Questions and Answers for Buyers
1. What price range of a home can I afford?
It’s easy to fall in love with a home you’ve seen and begin considering the purchase before you have been pre-approved for a mortgage. How much of a home you can afford (and the amount of a mortgage you may qualify for) is usually dependent on these six things:
• Your annual income (combined income may come into play)
• Cash-on-hand to cover the deposit, down payment, closing costs and other charges
• Current debt obligations (car payment, credit cards, loans, etc.)
• Your credit history
• The type of mortgage you select
• Current interest rates
Banks and mortgage lenders will analyze your income in relation to the projected cost of the home and your outstanding debts. This will determine the size loan you can borrow. Your housing expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your loan, property taxes and home insurance. The sum of these costs is referred to as 'PITI.'
Additionally, there may be monthly homeowner association fees, if you're purchasing a condominium or townhouse, and private mortgage insurance, which are added to the PITI. Your housing income-to-expense ratio should fall in the 28 to 33 percent range. 28 percent of your gross monthly income is allotted toward PITI. 33 percent of you gross monthly income is allowed for PITI and all long term debt. Some lenders will go higher under certain circumstances. Your total income-to-debt ratio should not exceed 34 to 38 percent of your gross income although some lenders will allow for a much higher ratio in some markets.
2. How do I find out about the condition of the home I am looking at?
Before you make an offer on a home, or as a condition on the purchase offer, you should have the home inspected by a qualified home inspector.
A home inspector will look for any significant defects or malfunctions existing in the home's major systems. A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems. However, many inspections are not “intrusive” and may not reveal material defects under, inside, or not visible.
It’s important to know that in Ontario home inspectors are not government regulated, licensed or certified* outside of independent organizations such as the “Ontario Association of Certified Home Inspectors” and the “Canadian Association of Home & Property Inspectors”. Your real estate sales professional should be able to provide you with three referrals of home inspectors that they have used before and are happy to recommend to you.
(*The Ontario government is considering legislation to change this in the spring of 2016.)
As a home buyer in Ontario you should consider asking the seller for a “Seller Property Information Statement” (SPIS). The SPIS will provide information related to defects, renovations and other pertinent property information, based on the seller’s knowledge and experience. A seller is not obligated to complete a SPIS but if one exists the broker or salesperson is required to disclose its existence to every buyer interested in the property. They are also required to make the SPIS available to any interested buyer upon request, unless the seller has directed them not to.
3. How low can I make an offer?
There are many influences on the type of offer you should make on a home that go well beyond the “Comparative Market Analysis” (CMA) of the property. Some of the things that will affect the acceptance of a low-ball offer are:
• The seller is in a rush to sell
• The property has been listed for an extended period of time
• There is little interest in the property
• Current market conditions including “supply and demand” economics
• Favourable purchase terms (such as an all-cash offer)
Try to learn about the seller's motivation. For example, a lower price with a fast closing date may be more acceptable to someone who must move quickly due to family circumstances. People going through a divorce or are eager to move into another home are frequently more receptive to lower offers.
An experienced REALTOR® can guide you through the offer process.
4. How and what do I negotiate besides the price?
The price paid is usually the largest consideration during negotiations but there are a host of other items that can be negotiated along with a home’s price. These may include:
• Pre-sale home repairs
• Purchase offer conditions
• Seller financing (mortgage transfer or take-back)
• Closing date timing
When the “Agreement of Purchase and Sale” is being drawn up by your REALTOR® they should be able to advise you on your negotiation options, dependent upon your “Buyer’s Representation Agreement”.
5. Should I put more or less of a down payment if I can afford it?
In Ontario a home that requires a mortgage will require a 5% down payment of the first $500,000 and a 10% down payment of any amount over $500,000 (effective February 2016).
The higher your down payment the less principal you will carry and the less interest you will pay. Many purchasers consider their home a long-term investment, however the less you owe on your mortgage the faster the equity in your home rises.
Economics and market conditions aside, you may want to consult a financial advisor with respect to your home purchase and down payment amount options.
6. What is title insurance?
Title insurance Protects purchasers, owners or lenders of residential property, against numerous covered title risks that can include (depending on the type of title insurance your policy covers):
• Ownership interests in the property
• Existing liens
• Municipal by-law violations
• Setback violations
• Legal access to the property
• Fraud, forgery and false impersonation to the extent they affect the validity of title
Title insurance is a form of insurance that is paid once when the property sale transaction closes and is valid for as long as you own your home. You should discuss title insurance with a qualified professional, such as your real estate lawyer.
