Home Buyers Guide

Are You Financially Prepared to Purchase a Home? Assess Your Monthly Expenses and Consider These Factors

When it comes to buying a home, financial readiness is crucial. To gauge your readiness, it is important to evaluate your current monthly expenses and take into account the following key factors: 

Give Due Consideration to Your Down Payment

The down payment represents the portion of the purchase price that you pay upfront in cash, rather than relying solely on mortgage financing. Typically, buyers are expected to provide a minimum of 5% of the purchase price as a down payment. However, it is worth noting that some lenders now offer mortgage options that allow you to borrow the down payment, or you may even receive a gift of a down payment from a relative. Nonetheless, excluding any gifted funds, it is essential to demonstrate to the financial institution or lender that the down payment comes from your own funds.

It's worth mentioning that if your down payment is less than 20% of the purchase price, you'll require a high ratio mortgage, which mandates that the property be your primary residence and not available for rental purposes. Financial institutions require borrowers with high ratio mortgages to obtain mortgage insurance, as they are perceived as higher risk. The premium for mortgage insurance varies based on the size of your down payment relative to the property's price, ranging from under 1% to over 3%. On the other hand, if your down payment is 20% or more of the purchase price, mortgage insurance is not necessary.

Ensure You Have Sufficient Deposit Funds

When making an offer to purchase a home, it's customary to provide a deposit. Typically, this deposit is part of your overall down payment. 

Plan for Closing Costs

Apart from your deposit and down payment, you must budget for closing costs, which are separate expenses incurred during the completion of the real estate transaction when the property officially becomes yours. Closing costs encompass various elements such as lawyer fees, property tax adjustments, title insurance (if applicable), and more. It's prudent to allocate a few thousand dollars in addition to the purchase price to account for these closing costs.

Avoid Overstretching Your Budget

Remember, just because you are approved for a certain mortgage amount doesn't mean you have to spend that much. In fact, experts often advise against maxing out the value of your home. It's crucial to leave some breathing room in your budget for unforeseen expenses, potential interest rate increases in the future, or periods of reduced income due to sickness, parental leave, and other life events. Keeping a buffer in your finances is a prudent approach to ensure long-term financial stability. 

Gain Insights into Market Conditions

Staying informed about real estate market conditions can provide valuable insights. News articles frequently mention three types of market conditions:

Buyer's Market: In a buyer's market, property supply outweighs buyer demand. This scenario presents favorable conditions for buyers, who are more likely to secure deals they consider advantageous.

 

• Seller's Market: On the other hand, a seller's market emerges when buyer demand is high while the supply of available properties is limited. Buyers in a seller's market might feel concerned about potentially overpaying due to competition among buyers for a scarce inventory of properties.
• Balanced Market: A balanced market occurs when buyer demand matches the available supply of properties for sale. In such a market, neither buyers nor sellers have a significant advantage, leading to more balanced negotiations.

 

Understanding the prevailing market conditions can greatly influence home prices and determine the bargaining power of buyers and sellers. Sellers aim to maximize their property's value, while buyers strive to strike a deal that suits their financial goals.

By considering these factors and evaluating your financial situation, you can make an informed decision about whether you are truly prepared to embark on the journey of homeownership.

Discovering Trustworthy Licensees to Work With: Your Key to a Successful Home Purchase

So, you've determined that you're financially prepared to embark on your home buying journey. The next logical step is to find the right licensees who can guide you through the process. Typically, you'll need the assistance of both a mortgage licensee (such as a bank employee or licensed mortgage broker) and a real estate agent. These professionals will play vital roles in helping you secure financing, locate suitable properties, and negotiate a successful purchase. But how exactly do you go about finding licensees you can trust? Here are some effective strategies: 

Harness the Power of Word-of-Mouth Referrals

Tap into the experiences of your friends and neighbors who have previously worked with mortgage brokers and real estate agents. Seek recommendations and insights from those you trust. Hearing firsthand accounts from people you know can provide valuable guidance in finding trustworthy professionals.

Conduct Online Research

The internet is an invaluable resource in your quest to find reliable licensees. Most mortgage brokers and real estate agents maintain an online presence, whether through personal websites or profiles on social media platforms. Leverage online search tools to identify professionals who resonate with you and align with your goals and preferences.

