By Mark Demas
You have been saving money and checking out properties that you are interested in. You are probably working with a real estate agent who can bring their expertise to your search, and now you have found the ideal house or condo that you want to purchase.
Before making an offer, here are some factors to consider first.
Determine how much you can spend
As a first-time buyer, you might not be aware of all of the costs associated with homeownership. Upfront expenses include the down payment, closing costs and any applicable taxes.
There are also ongoing costs to consider. These include mortgage payments, property taxes, insurance, utility bills, condominium fees (if applicable) and routine repairs and maintenance.
Then there are the major renovations and upgrades every home needs over time. This includes roof and furnace replacement, electrical upgrades and window and door replacements.
if your budget is already stretched to make the mortgage payments, you may be in financial trouble if your home needs one of these major upgrades shortly after purchase.
Mortgage rates can also increase, which will further exacerbate any money issues you are having.
Two affordability rules
To determine how much you can afford to spend on a home, the Canada Mortgage and Housing Corporation (CMHC) offers two affordability rules.
The first is that as a general rule, your monthly housing costs should be no more than 32 per cent of your average gross (before-tax) monthly income. This percentage is known as your gross debt-to-income or gross debt service (GDS) ratio. CMHC restricts homebuyers to a 39 per cent GDS ratio to qualify for an insured mortgage.
The second CMHC affordability guideline is that as a general rule, your monthly total debt load should be no more than 40 per cent of your average gross (before-tax) monthly income. This percentage is known as your total debt-to-income or total debt service (TDS) ratio. CMHC restricts homebuyers to a 44 per cent TDS ratio to qualify for an insured mortgage.
Your monthly debt load includes housing costs, car loans or leases and credit card or line of credit payments.
The maximum amount you can afford to spend on a home depends on these numbers and the size of your down payment.
You need to be pre-approved
It is always a good idea to get pre-approved for a mortgage before you start looking for a home. Pre-approval means that a lender has stated that you qualify for a mortgage loan based on the information you have provided, subject to certain conditions. A mortgage pre-approval often specifies a term, interest rate and principal amount. Although not a required step, it is helpful as it can give you a clearer picture of how much house you may be able to afford.
Getting pre-approved is not a guarantee of final approval for a mortgage. Once you find the home you want to buy, the property still has to be evaluated to ensure the price and condition of the home are acceptable to your lender.
Other ways to make your offer more appealing are to limit the number of conditions and offer a quick closing, if the seller is looking to move immediately. If you are sure this is the home for you, consider a “bully offer” where you make a bid before the formal offer date.
The bigger the downpayment, the better
The minimum down payment required for a home purchase in Alberta is five per cent of the first $500,000 of the purchase price, and 10 per cent for any amount over $500,000. A sizeable down payment will not only reduce the amount you need to borrow but it will also lower your monthly mortgage payments.
In addition, if you have a down payment of 20 per cent or more of the home price, you will also avoid having to get mortgage insurance on top of your monthly payments.
You may also want to include a deposit in your offer, to show you are serious about the purchase. The deposit is not part of the downpayment but is instead subtracted from the amount of money you owe if the offer is accepted.
Research the property
There are various ways to investigate the history of the property you are considering buying and this information may show if it is a good value for the money.
According to the Real Estate Council of Alberta (RECA), the first step is to review the Real Property Report (RPR), a legal document prepared by a licensed Alberta land surveyor. It shows property boundaries and improvements (structures) relative to boundaries. Would-be buyers are instructed by RECA to ensure an RPR has evidence of municipal compliance, which confirms property improvements comply with municipal bylaws and regulations.
“If there is no RPR available, discuss your options with your real estate professional and your lawyer,” RECA advises.
Another research option is your home computer. RECA recommends that you search the address of the property or the name of the condominium building/complex as “an internet search can uncover quite a bit.”
As a final step, RECA suggests buyers of newly built homes look into warranties and representations since Alberta has an online public registry of homes covered by a new home warranty.
Mortgage terms you need to know
Amortization period: The length of time it will take to pay off your mortgage (usually 25 years).
Mortgage term: The length of time that the options and interest rate you choose are in effect. This term can be anywhere from six months to 10 years. When the term is up, you must renegotiate your mortgage.
Payment schedule: The frequency of your mortgage payments. The usual choices are weekly, every two weeks or once a month.
Types of interest rates: If you choose a fixed rate it will not change for the term of the mortgage. A variable rate fluctuates with market rates. A protected (or capped) variable rate fluctuates but will not rise over a preset maximum rate.
Open mortgage: It allows you to pay off your mortgage in full or in part at any time without any penalties.
Closed mortgage: It offers no option to pay off your mortgage early in full or in part but it usually has a lower interest rate than an open mortgage.
Why you need a lawyer
A real estate lawyer can provide valuable assistance at every stage of purchasing a property. When it comes to buying a home, the sooner a problem is discovered the more time you have to deal with it.
A lawyer can review any legal documents connected to the property before you make an offer. There may be a lien on the Certificate of Title, which indicates the owner of the property owes money to someone. Avoid the home in that circumstance.
It is important to remember that your offer is a legally binding document, so a lawyer can ensure you understand every aspect of what it includes and make the paperwork more manageable.
If both the buyer and seller are represented by their real estate lawyers, they can be sure that their interests and rights are protected.
Contact us for assistance
If you are thinking of buying or selling a home in Northern Alberta, contact us for guidance, at every step of the process. We offer a free 15-minute telephone or video consultation.