7. What steps should I take when looking for a mortgage?
Shopping for a mortgage often goes beyond the banks advertised rates. You may be dealing with private mortgage lenders or other financial institutions or businesses for a mortgage.
It’s advisable to understand your credit worthiness, income-to-expense ratio and not to buy more house than you can reasonably afford.
You should have easy access to, or on hand, your bank statements, utility bills, income tax statements, loan documents, and wage statements.
The best scenario for home shopping is to be pre-qualified for a mortgage, this allows you to know your upper-limit price range as you look at houses. Pre-qualification for a mortgage does not guarantee that you will get it, but the negotiations of home buying are easier with a pre-qualified mortgage in hand.
8. Is it possible to negotiate mortgage interest rates?
Depending on your type of mortgage lender and the current market conditions you may be able to negotiate more favourable interest rates and payment options on your mortgage.
You won’t end up paying more if you shop around for the best rate or the most favourable payment terms as long as you act quickly to make your decision. It can happen that market conditions preclude advertised rates and you end up with a higher rate (or a lower rate) on rare occasions.
A seller financed mortgage is usually much more open to negotiation of the interest rate and payment terms, but again there is no hard-and-fast rule.
9. Which is a better purchase: a new home or a resale?
Comparing new versus resale home purchases isn’t always a case of comparing apples and apples.
There are common factors that affect pricing for both types of homes including location, current market conditions, interest rates and the economy.
While a new home won’t require the same upgrades and ongoing investment of renovations that a resale home may require, resale homes often appreciate faster simply because of their established neighbourhoods.
Whether you chose for a new home or a resale home, your REALTOR® can advise you on what you need to know when you compare two distinct properties.
10. Homes that need renovations - Are they good or bad?
The argument for purchasing a home that needs renovations runs on both sides of the fence.
You may benefit from a lower price when compared to other houses in the neighbourhood. You may be taken to task by finding the house needs more expensive renovations than first found.
Depending on your budget and comfort level you may just consider purchasing the house that requires some work to make it into a home. Be sure to set aside enough cash reserves to allow for a wild rise in the cost of renovations or you may end up living unhappily in your own “Money Pit”.
11. Are there good 'returns' on doing renovations to a home?
Renovations to your home should be looked at more towards improving your personal space and comfort than adding to a home’s value.
While many remodeling jobs will add value to a home it’s not the rule that the value added will exceed the remodeling cost.
Renovations to help a home sale may be suggested by your real estate professional, but if they are not within your financial means then you shouldn’t risk your time and money in such a project.
12. Is purchasing a home in Power of Sale proceedings a good or bad idea?
Buying a home in a “Power of Sale” proceeding is really a “buyer beware” situation.
The home may be in serious disrepair, the neighbourhood may be experiencing a downward trend, among the many considerations to be acknowledged.
Financing and the conditions of sale are sometimes another obstacle to purchasing a home in foreclosure.
Even experienced investors can lose money on a home that is going through foreclosure. Not to say that you will never find a great deal and save a lot of money, just be certain to do your due diligence.
13. What is the legal obligation of a REALTOR® representing me?
All persons selling real estate in Ontario are required by law to be registered and insured. They must have passed the Ontario Real Estate Association (OREA) educational courses that allow themselves to become a registered real estate salesperson and take additional courses to become a real estate broker and a broker of record. They must be registered with the Real Estate Council of Ontario (RECO) and are subject to RECO regulations and legislation of the Real Estate and Business Brokers Act, 2002 (REBBA 2002).
Representation by a registered real estate professional can vary according to the terms of the contract negotiated and signed. If there is no signed contact (Buyer’s Representation Agreement) the REALTOR® always should be understood to represent the interest of the seller.
As a home buyer you can be a “Customer”, that is, someone without a Buyer’s Representation Agreement or a “Client” that has a signed Buyer’s Representation Agreement. These are legal definitions that greatly affect who the REALTOR® is representing throughout your home buying process.
When you hire a REALTOR® to help you purchase a home and you sign a Buyer’s Representation Agreement the REALTOR® now works for you exclusively and the broker or salesperson must protect and promote the Client’s best interests.
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