Purchasing a new home is likely the single largest investment you'll ever make, so it is a financial decision that should be well researched and calculated. We have simplified the home buying process to 3 stages to help give a comprehensive walkthrough of the home-buying process:
There are several activities necessary for the completion of each stage; however, for simplicity’s sake, you should concentrate on the stage you are in right now. It is easy to get overwhelmed by looking at the macro-level; however, by breaking the process into achievable steps and following the checklists and detailed information we provide, you will have a clearer understanding of what you should be doing at each stage.
At the end of this Overview you will understand:
How Investing in a home is unique
Key activities in each stage
Mortgage Sandbox’s home buying philosophy
Moving cash between savings accounts costs next to nothing but selling one home and buying another one costs thousands of dollars in fees, commissions, and taxes, not to mention hundreds of hours of your valuable time. If you end up regretting your purchase, or simply want to trade up in a couple of years, the costs can end up setting you back significantly.
Property taxes, condo fees, utility charges, and general maintenance costs are generally predictable, but the sudden cost of replacing a faulty roof or furnace, or upgrading electrical and plumbing, can be harsh. You should always be prepared for unexpected and costly repairs by consistently setting aside money in a “rainy day fund”.
Like most investments, the value of a home can be affected by demand, the economy, and interest rates. Additionally, home values can be affected by the character of the neighbourhood in which they are located, the quality of local schools and public transit, building condition, and even something as seemingly trivial as unpleasant neighbours.
Not all these factors readily present themselves at an open house, and sometimes inexperienced buyers can get burned by unexpected issues that arise post-purchase. Homes are not commodities in the sense that not all 900 square foot, 2-bedroom apartments are alike. Furthermore, due to individual values and goals, a house which may look like a compromise to you could be someone else’s dream home.
Most buyers make the minimum down payment to buy a home and borrow the rest by taking out a substantial mortgage to pay off over the next 25 years. Due to the magnitude of such an investment, any change in the mortgage rate can be a big deal, as even a 1% percent difference can translate to tens of thousands of dollars in either savings or additional costs.
For example, imagine a family with a $400 thousand-dollar mortgage at a 3.5% 5-year fixed mortgage rate will pay $2,000 per month. If they renew the mortgage in 5 years at 4.5%, their mortgage payments will have risen to $2,200 monthly. Over the 5-year timeframe, that 1% change in rate will cost the family $12,000 more in monthly payments alone!
At its core, a mortgage is a home loan where you offer the bank your home a collateral for the loan. It’s like a car loan where you offer the car as collateral for the loan but different from an unsecured loan in which you don’t offer the lender anything you own as collateral.
If you miss too many payments or significantly alter the value of the property offered as collateral (home or car) then you will have broken the loan agreement and the lender will ask for the full loan amount back or ask a judge to force you to sell the property to pay them back.
When a lender gives you money for a home loan they register their name on the “title” to your home. The title is like a certificate of ownership that is held on record by the province where you live. Anyone can search provincial land titles and see who lent you your mortgage.
There is a lot of trust involved in a home loan because the lender will give you a loan that typically takes 25 to 30 years to pay off. Ideally, you want a lender who is larger and has a reputation to protect. They will generally make a bigger effort to work with you if you lose your job or get hit by a big unexpected expense. Not all of the big Canadian mortgage lenders are banks.
Home buying is complex and can differ strategically depending on whether you buy urban or rural, a condo or a detached home. As you can see in the figure below, we have compared some of the examples provided by other advisors and they often list anywhere from 6 to 16 stages in the process.
We believe that at its heart there are 3 primary stages to buying a home but at each stage we need to look at the Property, Financing, and Risk Protection. In this section, we explore the key activities for each stage of the buying process.
It is always important to enter your first meeting with a mortgage broker or real estate agent with an established preliminary budget.
For more details and access to checklists, visit the detailed steps for “Set a budget”.
Once you have finalized a realistic budget and have been pre-approved for a mortgage, you can begin searching for a home. Don't be surprised if you realize that your budget or expectations require adjustment. As you learn more about the market, you will be able to update your budget taking into consideration what is available and your individual needs.
For more details and access to checklists, visit the detailed steps for “House hunting”.
Once you have an accepted offer to buy a home, you can get formally approved for a mortgage. Remember to keep in mind that mortgage approvals remain dependent on your ability to satisfy lender conditions. Should you fail to meet any one of these conditions, you’ll have to get re-approved. Always try to satisfy lender conditions as quickly as possible to avoid this.
For more details and access to checklists, visit the detailed steps for “Closing The Deal”.
At the core of our philosophy is a belief that Canadians want to work with, and give business to, people who share and understand their interests and values. Home buying can take up to 5 months from beginning to end and it is the largest and most complex financial transaction a Canadian will undertake. You should embark on this journey with professionals who you get along with and trust.
We developed Mortgage Sandbox, a digital financial advisor website specialized in real estate, that allows home buyers to get sound real estate advice online. The tools offered assess people’s personal goals, their financial situation, and their personal values, and provide consistent advice on real estate purchases, financing, and local real estate agents and mortgage brokers to help execute their homeownership plan.
The software provides financial advice based on mathematical rules and algorithms that rely on data provided by leading economists. These algorithms are executed by intuitive, easy to use software and are supported by context-sensitive help. Our goal is to see more home buyers leave the process feeling they have made the best purchase and build enduring relationships with their real estate professionals. To learn more about Mortgage Sandbox, click the logo below.
If there is anything unclear in the explanations above. Please let us know so we can improve our advice for the next reader.