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The "First-Time Home Buyers" Guide
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BMO &mdash Bank of Montreal has published this common sense guide for first time home buyers. This provides an excellent step by step approach to the process of buying that first home and one of the more important recommendations is to lean on the experts to help you through the process, the experts such as your bank's mortgage professionals and real estate agents. Both will work diligently for you and the work is at no cost to you. If you do not know of the real estate agent you want to work with, ask family and friends who have recently purchased a home for their recommendations (or warnings!)

Getting pre-approved

As a first-time home buyer, you'll probably need to borrow most of the price of the home. That's why getting pre-approved for a mortgage is a smart thing to do - even before you start your home search.

By looking at how much you earn each month and how much you spend – particularly how much you must spend to pay off any existing debts — your bank's mortgage representative or mortgage specialist can tell you how much you are qualified to borrow to purchase a home. You can shop confidently, and when you find a home you want to purchase, you can make an offer knowing you can afford it and the funds are available. And, while you are shopping for your new home, a pre-approved mortgage locks in your rate for up to 90 days, so you don't have to worry about rising rates!

How pre-approval works

The mortgage representative normally will meet with you to complete a mortgage application and ask you for your consent to do a credit check. You'll also be asked to provide some information such as:
  • Name of your employer, length of employment, and current salary
  • Annual salary or wages for the household
  • If you are self-employed, earnings for the past two years
  • Annual earnings from commissions, bonuses or tips
  • Annual interest and investment income
  • Child support or alimony received this year and last
  • List of assets (bank accounts, RRSPs and other investments; major personal assets, such as jewelry, car, collections)

The lender will also need to know how much you currently need to pay to make debt repayments, including:
  • Credit card balances (major credit cards and retail credit cards)
  • Student loans
  • Car loans or lease
  • Other debts and loans

Calculating affordability

As part of the application eligibility process, the lender may run two calculations. You can easily calculate these yourself to get an idea of how much you can borrow.

The Gross Debt Service (GDS) ratio is the maximum you can afford to spend each month on mortgage principal and interest, property taxes, and heat (and 50% of the condo fee, if applicable). As a rule of thumb, your GDS should not exceed 32% of your gross monthly income (before taxes and other deductions).

Your Total Debt Service (TDS) ratio tells you the maximum total debt load you can afford to carry — including monthly mortgage costs plus all other debts and obligations. It should not exceed 40% of your gross monthly income.

In calculating the numbers, there's a built-in margin of safety. Under recent regulation changes, lenders are required to determine eligibility based on the Bank of Canada five-year interest rate for default insured mortgages.

Estimating what it will cost to own a home

One of the most important calculations you can make before becoming a homeowner is to figure out what the costs to own your home will be. Remember, the true cost of home ownership includes what you’ll be paying out each month to purchase your home as well as what you'll be paying to maintain your home. When calculating the costs of home ownership, remember to include everyday costs that you will incur no matter where you live — for example, groceries, gas, phone, etc.

To determine you own workable budget this handy "How Much Can I Afford" calculator developed by BMO will be a big help.

Remember the closing and other one-time costs

Monthly expenses don't always tell the whole picture. When you find the home you want, there are a number of closing costs and other one-time expenses to consider before you can complete the deal and move in. Depending on where you live and the type of home you buy, it is wise to budget between 3% and 4% of the purchase price.

Save for your down payment

It's smart to start saving as soon as you start thinking about buying a home. The larger your down payment, the less you'll have to borrow and the lower your interest costs will be.

How much of a down payment?

It doesn't take much. You can buy a home with as little as 5% of the purchase price as a down payment from your own savings. On a home that costs $300,000, that would be $15,000.

Mortgage down payment requirements

If your down payment is 20% or more of the home price, you'll qualify for a conventional or collateral mortgage. If it is less than 20%, it is a high-ratio conventional mortgage, and you'll need to insure it with Mortgage Default Insurance. This one-time insurance premium is usually added to your mortgage or it can be paid up front. Mortgage Default Insurance is not available on homes with a purchase price of $1 million or more. In these cases, you would be required to have at least a 20% down payment to obtain the mortgage.

In addition, you must have enough cash to cover closing costs. For a high-ratio mortgage, you must have at least 1.5% of the purchase price from your own resources to cover or contribute to the closing costs in order to qualify for mortgage default insurance.

How to find the right home

To find the right home for you, you must start with the most important factor of all—location. Homes in high-demand areas are priced at a premium, and homes in areas that evolve into prime locations can see their values increase significantly.

Other factors that will influence your ability to find the right home include:
  • Whether you prefer an urban, suburban or rural location
  • How far you are willing to commute to work
  • Whether you have school-aged children, and the availability/types of schools
  • Where your friends and family are situated, and how close you’d like to be
  • The amenities and infrastructure you’ll need in your neighbourhood (schools, hospitals, shops, parks, roadways, public transit)
  • The type of community you prefer

If you are looking within your current city or town, you may already have a good idea which neighbourhood you prefer. If you're moving to another province, or from city to rural (or vice versa), you may have to do some research in order to find the home that’s right for you.

