers, healthcare facilities, places of recreation, etc.? If you commute to work, do need a home in close proximity to a highway?
Keep in mind the type of neighborhoods that appeal to you, and how location will play into you and your families’ day-to-day life.
Do you have children, or plan to have children? In this case may want a home near schools. How large does your home need to be to accommodate you and your families’ needs? Consider bedrooms, bathrooms, garage space, office space, basement, playrooms, etc.
Does the neighborhood and home reflect you? Everyone has a style, and it’s important you feel that your home and the neighborhood it resides in also align with your personal tastes.
Your home will have larger impact on you and your families’ day-to-day life than you might expect, so be sure to choose a home that accommodates your lifestyle in its entirety. If you’re feeling overwhelmed, don’t worry. You’re never alone in your choice! Equipped with a budget and list of expectations, you and your agent will start viewing local properties together within you price range.
Step 6: Make an Offer
It may take viewing one property or several to find the right home for you, but once you have, you can now make an offer on it. At this point in the process, the Seller will require something called an “Agreement of Purchase and Sale.” Your agent and lawyer will have prepared this legal contract on your behalf and it will include the properties’ purchase price, the amount of the deposit and the conditions of the purchase (i.e. financing conditions and/or a condition of home inspection). If you choose not to include conditions then the house is bought firm and it will close on the closing day. Otherwise, you will have a stipulated period of time in your offer to fulfill any conditions aligned in the agreement.
The Two Conditions For the Buyer to Include in their Offer
Condition of Financing: The accepted Agreement of Purchase and Sale will be submitted to a mortgage specialist during the conditional period. If the Buyer cannot obtain final approval of their mortgage from the bank, then he or she will be relieved from the Agreement of Purchase and Sale.
Inspection Condition: If the Buyer chooses to include an inspection condition, they will hire an inspector to do an inspection of the property during the conditional period. If any issues with the property are found during the inspection, the Buyer can do one of three things; (1) the Buyer can choose to walk-away from the deal, (2) the Buyer can negotiate with the Seller for a price reduction on the purchase price to compensate for the cost of fixing the issue, (3) the Buyer can ask the Seller to fix the issue on their end. If the Seller chooses not to fix the issue to reduce the price, then the Buyer can choose to walk away from the deal.
Once your agent has submitted the offer, it will ultimately be at the Sellers’ digression to agree to the offer, reject it or present their own counteroffer. This part of the process may feel arduous, as it may take some back and forth to come to an agreement between both parties. Though let’s suppose all goes well, you will then submit a deposit and finalize the deal.
Step 7: Finalize the Deal
Once your offer is accepted, the details of your mortgage have been settled and you’ve met all the conditions of your purchase agreement, you must now sign a ‘Waiver or a Notice of Fulfillment.’ This document states that all the conditions of your agreement have been satisfied, and the deal is now considered ‘firm’ and shall proceed to close.
Step 8: Find a Lawyer
It is very important to hire lawyer who focuses specifically in real estate, as they’ll be the primary individuals responsible for preparing all paperwork necessary to place the house in your name. Additionally, it will be your lawyer’s job to do a title search, and evaluation to ensure you have no unsettled taxes or claims on the property.
Step 9: Final Walk-through and Move-in Preparations
A few days before the closing date, your agent will take you on a final walk-through of your soon to be new home. The purpose of this walk-through is to make sure that there are no outstanding issues with home. Most often then not it is the small problems that are overlooked, only to become a nuisance later. Create a walk-through checklist so as not to miss anything, and if the property meets your standards, you can then proceed to close.
You will also want to make your move-in preparations well-in advance to ensure everything is in tiptop shape and move in ready! Protect your home investment and make sure your insurance is in order. Inform the utilities company of your move in date and make sure all mail will be forwarded to your new address.
Step 10: Closing Day!!
It’s finally time for all that heavy house hunting and hard work to pay off. It’s closing day! On closing day you payments will be finalized and your lawyer will complete all the paperwork for you to legally gain possession of your house and get the deed in your name. Yes, that also means you will finally get those oh so precious house keys in your hands. Congratulations home Buyer, you have risen to the ranks of home ownership!