Verify License Status

To ensure credibility, it's crucial to confirm that the mortgage broker or real estate agent you're considering is licensed to operate in your area. In Alberta, for instance, you can conduct a public license search on the Real Estate Council of Alberta's (RECA) website to verify the current status of a licensee's license. Visit RECA's website and utilize the "Find a licensee" feature for this purpose. Keep in mind that while bank employees can assist with mortgage financing without a RECA license, mortgage brokers do require a license. Both can support you with your mortgage needs.

Check RECA's Website for Disciplinary History

RECA provides transparency by posting disciplinary decisions on its website. By navigating to the Complaints & Discipline tab on the RECA website, you can access two years' worth of disciplinary history and ascertain if the licensee you're interested in has faced any disciplinary action from RECA. This information can help you make an informed decision when choosing a licensee to work with.

Conduct Interviews and Request References

While the previous steps will help you identify potential licensees to engage with, they won't provide the complete picture of which professionals are the right fit for you. It's essential to conduct interviews with the licensees you are considering. During these interviews, evaluate their experience, background, and knowledge relevant to your specific needs. Additionally, don't hesitate to request references from them. This approach allows you to gather insights from past clients and ensure that you feel comfortable with your ultimate choice. It's worth mentioning that notifying the licensees about your interviewing process and their inclusion among multiple candidates is a prudent practice.

By utilizing these strategies, you'll be well on your way to finding licensees who can provide the expertise, guidance, and support necessary for a successful home purchase or sale. Remember, investing time and effort into this selection process will pay off in the long run as you navigate the exciting path of homeownership.

Navigating the Mortgage Maze: Understanding the Role of a Mortgage Broker

When it comes to purchasing a home, most buyers require financing in the form of a mortgage. There are two primary sources for obtaining a mortgage: directly through a bank or by working with a mortgage broker. While banks typically offer their own mortgage products, mortgage brokers have the advantage of being able to source mortgage options from various lenders.

To ensure a successful partnership with a mortgage broker, it's essential to ask the right questions during the interview process. Here are some key inquiries to consider:

Are you a licensed mortgage broker?

Confirming the broker's licensing ensures that they meet the necessary qualifications and adhere to industry standards and regulations.

Do you represent the borrower, the lender, or both?

Understanding the broker's role clarifies their obligations and helps you determine if their interests align with yours.

Do I need to sign a contract?

Clarify whether a contract is required and review its terms and conditions to ensure a transparent working relationship.

What services do you provide, and how will you help me?

Gain a clear understanding of the broker's services and how they will support you throughout the mortgage process, from initial assessment to securing the best financing options.

Do you charge borrowers a fee?

It's crucial to determine if the broker charges any fees for their services and to understand the associated costs upfront.

How do you receive compensation for your services?

Brokers receive compensation through various means, such as commissions from lenders or fees paid by borrowers. Understanding their compensation structure helps you evaluate their incentives and potential biases.

How many lenders do you work with?

Knowing the number of lenders a broker works with provides insight into the breadth of options they can offer and their ability to match you with suitable mortgage products.

Was most of your business done through one lender last year?

This question helps you gauge if the broker has a diverse network of lenders or if they primarily rely on a single lender, which could impact the range of options available to you.

It's crucial for borrowers to grasp the relationship they have with their mortgage broker. Here are the three potential scenarios:

Representation of the Borrower

When a mortgage brokerage represents you as a borrower, you become their client. In this role, the broker is obligated to act in your best interests, providing advice, advocacy, and confidentiality throughout the process.

Representation of the Lender

If a mortgage brokerage represents the lender, their fiduciary duty is to the lender, not to you as the borrower. However, they can still work with you as a customer, ensuring honest and competent service. 

Acting as an Intermediary

In some cases, a mortgage brokerage may act as an intermediary between you and potential lenders. Here, both you and the lender are considered customers of the brokerage. Their role is to facilitate the mortgage deal, gather information, explain options, and maintain transparency without favoring either party.

It's important to note that each mortgage brokerage determines its own business model. Some exclusively represent lenders, some solely represent buyers, while others may adopt an intermediary approach. By understanding the role and obligations of your mortgage broker, you can make an informed decision and establish a fruitful working relationship on your path to homeownership.

