Here is my list of 12 important things to do before buying first home in Canada.
1. Open RRSP Account
Open a RRSP account and put at least 25K CAD in it. It is a Registered Retirement Saving Plan. It gives you a tax break when you put money in a RRSP account and as a first time homebuyer you can withdraw up to 25K CAD for buying your home. It is a kind of loan which you need to payback in very low installment. You can only withdraw money after 90 days of opening this account. So plan accordingly.
Read this for more details.
2. Check Credit Score
Credit score is one of the main deciding factor banks consider before approving your mortgage. I’ll be writing a separate post on Credit score maintenance.
How to check Credit Score
- Ask Mortgage agent. They always check your score and can share that without charging any fee.
- Check online using www.ca or www.transunion.ca. They charge ~20$ to give a very detailed report of your credit history.
Tip: Each query by a different mortgage agent can cost you additional Credit Score points. There is complex logic for calculating the points to be deducted. I will discuss few points in my next post.
Checking credit score online by paying money doesn’t cause any credit score deduction.
3. Get Pre approval
Based on your budget you must have decided upper limit on the price of the house. One should do this exercise but actually, Banks defines their own upper limit for applicants based on various factors. It can be much lower than you expectation or much higher.
It is always advised to get a pre-approval letter from the bank. Banks do due diligence before issuing the letter to you. It states that the maximum mortgage amount you are eligible for and at what interest rate. This letter is generally valid for 90 days.
Once you have this letter you know your actual upper limit and can plan for the house accordingly.
Tip: Never ever believe on verbal approval. It can be a nightmare later.
Once out for mortgage shopping, check with different banks or institutions within small span of time. Don’t check one bank every month or two. It will cause more credit score deduction.
4. Target for 20% down payment
Once you have decided on the maximum house price, try to save 20% down payment for the house. As per law, if you have less than 20% of down payment then you have to buy insurance from CMHC
e.g. A Purchase price of 300,000 with 20,000 down payment will cost you additional 10,000 in CMHC insurance. It is added into your mortgage amount and paid along with your mortgage.
If possible, it is better to avoid this additional insurance cost by having 20% down payment i.e. 60000 CAD in above example.
5. Plan for closing cost
Make sure you plan your budget for closing cost of the house as well. Closing cost for 200K condominium is around 6000 – 8000 CAD whereas it can be around 20K for 800K house.
6. Budget for extra expenses
While planning consider other household expenses which will increase if you are moving from rented accommodation to Condominium or to a house. Average monthly expense for Water, electricity and natural gas will be around 200 to 250 CAD. Property tax can be somewhere around 100 per month for Condominium to 400 CAD per month for an average size house. Change in address will also change your Auto insurance. Call Insurance Company and get quote for the new area you are planning to move. Financial Institution asks for home Insurance details before closing. It can be somewhere around 25$ to 70$ per month. In House, there will be other seasonal costs e.g. lawn care and mowing equipment, snow removal equipment etc.
7. Find a good Mortgage Agent
It is very important as well. I have seen agents not picking you phone, not replying to your emails etc. Try to get a feedback from friends and relatives.
Few Agents put wrong information to get the mortgage approval but it can be very risky as mortgage can be cancelled at the last moment.
8. Find a good Lawyer
A good lawyer is also very important. So far I have dealt with two lawyers. One Indian and one Canadian.
Indian lawyer was very unpunctual. Average waiting time was close to 40 minute. He didn’t reply to my emails. We found few issues in our condominium and its lawyer’s job to contact the seller’s lawyer and get things fixed but there was no reply and no action from our lawyer. It cost us more than 1500 CAD to fixed things. A very unprofessional lawyer.
On the other hand, Canadian lawyer was very professional, very punctual to his time. Sent us a list of things he required two months advance. No scope of missing anything. Everything was done on timely manner and all the information was given to us in very timely manner. No phone calls required to get the status etc.
Above is my actual experience and nothing to say that Indian lawyer are bad and Canadian are good. Vice versa is quite possible.
I have heard of stories where lawyer recalculated the closing cost on the day of closing and asked for additional 6000 CAD, arranging that can a challenge sometimes.
A good lawyer will make things easier and closing smoother for you.
9. Find a good Home Inspector
Always get your home inspection done before finalizing the deal. It is not mandatory but highly recommended.
All Real estate agents have links with Home Inspectors. You can use their recommendation or find any other home Inspector.
10. Get Personal Insurance or Mortgage Insurance
Check with your financial institution, if need Mortgage Insurance or not. Few financial institutions need it on the day of closing.
Don’t buy Mortgage Insurance from the financial Institution. Instead buy a personal insurance covering your mortgage amount. There are lots of benefits of personal insurance over mortgage insurance which is out of scope for this post.
11. Do homework
All agents access Multiple Listing Service (mls) to find the listing. They have access to more details than general user. Try MLS and check the type of houses, average prices etc. in the area you are planning to move. It gives you better idea of the house prices and can help in planning and shortlisting the area you are planning to move.
12. Find a good real estate agent
Find a good real estate agent. An agent should not be in hurry of closing deal. It is a big decision. A good agent will understand your requirements and will show you relevant listings.
As a buyer, you will not pay anything to the agent. Agent will get his/her commission from the seller and in most cases it is 2.5% of the total cost.
Happy Home Searching !
Image Credit: Alan Cleaver