As an aspiring homebuyer here in Ontario, you may be wondering how to take advantage of the potential drop in interest rates later this year. Experts suggest that the Bank of Canada may lower its overnight rate in response to the slowing economy and cooling inflation, which could result in more favourable mortgage rates for both fixed and variable mortgages.
But before you start searching for your dream home, there are some steps you should take to prepare yourself for the home-buying process. Here are some tips to help you get ready for buying a home in 2024:
- Save For a Down Payment
- Build Your Credit Score
- Determine What You Can Afford
- Pick a Location
- Calculate the Closing Costs
- Get Pre-Approved for a Mortgage
- Find a Real Estate Agent
- Make an Offer and Negotiate
- Home Inspection
- Finalize Your Mortgage
- Close the Deal
Save For a Down Payment
One of the most important factors in buying a home is having enough money for a down payment. In Ontario, the minimum down payment is 5% for purchase prices up to $500,000. For homes with a purchase price between $500,000 and $1 million, the minimum down payment is 5% on the first $500,000, and 10% on any exceeding amount.
Regardless of the purchase prices, a larger down payment, preferably 20%, will offer more flexibility and substantial savings on both interest payments and mortgage default insurance.
Build Your Credit Score
Another key factor in buying a home is having a good credit score. Your credit score is a measure of your financial health and creditworthiness, based on your history of borrowing and repaying money. Lenders use your credit score to determine how likely you are to repay your mortgage, and what interest rate they will offer you.
The higher your credit score, the better your chances of getting approved for a mortgage and securing a lower interest rate. Aim for a credit score of at least 680 for good standing.
To build your credit score, you should:
- Pay your bills on time and in full every month
- Maintain a credit utilization ratio below 30% (the amount of credit you use compared to your available credit limit)
- Avoid applying for too many new credit accounts in a short period of time
- Check your credit report regularly and dispute any errors or inaccuracies
Determine What You Can Afford
Before you start looking for a home, you need a realistic idea of what you can afford to spend on your mortgage payments, property taxes, utilities, maintenance, and other homeownership expenses. A general rule of thumb is to allocate no more than 39% of your gross monthly income to housing costs and 44% to total debt payments, including mortgages, car loans, and credit cards.
To determine what you can afford, you can use a mortgage affordability calculator, to estimate how much you can borrow based on your income, debt, down payment, and other factors. You can also use a mortgage payment calculator, which will show you how much your monthly payments will be based on the mortgage amount, interest rate, amortization period, and payment frequency.
Pick A Location
Once you have a budget, you can start narrowing down your search area based on your preferences and needs. Some factors to consider when choosing a location are:
- The type and size of home you want (i.e., detached, semi-detached, townhouse, condo, etc.)
- The proximity to your work, school, family, friends, and amenities
- The neighbourhood characteristics (i.e., safety, walkability, transit, schools, parks, etc.)
- The market conditions, such as supply and demand, price trends, and future developments
Research different locations using online tools, such as neighbourhood guides, market reports, and property listings. You can also visit different areas in person, and talk to residents, real estate agents, and other industry experts to get a feel for the community and the market.
Calculate the Closing Costs
Beyond the down payment and mortgage payments, you also need to factor in closing costs, which are the fees and expenses that you pay when you finalize the purchase of your home. Closing costs typically range from about 1.5% to 4% of the home purchase price. These costs typically include:
- Land transfer tax
- Legal fees
- Home inspection fee
- Appraisal fee
- Mortgage default insurance
- Title insurance
- Adjustments
- and Moving costs
Get Pre-approved for a Mortgage
Getting pre-approved for a mortgage is a smart move that can help you early in your home search. A mortgage pre-approval is a conditional offer from a lender that states how much you can borrow, what interest rate you can get, and how long the offer is valid. A mortgage pre-approval can be beneficial as it can:
- Give you a clear idea of how much you can afford to spend on a home
- Show sellers and agents that you are a serious and qualified buyer
- Lock in a low-interest rate for a certain period (usually 90 to 120 days)
- Save you time and hassle when applying for a mortgage once you find a home
To get pre-approved for a mortgage, you need to provide some personal and financial information to the lender, such as:
- Name, address, phone number, and email address
- Employment history and income
- Assets and liabilities
- Credit score and report
- Down payment amount and source
The lender will then review your information and perform a credit check to determine your eligibility and creditworthiness. If you are approved, you will receive a pre-approval, which outlines the terms and conditions of the offer. Keep in mind that a mortgage pre-approval is NOT a guarantee that you will get the mortgage, as the lender will still need to verify your information and appraise the property before finalizing the loan.
Find a Real Estate Agent
Finding a reliable real estate agent is another essential step in the home-buying process. A real estate agent is a licensed professional who represents you as a buyer and helps you with various aspects of the transaction, such as:
- Searching for properties that match your criteria and budget
- Scheduling and accompanying you on property viewings
- Providing guidance on the local real estate market and trends
- Negotiating with sellers on your behalf
- Assisting with the paperwork and legalities of the home purchase
When choosing a real estate agent, try to find someone with experience in the local market, excellent communication skills, and a good understanding of your specific needs and preferences. You can ask for recommendations from friends, family, or colleagues, and also read reviews online to ensure you’re working with a reputable professional.
Make an Offer and Negotiate
Once you find a home that meets your criteria, it’s time to make an offer! Your real estate agent will guide you through the negotiation process, helping you determine a fair price based on comparable sales in the area and the condition of the property. Be prepared for some back-and-forth with the seller, as negotiations are a standard part of real estate transactions.
During this phase, stay flexible and be open to compromises. Your real estate agent’s expertise will be invaluable in navigating the negotiation process to ensure both parties are satisfied with the final terms.
Home Inspections
After your offer is accepted, it’s time to conduct home inspections. Hiring a qualified home inspector is essential to uncover any potential issues with the property. This includes checking for structural problems, plumbing issues, electrical concerns, and more. If the inspector identifies any significant issues, you may have the opportunity to negotiate repairs or a reduction in the sale price.
Finalize Your Mortgage
With the home inspection and negotiations settled, it’s time to finalize your mortgage!
Provide your chosen lender, or licensed mortgage professional, with all necessary documentation, and they will review the information before approving and funding your loan. Be sure to fully understand the terms and conditions of your mortgage, including the interest rate, repayment schedule, and any potential penalties for early repayment.
Close the Deal
The final step in the home-buying process is closing the deal. This involves signing all necessary legal documents, transferring funds, and officially taking ownership of the property. Your real estate agent and lawyer will guide you through this process, ensuring a smooth and legally compliant transaction.
Congratulations! You’re now a homeowner in Ontario! As you settle into your new home, take the time to enjoy the fruits of your careful planning and decision-making. Remember, buying a home is a significant investment, and with the right preparation and guidance, it can be a rewarding and fulfilling experience.
Good luck on your journey to homeownership in 2024!