Understanding Financing and Ensuring Feasibility for Your Mortgage

Securing suitable financing is a crucial aspect of your home buying journey. Working with a mortgage broker provides you with valuable tools to aid in your search for the perfect home. Before diving into house hunting, it's essential to determine how much mortgage your income can support and how your current debt load may impact your eligibility. This can be achieved through a mortgage prequalification.

A mortgage prequalification entails tentative approval from a lender based on your qualifications, such as income and down payment amount. It provides you with essential information about the mortgage amount you are likely to be approved for, helping you set realistic expectations and ensure you focus your search on homes within your budget. However, it's important to note that prequalification is not a guarantee of mortgage approval. Once you make an offer to purchase a property, you will need to formally apply for a mortgage, providing supporting documentation to confirm your financial position. It's worth noting that the lender may choose not to approve your mortgage after a closer assessment of your finances or the property. To maintain a strong financial position during the home search process, avoid making significant changes, such as switching jobs or taking on additional debt like vehicle loans.

Once you have chosen either a bank financial specialist or a mortgage broker to assist you, it's time to gather the necessary paperwork. You may need specific documents when seeking a mortgage prequalification, and these documents are essential when you apply for the mortgage. Some of the key documents may include proof of employment (such as an employer letter), the most recent Canada Revenue Agency Notice of Assessment, confirmation of income (such as pay stubs or a T4), and a gift letter if you are utilizing a gift as your down payment. Lenders will review these documents along with your credit report to assess your mortgage affordability. They will consider two key calculations:

Gross Debt Service (GDS) Ratio: Lenders use the GDS ratio to evaluate your acceptable debt level. It represents the percentage of your gross monthly income required to cover housing-related payments, including mortgage principal, interest, property taxes, heating, and a portion of your condominium fees (if applicable). Generally, lenders consider a GDS ratio of no more than 35% of your gross monthly income to qualify you for a mortgage.

Total Debt Service (TDS) Ratio: Lenders also assess your TDS ratio, which represents the percentage of your gross monthly income needed to cover all your monthly debt obligations. This includes housing costs as well as other debt payments like car loans, student loans, and lines of credit. Your TDS should not exceed 42% of your gross monthly income to meet lender criteria.

Lenders are unlikely to approve a mortgage if your GDS exceeds 35% and your TDS surpasses 42% of your gross monthly income. These ratios act as guidelines to ensure borrowers maintain a manageable debt burden. 

By understanding the mortgage prequalification process, preparing the required documents, and staying within acceptable GDS and TDS ratios, you can navigate the financing aspect of your home purchase with confidence and increase your chances of securing a suitable mortgage.

Collaborating with a Real Estate Professional: Key Questions and Understanding the Relationship

As you progress towards obtaining mortgage approval, you're likely eager to begin searching for houses. Engaging a licensed real estate professional is always a prudent choice. We've already covered methods of finding a real estate professional to work with, but during the interview process, it's important to ask the following questions:

How long have you been in the business?

Understanding the professional's experience provides insight into their expertise and familiarity with the industry.

Do you have a job other than being a real estate professional?

Determining if the professional has additional professional commitments helps assess their availability and level of dedication.

How many buyers did you represent last year?

This question offers an understanding of the professional's workload and their ability to handle multiple clients effectively.

What services will you provide to me?

Clarifying the specific services the professional will offer ensures they align with your needs and expectations. This may include property search, negotiations, contract preparation, and more.

What geographic areas do you serve?

Knowing the professional's area of expertise helps determine if they have extensive knowledge of the locations you are interested in.

Do you specialize in certain property types?

If you have specific property requirements, such as a preference for condos or single-family homes, it's important to ascertain if the professional specializes in those property types.

How will you search for my new home?

Understanding the professional's approach to property search ensures they employ effective strategies tailored to your preferences.

How do you handle multiple offers?

In competitive markets, multiple offers can arise. Knowing how the professional manages such situations provides insight into their negotiation skills and strategies.

How do you present my offer to the seller?

Understanding the professional's approach to presenting offers ensures effective communication of your interests and enhances the chances of a successful negotiation.

What are the top three things that separate you from your competition?

This question allows the professional to highlight their unique strengths, such as market knowledge, negotiation skills, technology utilization, or personalized service.

Are you working as part of a team, or will I always deal directly with you?

