What advice would you give your 20-something-self? After graduating university, it’s a question I asked everyone I knew and met. I encountered people who answered with confessions, satisfaction, reality hits, some with arrogance, others noting entanglements. The interesting common denominator between all of them? Their advice to start saving when you’re young to buy real estate!
I’m of Chinese descent, so the concept of saving money to buy a house is no stranger to me. In my culture, the purpose of buying a home is in the plan to build a future family. For young people, the time to buy a house is usually right before marriage, and it’s often an effort and decision made with their families. But with the improved status and independence of women, more and more high-earning, highly educated women are enjoying their single life. They’re not settling for someone they can’t imagine marrying, just for the sake of building a family. And that’s why we see more single women joining the ranks of homeowner today. I myself am one of those women, having bought my first condo at 25 and first home at 29.
I had so many questions as you probably do—how to budget? How do you know what you want? How to choose a real estate agent? What are the precautions when viewing a house? The list goes on. If you’re looking into a real estate investment—I’ve broken down 8 steps to buy your first home.
1. Save For a Down Payment
When you’re young, you should be putting money aside monthly to achieve your investment goals, especially if one of them is buying a property. The rule of thumb is, for a home 500k and under, you should save at least 5% of that total as your down payment amount. Over 500k – add at least an additional 10% of that. And if the home price is $1M and over, 20% of the total is required to be your down payment. FYI – any down payment less than 20% will require you to get mortgage default insurance, which is typically 2.8-4% of the home price. So really ask yourself if that’s worth not waiting until you can have a 20% down payment. I recommend a larger down payment because you’ll get more equity in your home, a lower monthly mortgage payment, less interest paid overall, and smaller mortgage default insurance rates. Depending on your goals—start saving accordingly now!
You can also look into other first-time home buyer programs to help you reach your down payment goals. For example, the Home Buyer’s Plan lets you withdraw 35k from your RRSP tax-free. But make sure to do your due diligence in researching what will be best for you in the long-run. Also, the general rule is it’s wise to buy a house if you know you’ll have it for at least the next 3-5 years. And to help you prepare for home ownership, you could rent a house at an affordable price. That way, you can learn of tenant-landlord-housing dynamics to inform when you're an investment property owner, as you get financially closer to your goal. This isn’t easy to do in the city, but it’s a perk renting from Ryna can give you—so you can get the experience, insights, and ability to save all at once.
2. Get Your Documentation & Financials in Order
By that I mean have the following ready: salary (T4, pay stub, letter from employer), savings and investments statements, other sources of income such as business income, proof of withdrawal from RRSP if you’re on the home buyer’s plan, a letter stating money from a family member is a gift and not a loan if that’s applicable, your void cheque, and any other debts (i.e. student loan) and assets (i.e. car). It’s best to have your debts paid, or to have financial evidence it’s well-managed before you buy your first home. And have built up your credit score—above 700 is good and above 800 is excellent. This will increase your changes of a mortgage pre-approval.
3. Get a Mortgage Pre-Approval & Determine Your Budget
Your mortgage pre-approval will consider your annual salary, credit score, and down payment. For those self-employed (hello freelance queens) with incomes that may fluctuate more—expect to hand over your tax returns from the last 2 years. These will determine how much of a mortgage and at what interest rate you’ll get. Because the laws and regulations banks have to follow are relatively cumbersome, the loans they can grant are relatively conservative. Instead of shopping the options from bank to bank, you can get a mortgage or loan broker who can find lenders that offer a better rate and higher loan amount, as their terms can be less stringent. Once you see the lender and rate options that are available to your situation, you can calculate how much house you can afford, what your maximum monthly mortgage payment could be, as well as your maximum purchasing price for a home.
In terms of your overall budget, you’ll want to account for an additional 3-5% of a home price for closing costs. This is because closing involves home inspection, land transfer tax, lawyer fees, insurance and home appraisal if applicable. Also note the cost of any repairs or renovating you may want to do when shopping homes.
4. Get the Right Real Estate Agent
With your mortgage pre-approval and first-time home-buying, it may be best to get expert counsel from a real estate agent. Family and friend referrals are great, but getting someone who is very experienced in the neighbourhood(s) you want most, trumps all else. Your friend’s reco of an agent who got them a place in the ‘burbs probably isn’t your person for a condo in the city. You can also relax knowing they’re free, as they’re paid on commission by the home seller.
