7 Common First Time Buyer Questions
7 Common Questions for First Time Home Buyers
Kevan Lewis - HomeLife Benchmark Realty
As a first time home buyer, everything can get quite overwhelming very quickly and you are certainly going to have more than seven questions, but I work with first time home buyers on a regular basis and today we are going to go over the seven most common questions I get from my first time buyer clients. If you know nothing about buying a home, I have made a great guide on the the six steps of purchasing a home and you can get that by CLICKING HERE.
1.What is the first step and how do I get started?
Well, you are certainly off to a good start by reading this and watching the video that goes along with it! The very first thing you want to do is to have a conversation with a great realtor like myself or with a mortgage professional. I have a couple mortgage professionals that I highly recommend HERE.
The reason that you will want to talk to a mortgage professional is to get a pre-approval. It is most likely that you will be needing a mortgage in order to purchase your first home, so we need to find out how much of a mortgage you can afford. I don't recommend spending much time using the online pre-approval tools that some of the banks offer on their websites, as I find them to be quite inaccurate.
There is no point in spending a bunch of time looking at homes in the $800,000 when the bank will only end up giving you a budget of $400,000. I find that getting a pre-approval done early, helps to bring the reality of the situation to light and you can start searching for homes that you may soon be able to call your own!
2. How much does it cost to work with a buyer's agent?
This is one of my favourite questions, because the answer is almost always... FREE!
The way it generally works, is that the seller pays the commission to their agents brokerage, who then offers a portion of that commission to any buyer's agents that bring a buyer to that property.
Now you are probably thinking, "I don't need a buyer's agent, I'll just take that part of the commission myself". Unfortunatly it doesn't quite work out that way. If there is no buyer's agent, then the listing agent will actually get the whole commission themselves.
It is also very risky and not at all recommended to forgo a purchase without your own representation, as the seller's agent can represent you as well as their seller, so the only way they can put an offer together for you is to have you be an unrepresented buyer. As an unrepresented buyer, no one knowledgable of the ins and outs of a real estate transaction are looking out for you best interest, and that seller's agent does not owe you any disclosure of important facts or any loyalty whatsoever. The seller's agent will be working to get the seller the most money possible, and you will have no one on your side fighting to get the price down and making sure that you know everything you should about that property.
Half a million dollars is a lot of money, you might want to have a professional looking out for your best interest.
3. What is the difference between the deposit and the downpayment, and are they the same?
You need to make a deposit in order to make an offer on a property. A deposit is a pre-determined amount of money that the buyer and seller agree on to secure the contract.
You will also need to make a down payment in order to purchase a home. A down payment is the amount of your money that you need to pay in order for the bank to agree to lend you the rest. Typically speaking, down payments are usually a minimum of 20% of the total purchase price, but there is always the option to go with am insured mortgage and put down only 5% of the purchase price as your down payment.
Your deposit is due at subject removal, and the down payment is due at completion. If you are not sure what subject removal or completion are, take a look at my Buyer's Guide, for a step by step guide walking you through the home buying process.
Now this is where many buyers get things confused. The deposit (due before the down-payment) almost always makes up a part of your down payment at the completion. They are two different things that eventually become the same in the end.
4. I've noticed that leasehold properties are a lot cheaper than freehold, should this be something I look into?
This is certainly a case by case situation, but for 99% of first time buyers, the easy answer is no! A leasehold property is a situation where the owner owns the building and everything in the building, but they are leasing the land from the owner of the land. Typically the owner of the land will be The Crown, meaning the government owns the land. Another common place that we will see leaseholds is on Native Reserve Land. Leaseholds agreements are only in place for a set amount of time (typically, but not always, 99 years) but the catch is that the cost of the lease is up for negotiation much sooner than this. Having to essentially pay rent for the land that the home you own sits on is not the most attractive situation in the first place, but when that rent could go up when the owner is allowed to raise it, that rent takes away from the value that you own the home for.