Understanding the professional's work structure helps clarify the level of direct involvement you can expect throughout the process.

How do you get paid? How much do you charge for your services?

Understanding the professional's compensation structure and fees ensures transparency and helps you assess the financial implications of working with them.

Will you work exclusively for me, not the seller?

Clarifying if the professional is committed to representing your interests exclusively ensures your needs remain the top priority throughout the transaction.

How do you handle conflicts of interest?

Understanding how the professional manages potential conflicts ensures transparency and allows you to assess their ability to navigate complex situations.

Will you perform a property evaluation on the home I want to buy?

Knowing if the professional provides property evaluation services can be valuable in assessing the fair market value of a property.

How do you keep me informed?

Understanding the professional's communication methods and frequency ensures you stay informed throughout the process.

How many clients do you work with at any one time?

Knowing the professional's workload helps gauge their availability and ability to provide dedicated attention to your needs.

 

The real estate professional you select will likely have questions for you as well, including your motivation for buying, the type of home you desire, preferred timing, needs, and wants.

Once you've chosen a real estate professional to work with, they should provide you with RECA's Consumer Relationships Guide. This mandatory document explains the legal relationship you will have with your real estate professional and outlines three types of relationships:

 

• Entire brokerage acting as your agent.
• Individual professional or team acting as your agent (designated agency).
• You being a customer without an agency relationship.

 

The Guide provides detailed explanations of these relationships, including the responsibilities your professional will have to you in each scenario. Your professional will ask you to sign an acknowledgment indicating that you have read the Guide, discussed it with them, and received satisfactory answers to your questions.

If you choose to enter into a client relationship, your professional will ask you to sign a written service agreement. These agreements are required in Alberta when you're a client of a residential real estate professional. Written service agreements help clarify the relationship, services to be provided, obligations and responsibilities of both parties, consent for the use of personal information, and the method of compensation. You can negotiate the terms of the agreement, including its duration, exclusivity, remuneration, services, and termination clauses. Ensure you understand and are comfortable with the agreement before signing.

Additionally, it can be beneficial to request a blank Offer to Purchase form from your real estate professional even before starting your home search. Familiarizing yourself with the document in advance can expedite and streamline the offer process when you find the right property. The Offer to Purchase form includes key details such as the date of the offer, property description, deposit amount, purchase price, financing and down payment details, names and addresses of parties involved, subject-to clauses, conditions, closing dates, and any special requirements you may have for the seller, such as including kitchen appliances.

By asking the right questions, understanding the relationship with your real estate professional, and being prepared with necessary documents, you can navigate the home buying process more smoothly and with confidence.

Now comes the exciting part - finding the perfect home! Consider the following factors to narrow down your search:

• Location: Determine the preferred neighborhood or area based on factors such as proximity to amenities, schools, transportation, and work.

• Home style: Decide on the type of home that suits your needs, whether it's a condo apartment, condo townhouse, or single-family home.

• Number of bedrooms and bathrooms: Consider the required number of bedrooms and bathrooms based on your family size and preferences.

• Features: Determine the desired features of the home, such as a garage, yard, or basement suite, based on your lifestyle and priorities.

• Inclusions: Decide on the appliances and other items you expect to be included with the home.

• Price: Set a budget and determine the maximum amount you're willing to spend on a home.

• Size: Consider the size of the property, keeping in mind that real estate agents in Alberta use the Residential Measurement Standard (RMS) to describe a property's size. If property size is crucial to you, verify it independently rather than relying solely on the seller's representation.

It's important to note that a property's size alone does not determine its listing price. Other factors such as location, features, décor, and upkeep also contribute to the price.

Additional considerations during your search include material latent defects and stigmatized properties. Material latent defects are defects that cannot be discovered through a reasonable inspection and could render a property dangerous, unfit to live in, or unsuitable for the buyer's purpose. Sellers and their real estate representatives must disclose known material latent defects to potential buyers.

Stigmatized properties refer to properties with unfavorable qualities that may make them less attractive to certain buyers, such as a history of death, crime, or rumors of haunting. While sellers are not required to disclose stigmas, you can discuss them with your real estate agent, who can provide guidance and help address any concerns you may have.