Regardless of your situation, get to know the area before choosing a home.. This can be extremely helpful when trying to find the right home. Walk around the neighbourhood at various times of day and night. How busy is it? Do you feel safe? How noisy is it? Is there a lot of traffic? Talk to others who live there. Check regional websites. Look up articles in local papers and magazines. What is the area's reputation? Remember that the character of a neighbourhood — and the prices of homes — can vary significantly from street to street within an area. To find the right home, it helps to work with a trusted real estate agent with a sound knowledge of the area (and knowledge of the development, if you are purchasing a condo).

Get the features you want

Once you know how much you can afford with a pre-approved mortgage, you’re ready to find a home that suits how you live, work and play. You'll also want to find a place that will maintain its value or appreciate over the long term.

Making choices

Finding the perfect home at a price you can afford can be hard work. You’ll need to set priorities by thinking about which features are most important for you, and which ones you could sacrifice.

Here are some categories to help you start thinking about your wish list:
  • Type of dwelling. Condo or house? Detached, semi-detached or row-house? Bungalow, two-storey or three?
  • Age and state of home. Are you looking at a new building, either a condo or a home? If you're looking for a resale, consider whether you want a home in move-in condition or a fixer-upper that you can add value to.
  • Beds and baths. Keep in mind your current needs and how they might change over the next five years or so. Will you be adding to your family? Will you need a home office? How many bathrooms do you need, and do they all have to be full, four-piece bathrooms?
  • Outside areas. Do you need a large yard for the kids, or space to plant a garden?
  • Parking. If you're buying in a busy urban centre, you might pay a premium for this. Consider whether you need a garage, carport or parking pad, or whether street parking will suffice.
  • Extras. Sometimes the unexpected details can make a home special, for example, a hot tub, a finished basement, a large balcony in a condo, or architectural details.

Tips to help you find the right home

You know what you want and how much you can afford. Now how do you find the right home for you?

Work with a pro

A real estate agent is a key member of your home-buying team. They can be extremely helpful in your search to find the right home because they'll know the pros and cons of the neighbourhoods in the areas you're interested in. Your agent should be someone you trust and get along with, who will provide the following services:
  • Meet with you and listen to what you want and need in a home
  • Narrow the search by sending you relevant listings based on your desired features
  • Brief you on the current state of the market
  • Arrange private viewings
  • Advise you on issues such as location, home features, factors influencing value and any concerns with a home that require follow up
  • Walk you through all the steps required to place an offer and purchase a home
  • Prepare paperwork such as the offer to purchase
  • Represent you and act on your behalf in negotiations

A real estate agent earns money through a commission from the person selling the property. As the buyer, you are not required to pay any fees or commissions to the real estate agent.

Take a good look

Once you have found some homes you’re interested in, what do you look for? Here are some viewing tips to help you make a thorough assessment.
  • Bring a camera or cell phone to take pictures. It will jog your memory and bring back all kinds of details you might forget.
  • Look for good building structure. Decor and even major elements like kitchens and bathrooms can be redone. The structure is harder to change. Consider the floor plan, the overall footprint, closet space, light and the vintage of the home.
  • Check the infrastructure. Look at elements such as flooring, and the heating, cooling, electrical and plumbing systems. Your home inspector will check these elements at the buying stage, but you should get a rough idea of whether they are in good working order before making an offer.

Making an offer on a home

Once you've found a home you wish to buy, your real estate agent can assist you with how to make an offer on a house or condo.

Signing for a resale home

The first step to making an offer on a house or condo is deciding how much you are going to offer as a purchase price and how much to attach as a deposit.
  • The agent will complete a form called the Offer to Purchase (also called an Agreement of Purchase and Sale). It documents information such as the names of the parties, the amount offered, the closing date, the length of time for which the offer is valid, and any conditions of the offer.
  • Note that the offer to purchase is a legally binding document, which means that you are committed to fulfilling these details. You may choose to have your lawyer or notary review (or even prepare) the contract if time permits. Whether your offer is accepted will depend upon price, as well as elements such as the closing date, the amount of the deposit, and the number and type of conditions.
  • Once you're happy with the Offer to Purchase, you’ll sign it and your agent will deliver it, with your deposit, to the seller for review.

Signing a contract on a new home builder purchase

If you've chosen a new home you want to purchase, the builder will supply the Offer to Purchase. Since there is no standard form for new homes, the Offer of Purchase can vary widely from builder to builder. A new home contract is also more complex than a resale offer.

You are strongly advised to have your lawyer/notary review it and explain all the terms to you. Your lawyer/notary will also point out any clauses that may be of concern, and may be able to suggest amendments. (Note that some builders may not accept changes to standard clauses.)

For a detailed explanation of the elements in a new home contract, visit CMHC, Understanding Your New Home Sales Contract. (

Putting conditions on your offer

In some cases, your offer will contain clauses specifying that the offer is "conditional upon" or "subject to" a situation that must be met. For example, it is often advisable to make your offer subject to financing and subject to a successful home inspection.

