With RRSP season out of the way for the time being, and with all my money spent on the recent cruise it seemed somehow fitting to talk about things I have already spent my money on for a while. Since buying a house was, at the time (before the wedding), the single largest and most complex financial undertaking we had gone through, I can relate to the fact that some people find the prospect daunting. Honestly, I think it could stand to be a little more daunting, and that there are people buying houses out there that really shouldn’t be, but that’s exactly the kind of talk you’d expect from a guy who’s already on the in-list, and is just trying to keep out the riffraff. I don’t know why you people keep reading, honestly.
Buying a house is much more complicated if you aren’t rich. And the less rich you are, the more complicated it gets, so the first piece of advice is that if you can be rich before you buy, it will really help you out, and you should totally do that first. Even if you aren’t rich though, the process is straightforward enough and can be really happy-making if:
- You can actually afford it
- You build a good team
- You keep some perspective
Don’t DO NOT Don’t buy a house until you’re okay with each of those. Let’s talk about them in turn.
Can you actually afford it?
It’s getting pretty cheap to buy a house these days. Used to be you needed to actually pay for the house, but now a whole lending community exists to get you there quicker. More recently, it used to be that you needed at least a 25% downpayment to prove that you were capable of managing your money. Then the CMHC was created (in Canada) to allow you to put as little as 5% down. The banks don’t like the idea of a 5% downpayment in terms of risk calculations, but the CMHC charges you a fee and then promises to insure the mortgage for the bank so that if you turn up broke, the bank is not out the money. Now even the 5% bar is being removed (or at least, they no longer insist it not be borrowed money, which is basically the same thing – downpayments can come off credit cards now.) All of this lets a responsible home buyer get in sooner which is great, but it makes it easier for people who don’t really have the money too, so let’s run some numbers.
First off, have at least 5% for the downpayment without borrowing. Honestly, if you can’t save that much (and believe me, I know it isn’t easy to save tens of thousands of dollars) you shouldn’t be buying yet. Think of it as a cooling off period, to make sure you’re really ready for this. The lawyer will cost $500-$1000. A home inspector will be about $250. Closing costs will be 2-3% of the closing cost, but read that as 3% not 2%. Home depot will be at least $1000. Read that again, I’m utterly serious: if you spend less than $1000 at home depot in the month after buying the house, you don’t own houses the way I do. Figure that the cost to move, and to restock your fridge, and to forward your mail, and to set up your new phone and internet and who knows what else will ballpark to between $300 for a small move in family minivans to $1000 for a pro move from an honest company. Maybe more, you know best here. Add it all up and you get about 8% + $2500-$3000. Wouldn’t you know it, we bought our house for $224k a couple years ago, and we spent about $20k – that’s 8% + $4000. We spent well over $1000 at Home Depot, I was being conservative.
If you can’t get there, save longer. Don’t tell yourself you can go thin on some of this, or do it on credit cards – saving this amount – at LEAST this amount – is how you know you’re ready to buy a house.
Build a good team
The good news is that you’re not buying a house alone. There are people out there who want nothing more than to help you organize and understand the process. Why? Because people spending hundreds of thousands of dollars tend to get something akin to snow blindness when it comes to any amount under $1000, and that’s a profitable place to be. These people are not all hucksters though, and they can make your life easier. Your core team consists of 2 people: the real estate agent and the lawyer, but I would hasten to add a third: the mortgage broker.
The real estate agent is easy when you’re buying your first house, because you don’t pay her a dime. Indeed she should be taking you out to lunch (ours bought us a dishwasher!) Your agent (the buying agent) and the agent of whomever’s house you buy (the selling, or listing agent) work out a percentage commission based on the closing price, but the seller is the one who foots the entire bill. Pick an agent with family ties, pick an agent who knows your target area, pick an agent with a friendly sign, whatever: a good agent can make a big difference in walking you through things, but don’t approach them with fear – you are a walking commission and are holding all the cards – there are lots of agents out there. When you settle on an agent, they have you sign a form basically saying that they are your agent, and that you won’t go buying through some other agent, and all sorts of other interesting but predictable things. So far so good.