Keep in mind special listing situations such as "as-is, where-is" sales or judicial sales/foreclosures. In an "as-is, where-is" sale, the property is sold without any guarantee of its condition, and there can be significant risks involved. Judicial sales involve the sale of real property under court authority and may come with specific conditions and restrictions that need to be carefully considered.

Take the time to weigh the pros and cons of any special listing situations against the potential benefits before making a decision.

By considering these factors and seeking guidance from your real estate agent, you'll be better equipped to find the right home for your needs and preferences.

When you're ready to make an offer on a property, it's important to take the following steps to prepare:

Review the Real Property Report (RPR): The RPR is a legal document prepared by a surveyor that shows property boundaries and improvements. Check if the RPR has evidence of municipal compliance, confirming that the property complies with local bylaws and regulations. If there is no RPR available, discuss alternatives with your real estate agent and lawyer.

Search the address: Conduct an internet search on the property address or the name of the condominium building/complex. This can help you uncover additional information or potential issues related to the property.

Conduct a historical listing search: Ask your real estate agent to perform a historical listing search, which will provide you with the listing history of the property. This can be useful in understanding the property's previous market activity and pricing trends.

Look into warranties and representations: If you're purchasing a new home, check the Alberta online public registry of homes covered by a new home warranty. This will help you verify if the property is covered under warranty. Additionally, discuss any warranties or representations made by the seller regarding the property's condition or features.

When writing your offer, consider the following elements:

Offer price: Your real estate agent will provide you with information on recent sales of similar properties (comparables) to help you determine an appropriate offer price. Ultimately, the decision on the offer price is yours.

Deposits: Prepare the deposit amount and have it ready at the time of submitting your offer. The deposit serves as a sign of your seriousness and commitment to the purchase.

Terms: Include important terms in the purchase contract, such as the possession date (when you will take possession of the property) and inclusions/exclusions (items you expect to be included or excluded from the sale). Specify the expiry date/time of the offer to create a sense of immediacy for the seller and avoid the need for future withdrawals.

Pre-possession inspection: Consider adding a pre-possession inspection term, which allows you to view the property with your real estate agent before taking possession. This inspection can help ensure the property is in the same condition as when you made the offer.

Conditions: Buyers often include conditions in their offers to protect their interests. Common conditions include home inspections, financing, and condominium document reviews (for condominium purchases). Ensure that each condition has an expiry date, giving you enough time to satisfy the conditions. If you don't waive the conditions by their expiry date, the contract ends with no further obligations.

Work closely with your real estate agent to draft an offer that reflects your needs and protects your interests.

Negotiations are a common part of the home buying process. Here's what you need to know:

 

Acceptance: If the seller accepts your offer, congratulations! Your real estate agent will guide you through the process of satisfying any conditions mentioned in the offer.

 

Rejection: If the seller rejects your offer, you have the option to submit a new Offer to Purchase or explore other properties.

 

Counter offer: If the seller’s provide a counter offer, carefully review it and consider all terms and conditions. A counter offer may include changes to the selling price, possession date, inclusions/exclusions, or other terms. If you want to accept the counter offer, review everything and ensure you are comfortable with the revised terms. If you want to make further changes, your response will essentially be a counter offer to the sellers.

 

Ignored offer: If the seller ignores your offer, it is essentially the same as rejecting it. You can choose to submit a new Offer to Purchase or continue your search for a different property.

 

Multiple offers:

In a multiple offer situation, multiple buyers submit offers on the same property simultaneously. The seller decides how to handle the situation, including whether to disclose the multiple offers. If a multiple offer situation arises, your real estate agent will:

• Inform you about the multiple offer situation.
• Advise you on the seller's options.
• Attempt to attend the offer presentations on your behalf.
• Discuss your options, including increasing your offer, leaving it as is, withdrawing the offer, or reconsidering terms and conditions.
• Advise on strategies that may improve your position, such as including a term or condition that compels the seller to deal with the offer immediately or face withdrawal or requiring the seller not to disclose the price and terms to other buyers.
• Your real estate agent will provide guidance and help you navigate through negotiations to ensure your best interests are represented.

Once your offer has been accepted, if it was conditional, you need to work on satisfying those conditions. Here's what you need to consider for common conditions:

Financing: If you included a financing condition, you need to confirm your financing before waiving this condition. Provide your lender or mortgage broker with the necessary documents, such as the accepted Offer to Purchase, listing sheet, Real Property Report, and current title for the property. Carefully review the mortgage commitment provided by your lender and consider any conditions they may have. Only waive your financing condition when you are confident in securing the necessary financing.