But if you’re quite familiar with local real estate, experienced many real estate investments and knows the procedures well, sometimes it may be better to have no agent, especially when the market is relatively hot (i.e. a "seller's market"). Although the agent’s commission is paid by the seller and shared with the seller’s broker according to a predetermined ratio—from the perspective of the seller (especially a seller’s broker) they’re more willing to deal with buyers without a broker. This is why we often hear, "the wool comes out of the sheep." This direct strategy will play a key role if there is a bidding war. But if an agent is better for you, don’t sweat it. Just get the one that will fit your situation best.
5. Shop for Homes & Understand Your Local Market
I think it’s safe to say doing research underpins all these steps—but knowing the budget you can have lets you know what neighbourhoods, homes, or condos you can afford. I recommend choosing your top 3 neighborhoods for your work-life balance. Then, starting with your top 1 neighbourhood, and list your top buildings by neighbourhood. If you want to be more comprehensive in your research, you can also go to the city government site to study the city plan.
You can bring a narrowed down top 10 buildings to your real estate agent, who can narrow it down even further. Let them know your ‘must-haves’ and ‘nice-to-haves.’ And your agent will filter all that with what the local market is like, how competitive your desired home is between buyers, if it’s a buyer’s or seller’s market, and all other insider info you couldn’t easily get publicly. For example, I asked for the house-viewing transactions of my top buildings from the last 10 years, which included the transaction length during the 2008 financial crisis. This is how I learned which buildings were most in demand, which was important info for my invest property goals. As for starter knowledge, a 500k budget could afford you a 1-bedroom condo in Toronto or Vancouver, with houses costing more.
Make sure in your viewings, you turn on the water to check the pipes for how the hot & cold water runs. Open windows to see if they work well, switch lights on and off to check lighting and electrical, record what repairs or renos you may have to do down the line. Assess the neighbourhood based on what you observe and your inside scoop from your agent. What are the neighbours like? How conveniently is it located to parks, restaurants, etc. Are the other homes in the neighbourhood well maintained?
6. Select Your Mortgage Loan
The Office of the Director of Financial Institutions (OSFI) issued their latest B-20 mortgage guidelines, which came into effect January, 2018. The updated guidelines apply to all OSFI-regulated mortgage lending institutions (such as banks, insurance companies, trust companies). The guiding principle proposes a stress test for low-rate mortgage loans [e1] (less than 80% of loans)—should you be interested. Otherwise, with your agent, your pre-approvals, a trusted financial advisor, peers, and your own research—you can decide which loan to commit to after seeing the options available to you.
7. Make An Offer
Let’s say you found your loan and home! Yippee! Your real estate can help you figure out your offer. What you have to do now is stay sensible. Before the offer is accepted, don't get too attached to the idea of this home—it’s what trips up a lot of first-time home shoppers. That’s because in a city like Toronto, you could easily encounter a bidding war. Remember your max budget, and if the bidding war pushes you to exceed it—walk away. You’re meant for a different place. Trust me.
8. Close the Sale of Your Home
If/when your offer does get accepted—yippe x 1000! Your real estate agent can set up a home inspection upon your offer being accepted by the seller. This lets you get a report and decide if you want to ask the seller to fix anything before closing the sale, and even if you want to walk away without penalty or to renegotiate your offer if significant material damage is found.
You loan lender will also get your home appraised, to make sure the selling cost is a fair and right one. You’ll secure your financing from your mortgage, and with the help of a real estate agent (remember those closing costs?) pay your down payment and transfer the title of the home to your name. There’s a land transfer tax in all provinces except AB and SK, with Toronto incurring a municipal tax as well. The brightside? First-time homebuyers can reap benefits such as the land transfer tax refund. Closing your home can take 30-60 days, but once it’s done, Congratulations!!!
You’re a proud homeowner now. Talk about #GirlPower.
Of course, if buying a home is not a part of your immediate plan. Company like Ryna provides safe and affordable housing to young women like you. With Ryna, we want your affordable place to feel like a support network, too. So that you’re not just surviving, but thriving as the empowering, young women in Toronto we know you can be!