How to buy a House in Ontario | Step-by-step guide

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Figuring out how to buy a house in Ontario is something many people will struggle to do. Not only will you need a significant down payment for your home purchase, but there are many steps you need to take before you even make an offer.

Since buying a home will likely be the largest purchase you ever make, you must ensure that you’re prepared. Finding that perfect home could take months or even years. As long as you know the process that goes into buying a home, you can jump on any opportunities that present themselves.

Decide if homeownership is right for you

There’s no denying that owning your home has plenty of advantages. It gives you a stable place to live, you can renovate as you please, and it allows you to build equity. That said, if you’re a first-time buyer, you may not have considered all the costs that come with being a homeowner:

  • Down payment – To buy a home in Canada, you must have a minimum down payment of 5%. You also need to consider closing costs and any insurance you may need.
  • Ongoing costs – Property taxes, condo fees, mortgage payments, utilities, and insurance are some monthly fees that come with home ownership.
  • Major repairs – Every home will require major repairs at some point, which cost you thousands of dollars. Even small repairs done by a handyman or plumber could cost you hundreds of dollars.

Renting is not throwing money away

Many people will argue that renting is throwing money away, but that’s not necessarily true. In fact, there are quite a few benefits that renters get that homeowners don’t.

  • No upfront costs – Besides first and last months’ rent, renters don’t need to pay many other upfront costs.
  • Lower monthly costs – Renters will spend less each month for housing since the owner is responsible for many of the overhead costs.
  • Flexibility – As a renter, you can move anytime you want without much worry. Homeowners don’t always have that luxury as it can take a while to sell.
  • Fewer responsibilities – The landlord is responsible for many things such as snow removal and repairs.
  • Opportunity costs – The money renters save can be invested or saved for a down payment.

Figure out if you’re financially ready to own a home

When looking into how to buy a house in Ontario, you’ll quickly realize that your financial situation will likely have the most significant impact on you becoming a homeowner. Simply put, if you can’t afford a down payment and the monthly carrying costs, you won’t be able to buy a home.

To prepare yourself, you need to look at how you spend money now and make adjustments to become a homeowner.

Look at your current budget

If you don’t currently have a budget, now is the time to make one. Track all of your expenses for two to three months, so you know exactly where your money is. Now, in a spreadsheet, list out all of your expenses, such as:

  • Rent
  • Groceries
  • Utilities
  • Internet and cellphone
  • Subscriptions
  • Debt repayment (credit cards, auto loans, student loans, etc.)
  • Entertainment
  • Eating out

Add up all of those expenses and then subtract them from your monthly income. The difference you have over is what can go towards savings. If you cut some of your expenses, that will allow you to save more. This is key if you want to own a home.

Determine your costs as a homeowner

Now that you know what your budget looks like as a renter, you can compare it with the costs of being a homeowner. Many of the costs will be similar, but you’ll need to swap or add in additional expenses. What you need to calculate include:

  • Monthly mortgage costs – Use an online calculator to see what your monthly mortgage costs will be based on your approved mortgage.
  • Property taxes – Your city should have an online estimator for property taxes.
  • Maintenance fees – Look at online listings to see the fees for properties you’re interested in.
  • Utilities – You should be able to get a rough estimate of utilities online.
  • Insurance – As a homeowner, you’ll need homeowner insurance and possibly life insurance.
  • Closing costs – Add another 1.5% to 4% of your mortgage to estimate your closing costs.

Knowing your homeownership costs is vital since you may quickly realize it’s not much different from renting. More importantly, your future housing costs will help determine your affordability ratios.

Figure out your affordability ratios

Eventually, when you apply for a mortgage, lenders are going to look at your affordability ratios. The more gross income you have, relative to any debt and expenses you have will increase your chances of being approved. There are two standard affordability ratios used by lenders: Gross debt serve and total debt service.

