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Buying a Home


Buying a home is the biggest investment most families will ever make. However, some people enter these transactions unprepared, unaware of the procedures and responsibilities of home ownership. First-time buyers may not know what questions to ask or who to ask, resulting in incomplete information and regrettable decisions.


It's easy to let emotions override common sense when buying a home. Buying a home is an emotional process, but cold reason and hard facts are essential to a successful real estate transaction. To make sound, logical, and correct decisions, the buyer must separate excitement from reality.


A buyer must fully understand the entire process of buying and owning a home or risk losing thousands of dollars and incurring costly legal fees. A home purchase decision should not be taken lightly or without careful consideration of the many factors involved in the purchase and long-term ownership of any residential unit. Owning a home provides a family with financial and emotional stability. Home ownership has historically outperformed the stock market, bank deposits, and overall inflation. Families also value the freedom to redecorate, expand, reconfigure, or customize their homes.


But home ownership comes with a lot of responsibilities. Buying a home requires a large down payment, as well as substantial closing and legal fees. Besides the mortgage, there are various taxes, levies, and utility payments that renters avoid. When a roof leaks or an electrical short occurs, it is not sufficient to call the landlord or manager and leave it.




Types of Homes


Individuals and families have different needs, so different residential structures and ownership styles have been developed. Your own preferences and needs, as well as your credit and income status, are critical factors to consider when balancing all of these varying factors.


·      Detached Single Family Home - This structure shares no walls with other structures and has a yard to the front, side, and rear. These homes range in size from a small one-story bungalow to a large mansion.


·      Semi-Detached - House with two separate dwellings, each for a single family. The dwellings usually share a common wall in the middle of the building.


·      Duplex - Two separate dwellings that are sometimes connected side by side as a semi-detached home. In many cases, a duplex has one unit on the ground floor and another above it. Many duplexes are strata titled and thus subject to the Strata Property Act's regulations.


·      Townhouse - Like a semi-detached home, a townhouse is a unit that is part of a linear group. Except for the end units, each has its own exterior entrance. Some yards are fenced off, while others are open.


·      Apartment or Condo - The distinction between apartment and condominium is blurred, but both terms refer to a single dwelling in a group of several units connected by a common hallway. A condo or apartment building can be three to fifty or more stories high. It is a type of individual ownership in a multi-unit building and thus can be applied to many other construction styles besides conventional apartments.


·      Modular Home - A home built in a factory and delivered in two sections to the owner's lot. These usually have a split sub-frame, but there are many variations.


·      Manufactured Home - Newer term for a residential unit designed to be trailered to a specific location and set up on a prepared lot area or "pad" that is often rented, not owned. Many manufactured homes are split longitudinally and reassembled.



Types of Home Ownership


The ownership of a residential property varies from the traditional full Freehold to a variety of collaborative and long lease options.


·      Freehold

This type of ownership is commonly referred to as fee simple ownership. The owner of a freehold or fee simple interest has complete control over the land and buildings on it, subject only to Crown rights and municipal bylaws.


·      Strata

This is a combined form of freehold ownership for condos. A strata lot unit such as an apartment or townhouse is owned by the owner. As part of the larger property, the strata project, which contains more similar residential units. The various "common property" areas such as garages, halls, grounds, elevators, and driveways are proportionately owned, responsible, and shared.


·      Cooperative

Unlike the more common strata title, where each unit owner owns a proportionate share of the entire project. The cooperative association assigns the specific unit that each owner may occupy.


·      Leasehold

This is a long-term rental of a property. This type of ownership is most common on municipal or First Nations land.


·      Common & Joint Tenancy

If more than one person owns a property, it is either Tenancy in Common or Joint Tenancy. The right of survivorship is the main distinction between these two forms. Surviving tenants in a Tenancy in Common do not have survivorship rights, while survivors in a Joint Tenancy do. Tenancy It is customary to include an individual's share of ownership in the estate and to address it in the will. Due to the nature of joint tenancy, the individual's share of ownership does not become part of the overall estate. So, if you want to control your share of a property through your will, the Tenancy in Common is the way to go.


Renting vs Buying


The desire to own a home is almost primal, and many would-be homeowners are driven by an irrational desire. It's easy to ignore the obvious signs that you'll be "house-poor" and risk your entire financial future to buy a house you can't afford. However, with careful planning, you can determine exactly what price range of residential property you can afford, and thus make an informed decision on whether to continue renting or buy your own home.