As I mentioned above, there are a few circumstances that a leasehold property might make sense, but in general it is not a good investment for your first home. Your first home will almost certainly not be your "forever home" so you will want your investment to increase in value while you own it, building up what we call equity. When you are ready to move on to your next home, chances are that prices will have increased in both your first home that you will be selling, as well as the next home that you are going to be buying. Leasehold properties do not tend to appreciate in value as much as the rest of the market (which is why we are talking about this in the first place) so when you want to cash out of your first home you may find that the leasehold home did not appreciate enough to be able to afford what you were hoping to move up to.
The main reason that leasehold could make sense is if someone is looking to retire and cannot afford to purchase a full home in a gated community as a freehold situation. Leaseholds can typically be had about 20-35% lower price than their freehold counterparts, and if long term investment is not a concern and the main concern is a nice roof over your head in retirement then it may be an option worth exploring.
5. I can't afford the home I want, should I just wait?
It depends. If you are very close to owning the home that you want to have then maybe waiting a couple months won't hurt. If you are wanting to get into a detached home on an acre with a huge shop, reality is that you will likely never get into that home without starting smaller. If we look at things at a less extreme example, we can use the example of a young family that needs a three bedroom home, but the budget will only allow that family to purchase a two bedroom home. There are three options that this family can look at, two of them will get them further ahead in the long term, the third will make them more comfortable in the short term.
Option A - Purchase a 2 bedroom home and make sacrifices to live a home that is smaller than you desire. As the price of real estate continues to rise over time, you are already in the market and your home is appreciating as much as the home that you desire to get into. You are not paying any rent, so paying the mortgage is essentially paying yourself money once you have paid interest, and the equity in your home will quickly rise, allowing you to get into the home you desire much sooner.
Option B - Purchase a home that you can afford and become a landlord, while renting the home that you wish to live in. You will still be building equity as in the example above, but you will also be paying rent for the home you are living in, essentially flushing that money down the drain.
Option C - Rent a home and save on the side. If prices continue to rise, this situation can creat an endless cycle of saving for a down payment, only to build your savings up to a point that you believe you can purchase, to find out that home prices have gone up again and you are back at square one.
The long and short of it is, if your goal is to own a home, you should get in the market as soon as you can afford it. By no means do I mean that you should drop everything and rush into a purchase, but the plan should certainly be on your radar.
6. What about the closing costs?
Closing costs are those additional expenses that come due when you complete the purchase of your home. They typically include:
-Lawyer’s or notary’s fees. When you buy a home, you need to hire a lawyer to complete a title search (to make sure there are no outstanding liens against the property and that the vendor actually owns the property), ensure all the documentation has been accurately completed, register your mortgage and register you as the new owner of the property.
-Land transfer tax. Most provinces (and some municipalities) charge a fee for documenting a change in ownership for real estate. If you are using the first time homebuyers grant, this will not be of concern to you as long as you are purchasing under $500,000. See here for more information on the first time home buyers program.
-Disbursements. These are costs that the seller has paid in advance, such as property taxes and utilities. You reimburse the seller for any prepayments that come into effect after you take possession of the home.
The amount of these costs will vary, depending on where you live and what kind of home you’re buying. As a guideline, you can estimate that closing costs will be about 2.5% of the purchase price of your home, though this may vary greatly, especially if GST applies to your purchase. In addition to closing costs, remember that you may also need to budget for appliances (if not included with the home), utility hook-up, redecorating and paying a professional mover
7. Should I get a fixer upper?
As I myself come from a construction background, this question is one that I often come across with first time buyers who are quite handy with the tools. This questions also cannot be answered with a blanket answer, and it is often a case by case scenario, but the key thing to remember when it comes to buying a fixer upper is that you will still have to pay for the materials even if you do all the work yourself, and if it needs a lot of work, you will still be paying a mortgage on the home while you are fixing it up.
If you are thinking about saving so much on the cost of the house that this will allow you to move up to a detached home instead of a condo or townhouse, unfortunatly I have some bad news. The price of land is so high lately that the value of the purchase price for a fully renovated home and a tear down of the same age are not that far apart. I have seen several tear downs sell for the value of the land, that it would make no sense to fix up the home that is on the land already as the total cost of materials alone would make more sense to purchase a home that is already renovated.
Buying your first home is an exciting experience, and I would love to be part of the process. It is never too early to start planning, so get in touch with me today!