Gross debt service ratio

Your gross debt service (GDS) ratio is your housing costs relative to your average (before-tax) income. This ratio should not exceed 32% of your monthly income. That said, if you’re getting mortgage loan insurance, some insurers will allow a GDS ratio of up to 39%.

Housing costs (which you already figured out above) in this ratio would include:

  • Your monthly mortgage payment
  • Property taxes
  • Utilities
  • 50% of condo fees
  • 50% of homeowners association fees

Let’s say your monthly income before tax is $7,000, and all of your monthly housing expenses are $2,000. Your GDS ratio would be 29%. This ratio is essential when figuring out how to buy a house in Ontario.

Total debt service ratio

The total debt service (TDS) ratio is another calculation lenders use to determine affordability. It’s similar to the GDS ratio but adds any other outstanding debt you may have. Your TDS shouldn’t be higher than 40%, but if you get mortgage loan insurance, it can be as high as 44%/

Additional debt that counts towards your TDS include:

  • Student loans
  • Car payments
  • Credit card payments
  • Line of credit payments
  • Other mortgage payments

Let’s use the same example above, but assume the potential homeowner also has an additional $1,000 in monthly debt repayments. That would put their total monthly expenses at $3,000. That’s a TDS of 43%, which puts them just below the affordability threshold.

Use a mortgage calculator to quickly figure out what your housing and affordability costs will look like.

Check your credit score

Your credit score is a number between 300 and 900. The higher your credit score, the more creditworthy you are. This is relevant because future lenders want to ensure you can repay your loan. Your credit score is one of the things they look at when deciding if they’ll approve your mortgage. Having a good credit score will give you access to more lenders and lower interest rates.

To check your credit score, you can go right to the source with Equifax or TransUnion. Alternatively, Borrowell allows you to check your credit score for free.

Start the process

Now that you know the first steps about how to buy a house in Ontario, you can begin the actual process of getting a home. The key to becoming a successful homeowner is to ensure you’re prepared and have the right team working with you.

Save for a down payment

To purchase a home in Canada, you will need a down payment. How much you need saved depends on the purchase price of your home

  • $500,000 or less – 5% down payment
  • $500,001 – $999,999 – 5% down payment for the first $500,000, 10% for the remaining balance
  • $1,000,000+ – 20% down payment

Note that if you have a down payment of less than 20%, you’ll have a high ratio mortgage. As a result, you’ll need to get mortgage insurance (sometimes referred to as Canada Mortgage Housing Corporation insurance). In addition, those with a high ratio can not exceed an amortization period of 25 years.

Take advantage of government programs

When trying to figure out how to buy a house in Ontario, many people will struggle with the down payment. Fortunately, the government has a few programs that could help you become a homeowner. First, there’s the Home Buyers’ Plan. This program allows you to withdraw up to $35,000 from your Registered Retirement Savings Plan (RRSP) to buy a home. The government also announced the Tax-Free First Home Savings Account (FHSA), which will allow you to save up to $40,000 to purchase a home. FHSA contributions reduce your taxable income, while any gains made are tax-free. Finally, there’s the First Time Home Buyer Incentive.

Get pre-approved

With a down payment in place, it’s a good idea to get a mortgage pre-approval, so you know exactly how much you’ll be approved for. To get pre-approved, you’ll need to talk to a lender or mortgage broker. They’ll take all of your personal information and down payment into consideration. They’ll then be able to tell you exactly how much of a mortgage you’ll be approved for and at what interest rate. You can then lock in that rate for 90 to 120 days. Since you’ll know exactly how much money you can borrow, you can start the house-hunting process with a maximum budget.

Find a good real estate agent

Technically speaking, you can buy a home without a real estate agent, but hiring one can help you with the process. What you want is a real estate agent that does the job full-time and is familiar with the areas you’re interested in. It doesn’t make sense to work with a part-time real estate agent or someone who has never helped people buy a home in the area you want since they may not be able to fully assist you.

Ask your friends and family if they have a real estate agent they’ve worked with that they can recommend. If you don’t get any recommendations, don’t be afraid to call some brokerages in your area. Interview any possible candidates to ensure they’re a good fit for you. A good real estate agent will answer any questions you have about how to buy a house in Ontario.