Your lawyer is someone you do have to pay. He costs about $500-$1000 most of the time, give or take (though if there is give and take, the reader is left to guess which of you gives, and which takes.) The good news is, he handles a lot of crap for his fee. For one thing, he writes up your actual mortgage. This ought to be a $29.95 form at Office Depot, but regardless, it’s not all he does. His job is to basically guarantee that when you move in, everything is squared away: no one else has debts secured by your house, the hydro is paid up, the gas is paid up, the property taxes for the first X% of the year are paid up, everything. He also handles all the paperwork in terms of preparing deeds, paying land transfer taxes, fun times. He doesn’t do this out of the goodness of his heart – on top of his fee for his own work, he will take your money for any bills/taxes/fees you have to pay, and he will take the seller’s money for any outstanding bills that need paying before you take possession (so that it’s not your problem). He also gives you the keys, because he is the third party that everyone trusts.
A mortgage broker is a no brainer. A mortgage broker gets you a mortgage on the basis that when SHE shows up to talk to a bank, she’s got 50 potential mortgages under her arm, and has a much nicer negotiating position. Banks are always willing to give a little bit more to get themselves $15 million in mortgages than they are to get $300,000. The banks are so overjoyed, in fact, that they pay the mortgage broker a commission; so in addition to getting you a kickass rate, mortgage brokers don’t cost you a dime. They also simplify your life by managing paperwork and are deliciously flexible when helping you find the mortgage you want. Lots of people choose to negotiate with the banks directly, and if you enjoy that then by all means do so. It is even possible to get rates as good or better than a broker on your own in some cases, but you’ll be doing more footwork and more haggling for maybe no gain or worse. For a first house, a mortgage broker is, as I say, a no brainer. With these three people helping you out, the paperwork gets a lot easier and you’re much less likely to go horribly wrong.
Keep Some Perspective
It’s easy to get wrapped up in the process and lose track of some basic facts, so I’m going to mention 3 of them here as a quick reference, because this will not be a happy-best-wish experience if you don’t keep your head on tight.
FACT: The banks are not evil. Neither is CMHC. Without them, you couldn’t buy your house. Maybe nothing about home buying sickens me more than the ungrateful whiners who are sick of the bank wanting money and CMHC wanting fees, all the while forgetting that they’re buying a house, THEIR HOME, with 95% borrowed money. Of course the banks are in this to make money, but any time you decide you don’t need their money, feel free to save up that 100% downpayment and buy the house flat out. In the meantime cut the crap and recognize that you are buying this house solely through their existence.
FACT: No one wants this house more than you do. A good team will manage their respective duties well, but it’s on you to watch the calendar and cross the t’s. Your team might also not talk to each other much, so if your lawyer needs something from your agent, you are their common point of contact. Be near a fax machine.
FACT: Lots of people want you in THIS house more than you do. The seller, your agent, their agent, the mortgage broker, the bank, and the lawyer, basically everyone involved in this transaction only gets paid when you buy a house. Agents have a hundred tricks to “help” their clients close a house — showing a bunch of crappy houses first so that you pounce on the first decent ones; showing you listings slightly outside your price range which, naturally, exceed the expectations you’ve set based on the houses in your price range; the list goes on. A showing is just a showing. Even making an offer, you often include conditions so that you can back out for a couple days afterwards if things don’t feel right. Your agent will definitely get annoyed if you waffle for months, but you have to live in the house you buy – be sure.
I’m hoping this post demystifies home buying a little bit, but I know I haven’t gone into the details around picking a house, or what the offer process is like, or how closing day works. The post is probably already too long as is, but those other details are ones we can cover after the basics. The basics are: have enough money, build a team that helps keep things smooth, and hold on to your head. Buying a house is not only a lot of fun, it’s a ticket off the rent treadmill and for many people, the biggest investment they ever make. Enjoy it, it truly is a great feeling to move into the house that you yourself own.