Home inspection: If you included a home inspection condition, hire a licensed home inspector. The inspector will conduct a non-invasive examination of the property's major components and provide you with a written report. Review the report with the home inspector and your real estate professional. Keep in mind that a home inspection may uncover issues, and you should consider the findings before proceeding.

Condominium document review: If you're buying a condominium, you may include a condition to review the condominium documents. The seller is required to provide you with various documents related to the condominium corporation, finances, bylaws, and maintenance. You may choose to hire a licensee to review these documents and provide you with a summary of their findings. Consider any financial difficulties, bylaw restrictions, necessary maintenance, and other relevant information before proceeding.

If you meet all your conditions and are ready to proceed with the purchase, your real estate agent will provide you with a waiver to sign. By signing the waiver, you indicate that you are satisfied with the conditions and are moving forward with the transaction.

However, if you do not waive all your conditions, the accepted Offer to Purchase becomes null and void. The seller is released from their obligations, and you are released from yours. It is important to carefully consider and satisfy your conditions before waiving them, as failing to do so could result in the loss of your deposit and potential legal consequences. Only waive your conditions when you are confident and committed to proceeding with the purchase.

Preparing for Possession

After your offer has been accepted and the conditions are satisfied, you will need to find and meet with a real estate lawyer. Your lawyer will guide you through the legal process and ensure all necessary documents are properly handled. Here's what you can expect during this phase:

Meeting with your lawyer: Your lawyer will review the legal documents, such as the Real Property Report (RPR) and title, to ensure there are no issues or restrictions affecting the property. They will discuss closing costs and disbursements, which may include fees for their services, land transfer taxes, and other expenses. Bring photo ID to the meeting and inquire about any additional identification requirements.

Title insurance: Your lawyer will explain title insurance and its benefits. There are two types of title insurance policies: lender's title insurance and owner's title insurance. Lender's title insurance is typically required by the mortgage lender and protects their interest in the property. Owner's title insurance, on the other hand, protects your equity in the property and may cover title and non-title issues, such as title fraud. Discuss with your lawyer which type of insurance is necessary and who will be responsible for the premiums.

Signing the documentation: You will sign the necessary legal documents, including mortgage documents if you are obtaining a mortgage. Your lawyer will ensure all the paperwork is in order and advance the purchase funds to the seller.

Preparing for possession: Once the legal matters are taken care of, you will wait for the possession date. During this time, you can make necessary arrangements such as forwarding your mail, scheduling utility hook-ups, and arranging home insurance to be effective on the possession day or move-in date.

Additional closing costs: Besides lawyer fees and title insurance, there may be other closing costs to consider. This may include property tax adjustments, where you may need to reimburse the seller for a portion of the property taxes they've already paid for the current year. Your lawyer can provide more details about these costs, and your real estate agent can also assist in explaining the market-specific expenses you should expect.

It's important to maintain communication with your lawyer and real estate agent throughout the process to ensure a smooth and successful closing.

On possession day, which typically occurs around noon, you will receive the keys to the property. Here's what you can expect on possession day:

Pre-possession inspection: If you included a pre-possession inspection as a term in your Offer to Purchase, your real estate agent will arrange it with the seller's representative. The inspection may take place the day before possession or on the morning of possession, depending on the negotiation between you and the seller. During the inspection, you'll want to ensure that the property is in substantially the same condition as when you submitted your offer. Check that attached goods and additional inclusions are still in place, and that appliances are in working order.

Property cleanliness: The seller is not obligated to clean the property to a specific standard. However, you can generally expect the property to be in a similar condition to when you purchased it.

Addressing issues: If you discover that the property is not in substantially the same condition or if something has been removed that should have remained, it is important to contact your lawyer. They will guide you through the legal process and assist in resolving any issues. Your real estate agent can try to address the matter with the seller's representative, but if a satisfactory resolution cannot be reached, your lawyer will provide further guidance.

Remember, once possession has occurred, the funds have typically been transferred to the seller, and any issues that arise will need to be resolved through legal means. Maintain open communication with your lawyer throughout the process to ensure your rights and interests are protected.