Start looking

Now that you have a real estate agent, you can start looking for homes. First off, create a needs and wants list for your home. This list will guide your search as it’ll quickly allow you to assess if certain homes have potential. With this list in hand, you can start scanning for homes that meet your criteria.

Once you’ve found some homes you’re interested in, your real estate agent will be able to set up appointments to view the properties. Check things out thoroughly and be sure to look up any details that come with the home, such as property taxes, maintenance fees, or when things were renovated.

Adjust your expectations

No one ever finds their dream home after a few showings. In fact, there’s a good chance you’ll see dozens of homes and realize that your expectations need to change. Perhaps what you want is not realistic for your budget. Alternatively, it’s possible that you can afford a home in your preferred area, but you may not get everything on your wants list. Speak to your real estate agent and go over what’s realistic and ask them for recommendations. It’s possible they know different areas that could be perfect for you that you never considered.

Make an offer

Once you’ve found a home that you want, it’s time to make a bid. Your real estate agent will look at recently sold comparable homes and recommend a number you should offer. They’ll also advise you to include conditions such as financing and a home inspection. These conditions can be essential as they’ll allow you to do a final check before you close the deal.

Remember that what the seller has listed their home for may not be what it’s worth. It’s a common strategy to list homes lower than the actual value to draw interest. The hope is that there will be a bidding war. Even if you bid more than what they’re asking, there’s no guarantee you’ll get the home.

Hire a lawyer

Assuming your offer is accepted, you’ll need to hire a real estate lawyer to close the deal. If you’re buying a condo, you may need to hire one before you even make an offer, as they’ll need to go over the condo documents to ensure everything looks good. Real estate lawyers ensure that all the paperwork is done for the home you’re buying. They’ll deal with things such as land transfer tax, and title insurance. They’ll also ensure that the funds you get from your mortgage are transferred to the seller. Simply put, you can’t close the deal without a real estate lawyer.

Close the deal

When it comes to knowing how to buy a house in Ontario, the final step is to close the deal. Generally speaking, you’ll get about 90 days to complete the transaction. However, some sellers may ask for a shorter or longer closing window. The number of days to close would be negotiated during the offer. Since you’ll be on a fixed timeline, you’ll want to ensure you take care of the following.

Get a home inspection

If you had a home inspection condition included in your offer, you must get that done before finalizing the purchasing agreement. A home inspector’s job is to look at the ins and outs of your potential home and to provide you with a detailed report. They’ll look for things such as structural issues, mould, electrical, plumbing, and more. If the inspection report is clean, you can remove the condition and complete the purchase agreement. However, if the home inspector finds things of concern, you could walk away from the deal or rework your purchase agreement. For example, if the home inspector finds that a new roof will be needed in the next five years, and it’ll cost $25,000, you could ask the seller for $25,000 off.

Secure your financing

If you were pre-approved for a mortgage, then including a financing condition, but not be necessary. That said, keeping one in will allow you to do one final check with your lender to ensure you’ll be getting the money you need to buy the home. If for whatever reason, you can’t secure financing for your home, you can walk away from the deal since you included the condition. If you didn’t include this condition, you still need to close the deal even if you don’t have a lender in place. If you don’t close, you could be sued.

Don’t forget about closing costs

Even though you’ve already agreed to the price for the home you’ve purchased, there will be closing costs to factor in. As a general rule, you’ll want to budget an additional 1.5% to 4% of your purchase price for closing costs. This will cover everything your lawyer needs to pay, including legal fees. If you’re going to hire movers, you should also budget that into your closing costs.

Pick up your keys

On the day of closing, after the funds have been transferred to the seller and your mortgage formally kicks in, the keys will be delivered. You’ll be able to pick them up directly from your lawyer or real estate agent. You’re now officially a homeowner, and you can move in and prepare for the next stage of your life.

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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