Whether you’re buying a house, townhouse or condo, the home buying process can seem quite daunting and you may not know where to start. This step-by-step guide will help you better understand what is all required to buy your first home in Alberta and help you feel more confident in the process.
Step 1: Save for a Down Payment
Before you start home shopping, your first step is to save up for your down payment. A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.
As you start saving, you might ask: how much do I need to save for a down payment? The minimum amount you need for your down payment depends on the purchase price of the home. For homes up to $500,000, the minimum down payment required in Canada is 5% of the purchase price.
If your down payment is less than 20% of the price of your home, you are required to pay for mortgage default insurance through one of Canada’s three mortgage insurers: Canada Mortgage and Housing Corporation (CMHC), Sagen (Previously known as Genworth), or Canada Guaranty. This insurance protects the lender in the event you are unable to make your mortgage payments. The cost of mortgage default insurance depends on the amount of your down payment and premiums typically range from 2.8% to 4.0% of the mortgage amount and are added onto the mortgage.
The larger your down payment, the less you will need to borrow as well as the less you pay in mortgage default insurance premiums.
Save for Closing Costs
While saving for a down payment should be a top priority, put aside some money (generally 1.5 to 4% of the home purchase price) to cover future closing costs.
These are legal and administrative fees paid at the closing of a real estate transaction and generally range from 1.5% to 4% of the purchase price. It’s important to save for these expenses in advance to buying a home, so you’re not in the red when it’s time to close on your home.
Closing Costs May Include:
- Legal fees
- Home Inspection
- Home Insurance
- Title Insurance
- Property Tax Adjustment
- Utility Service Charges
- Moving Expenses
This is not an exhaustive list—it doesn’t include property taxes or utility bills, for example—but it gives an idea of possible closing costs.
Step 2: Prepare Your Finances
This is an important step to get your financial ‘ducks in a row’ by checking your credit and organizing documents needed for a mortgage application.
Check Your Credit Score
A credit score is a rating (between 300 and 900) used by lenders to assess the amount of risk you present as a borrower. In general, the lower your score, the less likely you are to be approved for a mortgage. Checking your credit allows you to better understand where you fall on the scale and to determine if you need to improve your credit score before submitting a mortgage application, lenders generally want your credit score to be over 680 with a relatively clean credit history. The benefit of checking your credit score directly through Equifax Canada is that it does not negatively affect your score.
Organize Your Documentation
One of the most overwhelming parts of applying for a mortgage is organizing all of the documents that are required. There are three key financial factors that a lender will look at before approving you for a mortgage: your current assets, debts and income. During the application process, here are a few items that may be requested from you:
- Government Issued Photo ID — Driver’s License, Passport, etc.
- Proof of Employment — Letter of employment, pay stubs, T4’s, T1 Generals, Notice of Assessments, etc.
- Proof of Down Payment — You are required to prove a 90 day history of transactions or statements as well as where it came from (savings, RRSP’s,
- Information about your assets — Savings, TFSA’s, RRSP’s, investments, vehicles, etc.
- Information about your debts — Personal loans, vehicle loans, student loans, credit cards, lines of credit, etc. or other financial obligations such as spousal or child support
Lenders want to do their due diligence to ensure you’re a good candidate for a mortgage, so it’s important to gather all the documents required and have them ready for your application. This will ultimately prevent you from scrambling to get everything together at the last minute.
Step 3: Get a Mortgage Pre-Approval
With your finances in order, the next step is to determine how much you can qualify for. A mortgage pre-approval is when a potential mortgage lender looks at your application and determines how much money they will lend you and at what interest rate.
A pre-approval comes with a bit of work, but allows you to:
- Know the maximum amount of mortgage you can qualify for
- Estimate your mortgage payments
- Lock in an interest rate for up to 120 days
- Get a better understanding of the mortgage and home buying process
- Is used to help set your budget for house hunting
In fact, most REALTORS® require it before taking you out to view homes.
