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Purchasing Library
A Good Investment
Selecting a Home Type
Key Purchase Players
Home Purchase Finance Considerations
A Good Investment?
Ask any homeowner, a house is a solid investment that is difficult to match. Why?
- Capital Gains Are Tax Free — Any capital gains that accrue and are realized on the sale of a principal residence are tax free — your money, 100%!!
To match even a small appreciation of 6%, the return on a fixed-income investment such as a GIC would have to be as much as 12%. - Gain Leverage — You do not need the full purchase price to own a home.
Selecting a Home Type
Don't be pressured into buying a home that is not right for you - there are a lot of choices out there. Here are the Pros and Cons of the various options as well as a comparison of resale homes vs. new homes purchased directly from the builder.
Condo Apartment
Pros:
- Lowest purchase price, lowest taxes
- Virtually maintenance free — no snow shovelling or lawn mowing.
- Convenient for singles, childless couples and empty nesters.
Cons:
- Lower resale value, hardest to re-sell and can be difficult to finance with low down payment.
- Can have large maintenance fees that can substantially increase carrying costs.
- No private yard so you can't enjoy backyard activities such as barbecuing, gardening, etc.
- Share common walls with neighbours — if they're noisy you're out of luck.
Condo/Freehold Townhouse
Pros:
- Lower purchase price and taxes than semi or detached and less maintenance.
- Better resale value than condo apartment.
- May have a backyard.
Cons:
- Lower re-sale value than semi or detached and harder to re-sell.
- Don't own the land — the most valuable asset (unless freehold Townhouse).
- Share common walls and close to neighbours.
Semi-Detached
Pros:
- Most privacy at least cost — great for first-time buyer.
- You own the land — the appreciating asset — bricks and mortar depreciate.
- Good resale value and easy re-sell.
- Easy to finance at best rates.
- Usually has larger yard than townhouse, more backyard activities possible.
Cons:
- Share a common wall with neighbours.
- Higher price per square foot of living space than a townhouse in a similar location.
Detached
Pros:
- Best resale value and you own the land, the main appreciating asset.
- Most privacy, least noise from neighbours because there are no common walls.
- Most desirable type of home with greatest perceived value.
- Lower priced detached homes tend to sell quickly because of the combination of prestige and affordability.
Cons:
- Highest purchase price and property taxes.
Re-Sale Home vs. New from Builder
As a first-time buyer, another major decision you may have to make is whether to purchase a re-sale home or a new home directly from a builder. Both options have their advantages and disadvantages. Here's how they compare.
Re-Sale Home
Pros:
- Lower prices because of some wear and tear (which varies greatly — check closely!)
- You get the benefit of upgrades (finished basement, pool, etc.) at a depreciated price.
- Established neighbourhood, current neighbours, etc., are known entities although they can change.
Cons:
- Home has been used by others.
- No warranty for repairs required by law, although it can be made a condition of purchase.
- If existing décor is not to your liking, it can be expensive and time consuming to change.
New Home from Builder
Pros:
- You are the first occupant and the house is yours to decorate as you wish.
- Purchase price includes colours, design features, etc. that you select, usually with negotiable upgrades.
- Protection from construction deficiencies is usually required by Provincial Law.
Cons:
- There is often an extended period of time without lawns or paved driveways, and with dust from un-sodded areas and construction traffic.
- There can be problems with permits or trade strikes that prevent timely completion and occupancy.
- Defects in construction may not be addressed promptly.
- Some closing costs apply to new homes that do not exist with resales.
Key Purchase Players
Purchasing a home requires more than just the buyer and seller. You’ll also require the services of a variety of home-related professionals and we can help you find many of the right ones. Get Your Mortgage Professional working for you today!
Call 1-877-843-8989 or e-mail us today.
Here are the key players in your purchase and the roles they play:
Realtor
Finding a home to purchase is a big job and a realtor can make it a lot easier by doing a good deal of the looking for you
The role of the realtor is to screen available properties, identify those that most closely meet your requirements and arrange to view them with you. Ideally, your realtor is more than a sales agent. He or she should serve as a resource person who can provide valuable advice and help you make an informed purchase decision.
The realtor:
- Is a certified real estate agent who keeps tabs on the latest properties by tracking the Multiple Listing Service (MLS) and other sources.
