You’ve finally saved up the downpayment for your first home. But be warned: purchasing your dream home could become a nightmare if you’re not prepared.
“Buying a home, some would say, is the largest purchase you’ll ever make in your life so it does justify a large amount of research and rigour before jumping in full throttle,” says Michelle Snow, associate vice-president of retail products at TD Canada Trust.
Here are some potential pitfalls to be aware of so that your purchase doesn’t come back to haunt you.
Phantom cash: You have the money to buy a home; but is it ready to go and in one place?
With e-transfers and cashless transactions being the norm, buyers could take for granted the time it might take to move money from one account to another or to turn immaterial numbers into a tangible cheque or bank draft.
Mike, a 37-year-old Torontonian, spent 24 hours in panic when he and his wife bought their first home together last month. They put in a bully bid on a house and were surprised when the sellers accepted. This meant that they needed to put down a $30,000 deposit within 24 hours to seal the deal.
Mike’s plan was to take half of the money out of his PC Financial savings account and borrow half from his credit card. PC Financial told him that it would take 24 hours to move his money from his savings account to his chequing account and then one to three days to produce a cashier’s cheque.
“It was this total panic because you forget how much time it takes actually to turn that money into a piece of paper,” he says. Luckily, his bank was able to produce a cashier’s cheque for 3 p.m. the next day, two hours ahead of his deadline. “If you are looking for a house you’ve got to have your deposit ready to go.”
If you deposit a personal cheque in your account, it can take anywhere from four to five business days to process and appear in your account, a TD representative says. An electronic money transfer takes one to two business days.
Closing nightmares: The same rules apply when your closing date is approaching. If you don’t have the money ready, you could be in default, forfeit your deposit and face a lawsuit.
A lot of first-time homebuyers use the Home Buyers’ Plan to take money out of their registered retirement savings plan so speak to your financial institution to ensure timely access to your money, advises Mark Weisleder, a Toronto real estate lawyer and author.
My husband and I foolishly waited too long to transfer money from different accounts into one account when we bought our first home. We brought a certified cheque from one of our banks to another financial institution and were told that there would be a hold on the funds for 15 business days because it was in U.S. currency. If our parents had not lent us the difference so we could close on time, we would have needed to ask the seller for an extension.
An extension would have cost us at least $250 to cover the seller’s lawyer fees and any mortgage interest on the property that the seller would pay during the extended period. The seller might have also asked for an additional deposit that would be forfeited if we couldn’t close on the new extended closing date.
Pre-approval perils: In bidding wars, buyers sometimes do not include a condition on financing, hoping their pre-approval will be enough. But a pre-approval is not a full approval. Even if a lender pre-approves you, if it believes upon appraisal that the house is not worth what you’ve paid, the lender could just cancel the loan.
“Let’s say you went to a bank and you got approved for $300,000 then bought a house based on that approval. The bank is not going to give you $300,000 if they think you overpaid for the house,” Mr. Weisleder says. “I’ve seen cases where on the day before closing, an appraiser goes out there for a lender and they say, ‘Sorry, we’re not satisfied. We’re not giving you the money.’”
If you’re working with a mortgage broker, make sure you have satisfied all of the lender conditions as soon as possible. Also, find out when the lender does its appraisal. Mr. Weisleder recommends having a cushion of up to 5% of your purchasing price available in case the lender decides to loan you less money.
Unexpected frights: Buyers in hot markets are also waiving home inspections in desperate bids to win homes. However, unseen problems could be lurking in the walls, the attic or basement, etc. “It’s a terrible risk to buy a house without an inspection,” Mr. Weisleder says.
There could be costly issues such as worn-out shingles, water seepage in the basement, dying furnace or water heaters, termite damage and asbestos in the insulation.
A family that moves into a new home in the summer could get a nasty surprise in the winter when the furnace doesn’t work. “A furnace replacement is anywhere from $3,500 to $5,000 and there’s a health issue there because if a furnace is not working, it produces carbon monoxide,” says Don Ruggles, owner of Sherlock Inspection Service in Victoria.
He’s seen the owner of a small house pay $15,000 to get asbestos removed. He’s seen people have to re-shingle the roof of their three-bedroom bungalow for at least $7,000.
Meanwhile, a home inspection can start at about $400. “Are you going to put your whole investment at risk for $500?” He adds.
If you think you’re going to enter into a few bidding wars, consider working out a deal with a home inspector to inspect a number of homes for a discount, Mr. Weisleder suggests. If you’re going to rely on the seller’s pre-existing home inspection report, make sure that it’s from a reputable home inspector.
At the very least, go and walk around the house with a knowledgeable or handy friend before you put in the offer. Peek under the area rug to check for cracks. Lift the microwave to look for holes. Open and close all of the windows. “When there are recent renovations, sometimes they’re just covering up problems,” Mr. Weisleder says.
Talk to the neighbours and ask them: “Did you see any repair trucks here in the last year?” Then ask about the neighbours on either side of the property because you can’t easily exorcise a horrific neighbor.
If something goes wrong after you’ve purchased the home, you could sue the seller if you believe he’s deliberately concealed defects; but you want to avoid that nightmare if you can.
Disappearing acts: “Some people are wonderful when they sell a house and some people are just terrible,” Mr. Weisleder says. “Some sellers take out all of the light bulbs. I’ve had someone take out the shed from the backyard. The funniest one I ever had was a lawyer was buying a house and they took the toilets out.”
The lesson? Mark everything down that you expect to receive and include it in the contract under the fixtures and chattels clause. “I’ve seen people argue about closet organizers, TV brackets, window coverings, chandeliers.”
The chill of closing costs: Don’t let yourself get shocked by closing costs that you didn’t budget such as the home inspection ($400), lawyer fees ($1,500) and land-transfer tax (for a $300,000 home in Toronto, the provincial and municipal land transfer tax could be more than $5,000 — but you could be eligible for a rebate as a first-time homebuyer). Also consider moving costs, property tax adjustments and property insurance (maybe $450 a year).
A first-time homebuyer might understandably be caught off guard by the extra costs associated with buying a home, Ms. Snow says. “Most people are trying to save as much as they possibly can and load it into their downpayment to save on default insurance.”
If you’ve under-budgeted for these costs, she suggests that you speak to your lender or financial institution about the possibility of getting an unsecured line of credit to help cover the extra fees for a short time.
Castles of doom: Just because a bank representative or online calculator has told you what you can afford to buy, it doesn’t mean that you should max out your borrowing. You don’t want to ever struggle to make your mortgage payments. As a general rule, the total monthly housing costs (mortgage payments, condo fees, utilities, etc.) should be no more than 32% of gross household monthly income.
Sit down yourself or with a planner and create a projected household budget; try creating a few budgets for different scenarios. Consider your other plans: how much do you want to contribute to retirement or have set aside for vacations?
“You have to ask yourself: how much will you have left over of your paycheque on a monthly basis to live the life you want to live,” Ms. Snow says. “It’s unique for each individual but asking yourself the questions will help you make the right decision.”
You should also consider the ramifications of rates rising in the future. Make sure you have contingency plans in place in case of emergency: loss of job, illness, etc. A friend of mine purchased a condo and when maintenance fees suddenly spiked, she could no longer afford her monthly bills and is now looking to sell.