As each condition is successfully met, both parties sign a waiver of the condition.

Negotiating the offer

In a resale purchase, once your Offer to Purchase has been delivered, the seller can decide to:
(a) accept your offer,
(b) reject it, or
(c) make a counter-offer. If the seller makes a counter-offer, he or she will amend the document and sign it back to you within the time frame specified.

(In a new home purchase, your negotiation will probably centre on issues such as payment schedule, material upgrades, and lot, rather than the price.)

You will review the counter-offer and accept, reject, or counter again.

This process continues until the offer is rejected or accepted. If accepted, both parties sign the offer and proceed to the next steps, to satisfy any conditions that were put on the offer. Waivers will be signed as the conditions are satisfied.

Confirm with a home inspection

No matter how perfect a home may seem, it's a good idea to make your offer to purchase conditional upon a successful home inspection by a qualified professional. An expert can tell you whether the place is structurally sound and the systems are in good working order.

The cost of a home inspection usually depends on the location and size of the home. For a typical home, plan to spend between $375 and $500. It could be one of the smartest investments you’ll make.

What the inspector does

The inspector performs a visual inspection of the home's structure and major systems, including heating and air conditioning, electrical and plumbing systems, roof, foundation, insulation, framing, and windows. The inspector looks for equipment or areas that are worn, need repair or replacement, and are unsafe or inefficient, as well as how one system may have an impact on another.

An inspection takes about three hours, and it's best if you are there to ask questions. The inspector provides a written report on the findings, listing necessary and recommended repairs or replacements and structural problems. These can range from minor, inexpensive repairs to major, costly replacements and expenses.

How the inspection helps

It's almost always advisable — especially as a first-time buyer — to make your offer to purchase conditional on a successful home inspection. This clause allows you to back out of the purchase if the inspection uncovers significant flaws in the home. In some situations, this information could help you to negotiate a better price.

In a very competitive market, you might want to request permission to do an inspection before you place the offer, so that you can go in without that condition.

Finding an inspector

You should work with someone who:
  • Belongs to one of the seven provincial organizations of the Canadian Association of Home and Property Inspectors (CAHPI) and follows the association's standards of practice
  • Is an experienced, full-time professional
  • Does not work as a tradesperson or contractor as well
  • Has errors and omissions insurance and general liability insurance

Your real estate agent may be able to refer you to a home inspection agency, or you can check the CAHPI website to find a qualified Registered Home Inspector.

Completing the home buying purchase process

Wondering what the final stages of the home buying purchase process entail? Here's a complete, step-by-step look at what's involved in closing a real estate deal after your offer has been accepted.

1. Obtain mortgage approval
If you’ve pre-arranged the mortgage, a copy of the accepted offer (and MLS® listing, if applicable) goes to the lender and the lawyer (or notary). The lender will send an appraiser to assess the property to see that it's worth what you've agreed to pay and can be financed to that amount. You'll meet with the lender to obtain complete terms and conditions of your mortgage.

2. Call in your lawyer
The lawyer or notary conducts a title search (to check for liens and ensure the legal ownership lies with the vendors) and may recommend that you purchase title insurance. A new survey will be arranged if an acceptable land survey is not on file. The lawyer will also check property taxes and prepare a statement of adjustments, outlining utilities and other home costs that were prepaid by the seller.

3. Get a home inspection
If an inspection was one of the conditions of your offer, call the inspector as soon as the offer is accepted. The inspection must be completed within the time frame specified in your condition. If significant issues are discovered, you may withdraw the offer, request that the seller make the repairs or renegotiate the price. If you are buying a new house, bring an inspector when you conduct your pre-completion deficiency inspection. Talk to your lawyer or notary about amending your contract, before you sign it, to allow for this.

4. Insure the property
Contact your insurance representative immediately to arrange fire insurance for the property. As soon as you receive the policy, send a copy to your lawyer.

5. Finish the paperwork
Your lawyer or notary will advise you of any documents you are required to provide. An appointment will be set up a few days before closing to complete the paperwork and provide the remainder of the down payment, as well as adjustments and other closing costs. At the closing meeting, your lender will review your credit requirements, provide you with cost-of-borrowing details in writing, and get your signature on all loan and collateral documentation. Where two people are borrowing (a married couple, for example), both borrowers must sign the mortgage documentation. You'll also need to bring in your home insurance documents, to prove that you have fire insurance.

6. Pick up your keys
The lawyer or notary registers the home in your name. The mortgage money is advanced to the seller on your behalf, and later that day you receive the deed and the keys to your new home.

Helpful Links:
BMO presents: I am a first time home buyer
London St Thomas Association of Realtors
MLS Canada
Canadian Association of Accredited Mortgage Professionals
Canadian Association of Home and Property Inspectors
Canadian Home Builders' Association
Hiring a Contractor — CMHC
Ontario - Tarion Warranty Corporation (Formerly the Ontario New Home Warranty Corporation)