- May also be acting as agent for the seller when the property is an MLS listing. However, if you have already engaged the realtor as your agent, then he or she will act specifically and contractually in your best interest. This is known as Buyer's Agency.
- Negotiates terms and conditions of your purchase with the seller's agent or with the seller directly (if a private seller or their own listing).
- Realtor's commission is paid by seller out of proceeds of the sale. Usually it is split between the buyer's agent and seller's agent, if both agents are involved.
- Arranges to get information for you, or for certain conditions to be fulfilled, as agreed with you — i.e. survey, appraisal (for mortgage purposes), and a home inspection report.
Lawyer
Your lawyer makes sure that the property you purchase is legally yours and comes with no strings attached.
When you buy property you are not just buying the land and building, you are also buying the legal rights of ownership so you need to be certain that no other party has a claim to them. Your lawyer will confirm that there are no legal obstacles to your purchase and help it proceed smoothly.
The lawyer:
- Conducts a title search to ensure that the seller is the true owner of the property, makes sure that the current or proposed occupancy usage conforms to local by-laws.
- Obtains all necessary documentation including:
Compliance Letter acknowledging that no outstanding liens (legal claims) or work orders are in effect - Tax Department release verifying that property taxes are up to date
- Handles the transfer of ownership from seller to buyer and the registration of the mortgage on title.
- Ensures arrangements are in place for funds to be available for closing.
- Coordinates with lenders the setup of legal documents for any mortgage security.
- Ensures that all mortgage terms and conditions are met, and that title is clear in order to make undertakings to lender(s). May obtain title insurance on your behalf if there is any issue surrounding title that may cause a claim or work order of some kind in the future.
- Arranges with you the signing of legal documents and submission of remaining funds not provided by the Mortgage Lender(s).
- Coordinates closing of the purchase transaction with the lawyer(s) for the seller of the property.
Mortgage Lender
The financial backer in your real estate venture.
In today's mortgage market it pays to shop around because there are many lenders and different financing options available. Save yourself the time and trouble. Sit back and let an Invis Mortgage Consultant find a lender who will give you the best rate for the best product to suit your needs. As the party providing the funding, the lender will want to be sure that you are a worthy credit risk and that the mortgage you are requesting corresponds to the value of the property you intend to purchase.
The mortgage lender:
- Sets out the legally stipulated lending criteria that you need to meet to qualify for a loan.
Appraiser
Appraisers assess property value for the lender.
When you purchase a property it's important for the lender to be satisfied that the price reflects the property's true market value. An appraiser is an officially accredited valuator who is hired to conduct an inspection of the property for the lender to assess and certify its value.
The appraiser:
- Provides the lender an accredited opinion about the market value of the property (to be) purchased, which can be compared to the purchase amount.
Home Inspector
The Home Inspector acts as your extra pair of eyes, able to see things about a property that may not be visible to you.
If you are buying a resale home, it's always advisable to have it checked by a Home Inspector as a condition of purchase. This individual (not requiring provincial licensing in most cases)will inspect the property for major deficiencies, which may not always be apparent. The results are presented in a written Home Inspection Report.
The Home Inspector:
- Identifies the soundness of the structure and any improvements that have been made.
- Notes any specific deficiencies and their impact on the value of the property.
- Estimates the cost to correct any identified deficiencies.
Builder's Representative
Your information resource when you buy a newly constructed home.
Should you decide to purchase a newly constructed home from a Builder, then you will probably deal with a builder's representative who arranges the sale of new homes to the buying public.
The builder's representative:
- Provides information to buyers on house models, lots, costs of purchasing, municipal procedures and requirements, New Home Warranty programs, and all other related features of the property.
Note: Although Builder's Representatives are governed by regular consumer law, their duty is to the builder and they are in fact the Seller's Agent.
Home Purchase Financing Considerations
Aside from considering the different options when purchasing a home, you as a home buyer need to understand how lenders look at your “financial situation” when deciding whether to grant mortgage financing. By understanding what lenders look for, you will be better prepared to work with your mortgage consultant and make the whole process as smooth and efficient as possible.
There are two main areas to examine:
- Understanding credit. What factors about applicants do financial institutions consider? Lenders look at the 5 C’s of Credit: Capacity, Capital, Collateral, Character and Credit.