One caveat: a mortgage pre-approval does not guarantee financing. The lender and potentially insurer have to both approve you as the applicant but also the property you’re looking to purchase. It’s also important to note that just because you can qualify for a certain amount, doesn’t necessarily mean you should spend that. You need to keep in mind how much you can actually afford, without overextending yourself.
Consider First Time Home Buyer Incentives
- RRSP Home Buyers’ Plan — Allows first time home buyers to withdraw up to $35,000 from their RRSP (or $70,000 for a couple) to be used towards your down payment.
Step 4: Start House Hunting
Now that you’ve got some money saved and a pre-approval in place, it’s time to get connected with a trusted REALTOR® that suits your personality. This is the exciting part of the home buying process—when you can get setup on a search based on your budget and home criteria and start viewing homes.
It’s important to choose the right REALTOR® that will guide you through every step of the process, this can help to alleviate some stress. As a buyer, they are free to you and have your best interests in mind. They, along with your mortgage broker, becoming a part of your home buying power team and are there to support you in your first home purchase.
Step 5: Make an Offer
Once you’ve found a property you’d like to purchase, you will work together with your REALTOR® to make an offer. Your REALTOR® will help you present an appealing offer to the sellers and help with negotiation if you end up in a multiple-offer scenario competing against other buyers for the same property.
Most offers are conditional offers pending home inspection and final approval of your lender for the mortgage. Some other conditions may also apply, like the sale of your home, etc.
Read More: What to do after your offer is accepted
Step 6: Mortgage Approval
Once your offer has been accepted by the sellers, we can move onto the next step, to determine what lender, mortgage product and interest rate is best suited for your current and future needs.
Step 7: Fulfill Purchase Conditions
If your offer on a house included conditions, you’ll need to fulfill them. Common conditions include:
Once your offer on a house has been accepted, it’s important to let your Mortgage Broker know right away. Your Realtor can send the MLS listing along with the accepted offer to the Mortgage Broker to get started your financing. This process of submitting to a lender, mortgage underwriting, and document review typically takes about two weeks. The financing condition protects the buyer, which essentially tells the seller that the purchase is conditional on you obtaining financing.
Selling your current property
If you are an existing homeowner and need the funds from the sale of that home to buy the new property, you should make your purchase offer contingent upon the sale of your current home. This typically includes a reasonable time frame to sell your home, such as 30 or 60 days.
Getting a home inspection
While home inspections aren’t mandatory, keep in mind that an inspection could help uncover construction and/or repair/replacement issues that could prove much more costly. Expect to pay in the range of $350-$500 for a home inspection by a qualified inspector.
Get the home appraised (if required)
An accredited home appraiser evaluates properties to calculate the current market value when a home is sold. Lenders require home appraisal reports before finalizing mortgage offers to protect their loan and make sure a property is worth what a buyer is paying for it!
Step 8: Lawyer Appointment
If you don’t already have a real estate lawyer, you’ll need one. The lawyer will take care of various legal tasks associated with the purchase. Some of their responsibilities might include:
- Arranging for title insurance and/or completing a title search
- Helping first-time buyers understand common mortgage terms and meanings
- Preparing and finalizing mortgage documents based on instructions from your lender
- Registering the title and mortgage documents with the appropriate government office
- Handling the transfer of funds for the purchase and sale
- Getting a status or estoppel certificate for condominium purchases
Legal fees for purchases can vary, but will likely range between $1,700 – $2,000. These legal fees are part of the closing costs you should expect to pay once an offer is accepted on a house and the sale is finalized or closed. The general rule of thumb is to set aside about 1.5% to 4% of the purchase price for closing costs.
Step 9: Take Possession
Your offer will include your closing/possession date, this date may change but it’s important to remember each deadline to ensure you don’t miss any important deadlines. After you’ve completed all of these steps, there’s only one thing left to do: move in and make yourself at home. Congrats!
Tatum Neufeld, BComm
Mortgage Broker • Mortgage Tailors