Benefits of Ownership


Buying a home has the unrivaled benefit of building equity. Although a large portion of the monthly mortgage payment goes towards interest, especially early in the term, some principal is still being paid off each month. Moreover, over the last century, residential property has always appreciated year after year, with very few exceptions. So, you are not only lowering your monthly loan payment but also increasing the value of your property.


No matter how long a tenant stays in their home, they will always have nothing to show for their years of monthly payments. This is the main factor that makes owning a home over renting seem like a no-brainer. But the big picture isn't so simple.


Benefits of Renting


When renting a home, you can specify the end date. However, if you own a home and have been transferred to another city, you may find that selling your home on a specific date will result in a net loss. The most important factor in deciding to rent or buy is always money. The ongoing costs of owning a home go far beyond the mortgage payment. Some of these include strata fees and land lease payments as well as taxes and levies. The biggest can be maintenance and repairs. Some homes can cost tens of thousands of dollars a year to maintain cosmetically and functionally. The landlord always bears this charge, and the tenant is unconcerned.


When your roof leaks, your pipes clog, or your electrical system fails, you could be looking at thousands of dollars in repair bills. There's no telling the landlord to fix it. You're alone. So, the decision to rent or buy is always based on the property. If you want to buy a charming century home, be prepared for astronomical maintenance and repair costs. However, if you buy a semi-new home built by a reputable major contractor, you may have years where all you need to do is maintain the property and avoid large unexpected repair bills.



What Can You Afford?


Many families get into serious financial trouble by underestimating their monthly expenses, which include mortgage, maintenance, utilities, taxes, and other household expenses. Housing payments should not exceed one-third of gross monthly income before deductions. Many experts advise that payments should not exceed one-quarter of gross monthly income to ensure peace and security.


The mortgage lender will calculate your ability to repay the mortgage loan using your gross and total debt service ratios. This calculation will determine how much the lender believes they can responsibly lend you. The down payment percentage is the most critical mortgage factor. Lenders will require a large down payment on the total purchase price. Traditionally, this down payment was between 20% and 25%, but with CMHC's help, it can be as low as 5% or even less in some cases.


Increasing the down payment is the best way to reduce ongoing monthly costs because not only will the total mortgage be less, but most lenders will allow for lower interest rates on lower mortgage loan-to-value ratios.


Closing Costs


Many inexperienced home buyers overlook the necessity of saving significantly for closing costs. These charges are always in addition to the down payment and moving costs, and are usually due at closing. These costs can range from hundreds to thousands of dollars, and some cannot be "rolled up" into the loan. They are due at closing in cash.


·      Taxes - The purchase price of a newly built home may be subject to a 5% GST. The total tax would be up to 13% if the HST is implemented in BC and Ontario. Various exemptions and rebates are available to reduce the tax's impact, but the costs remain significant. Previously owned homes are exempt from GST and HST.


·      Land Transfer Tax - It is equivalent to between 0.5 percent and 2 percent of the total cost of the home. Except in Alberta, Saskatchewan, and rural Nova Scotia, it applies to all Canadian real estate transactions. Those areas also have similar but smaller levies, such as land registration fees.


·      Property Tax - A buyer must reimburse the seller for the prorated unused portion of the property tax.


·      Appraisal Fee - In most cases, mortgage lenders will require a full professional appraisal of the residential property before approving it.


·      Survey Fee - The mortgage lender may also request a survey certificate to verify the property's boundaries and easements. If no current, acceptable survey is available, the buyer is usually responsible for the surveyor's fees.


·      Mortgage Application Fee - Banks, credit unions, and other financial institutions charge an application fee to consider a buyer's mortgage application. This fee is generally non-refundable if the application is denied.


·      Mortgage Default Insurance - If the mortgage loan has a high ratio, or covers more than 75% of the total purchase price, this insurance is usually required. This insurance covers any shortfall if the lender has to foreclose and the property does not sell for enough to cover the debt. This premium is usually paid overtime.


·      Fire & Liability Insurance - Lenders generally require that a property insurance policy be placed on the property to cover fire and third-party liability. Some lenders will also require a Life & Disability Mortgage Insurance policy.


·      Legal Fees - The transfer of ownership of the residential unit must be registered at the Land Title and Survey Authority Office by a lawyer or notary. These experts will charge fees in addition to the Land Title Registration fees and other expenses. A new mortgage loan will also require a number of fees and disbursements to properly register the documents.

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