- What type of borrower are you? Common borrower profiles are risk averse, risk tolerant, and those with flexible borrowing requirements. In this section, we offer some guidance to help you determine what type of borrower you are. We look at some key questions for prospective borrowers to ask themselves.
1. Understanding Credit
Remember, lenders run a business to make money, not lose it. Those with good/better credit receive lower rates, and those with spotty credit receive slightly higher rates – the higher the risk, the higher the return for the financial institution. As part of the application process, lenders examine prospective borrowers according to varying requirements, however central to all decisions are the 5 C’s of credit: Capacity, Capital, Collateral, Character and Credit.
Capacity
Capacity to repay the loan is the most critical of the 5 C’s. Is your income sufficient to support the repayment of the requested loan amount? This is where lenders look at your Gross and Total Debt Service Ratios. Do the monthly carrying costs of the loan represent less than or equal to 32% of your total monthly income? Including other loans outstanding, do your loan obligations and carrying costs represent less than or equal to 40% of your total monthly income? Prospective lenders will also want to know about any other sources of income you may have to repay the loan, in case your steady income stream is interrupted.
Capital
Capital is the money you have personally invested in the purchase, otherwise known as your down payment. The amount of your own money put into the home portrays a message of confidence and trust. The more money you contribute, the less risk for the lender of losing money if default occurs, and the more likely it is that you will do all you can to maintain your payment obligations. Capital also reflects your ability and willingness to save money and accumulate assets, confirming that you can manage your financial affairs adequately within your income. The higher your net worth, the more you have as a cushion for repayment in the event you run into a financial setback. Lenders will look at the source of the down payment to confirm that it comes mostly from the applicant’s own resources such as savings, RRSPs, a family gift or unencumbered assets. A lack of accumulated worth could be a danger signal to lenders in some circumstances.
Collateral
Collateral is additional security you can provide the lender should you for some reason not be able to provide repayment. In real estate transactions, collateral is generally the property, and the lender will want to ensure that the property for which they are providing mortgage financing is marketable real estate. An appraisal will determine whether the subject property has sufficient value to support the requested mortgage amount, taking into consideration any deficiencies that may affect the ability to resell. Collateral may also include such things as investments, other real estate, stocks, etc.
Character
Character is your reputation and reliability – the general impression you make on the potential lender. Are you trustworthy enough to repay the loan? Factors associated with your character can include your educational background, business experience, length of time at your current employment and current residence.
Credit
Credit is the evaluation of your habits in meeting credit obligations. Information about your credit history is stored at the credit agency, or “credit bureau," and indicates how well you have paid your bills over the last six years. All major credit cards, auto loans, leases, etc. are reported to the credit bureau. A lender will evaluate your ability to maintain your obligations and try and determine how well you live within your means. Some individuals make the mistake of not paying the minimum monthly obligations on loans and credit cards with the expectation of making a larger payment the following month. These missed payments appear on their credit report, branding them as chronic "late-payers" for the next six years. If there are any problems with your credit bureau, you will need to provide a full and satisfactory explanation to the lender.
2. What Type of Borrower Are You?
Your mortgage consultant will guide you through the myriad of options that are available and get you the mortgage product that best suits your individual needs. In order to get the ball rolling, it is helpful to begin thinking about what mortgage product options you would feel comfortable with. By having an understanding of who you are, the mortgage process becomes more efficient and your satisfaction over the term of your mortgage increases.
Here are some questions that you should mull over and speak about with any of your fellow purchasers. Although this is not an exhaustive list, it provides a good start.
Consideration #1:
Is some fluctuation and change in payments acceptable?
Consideration #2:
Do I want the comfort of knowing what my payment is every month and of knowing it will not change for the whole term?
Consideration #3:
Do I want the lowest payment possible?
Consideration #4:
Do I want to pay down my mortgage as soon as possible?
Consideration #5:
How much down payment am I comfortable with, while not putting myself and my family into financial difficulty?
Consideration #6:
Are there any credit issues about which I will need to provide documentation?
There are numerous other considerations that your mortgage consultant will cover with you, however this will be on a case by case basis and will depend on your own personal situation.
Other issues that may also have to be addressed and require special consideration are:
- Nature of income – self-employed, commission based, or salary, for example.
- Status of applicant – new immigrant, foreign investor, etc.
For more information on special situation considerations, please click here.
