Financing and Legal
Costs and Financing
One of the first steps in buying a new home is to take a realistic look at what you can afford and how you are going to pay for it. If you are like most people, you will probably have to finance your home purchase with a mortgage loan.
Remember that “affordability” isn’t about how much money you can borrow, but how much debt you are comfortable with and can manage long-term. Spending less than your maximum mortgage qualification provides you with more flexibility to deal with other financial needs that you may have.
Two Types of Mortgages
1. A conventional mortgage
where the loan amount does not exceed 80% of the property value, defined as the lesser of the purchase price or the appraised value.
2. High-ratio mortgage
where the amount borrowed is more than 80% of the property value (up to 95%). By law, a high-ratio mortgage must be insured against borrower default. The borrower pays a mortgage insurance premium (a percentage of the total loan amount) which can be added to the mortgage loan or paid in a lump sum in advance.
If you are likely to take out a high-ratio mortgage, your will also need to purchase Mortgage Insurance. The one-time premium for this insurance varies based on the amount of your mortgage and the total mortgage-to-price ratio. You can get current mortgage insurance premium rates online from Sagen and Canada Mortgage of Housing Corporation.
Where to Go to Get a Mortgage
Shopping for a mortgage is no different than shopping for any other product. Banks, trust companies, mortgage brokers and other financial institutions offer a wide range of mortgage options to finance your new home purchase.
You can start with your current lender or financial institution. Make sure you talk with someone who specializes in residential mortgages, as they will be in the best position to offer you advice and assistance. A growing number of lenders offer flexible business hours, including evening and weekend meetings, or will even meet at your home.
You can also arrange mortgage financing through a mortgage broker. Mortgage brokers, who have access to a wide range of lenders (e.g. banks, trust and life insurance companies, credit unions) and will "shop around" on your behalf for the best possible mortgage to fit your needs. Usually, you will not be charged a fee for this service, as brokers are paid a referral fee or commission by the lender.
Many home builders have established business relationships with a mortgage lenders and may be able to get preferred rates for their buyers. Don’t hesitate to ask New Home Salespeople if their company offers such a service, and which lender they recommend you talk with.
It is a good idea to have your financing in place before you begin looking for your home. That way you can negotiate arrangements with your builder in full confidence and without delay.
A pre-approved mortgage is preliminary approval by the lender for a mortgage up to a maximum amount, usually with a guaranteed rate for a specified time period (90 days and sometimes longer). If interest rates go down during that period, you will get the benefit of the lower rate. If they go up, your lower rate is locked in.
Pre-approved mortgage financing is simple to arrange, costs nothing and does not obligate you to go ahead with the loan, if you choose not to. The final mortgage amount and terms will be determined once you have reached a final agreement with your builder.
Your New Home Warranty
One of the great advantages of buying a new home is that it should come with a third-party warranty. A new home warranty protects you. As you look at homes and get to know the builders in your community, consider the warranty carefully.
Is a new home warranty mandatory?
In British Columbia, Alberta, Ontario and Quebec, builders must provide home buyers with a third-party warranty. In the rest of Canada, the decision is left up to the individual builder, but members of the Canadian Home Builders’ Association are required to offer a warranty as a condition of membership.
For home buyers, the choice is easy – you want to buy your home from a professional builder with a solid reputation, excellent after-sales service and a third-party warranty.
At a minimum, a new home warranty generally includes deposit insurance and protection against defects in work and materials as well as major structural defects. Additional coverage may include defects in your home's mechanical systems or building envelope. Some warranties include living expenses to offset the cost of temporary accommodations, moving and storage if you cannot occupy your home due to builder failure or warranty repairs. You may also be able to upgrade a "basic package" and get extended coverage.
Before you sign a contract with your builder ask them to explain the warranty provided and its coverage – what's covered and for how long, and what's not covered. Also verify that the builder is registered with a warranty provider; you can contact the provider by telephone or check their web site.
Before you move in
As your home nears completion, your builder will schedule a walk-through inspection/orientation of your home, also known as a pre-delivery inspection. Together, you and your builder will go through the home to verify that it is built according to plan, with the features and inclusions specified in your agreement. At the same time, you should take note of any imperfections and defects that require attention, down to the smallest detail such as a sticking drawer, a missing towel rack, a scratch on the wall and so on. Discuss with your builder how and when these things will be dealt with.
During the walk-through, your builder will explain how to operate and service the mechanical systems, and how to take care of the many components in your home to ensure long-lasting performance. Ask questions as you go – it's important that you feel confident and knowledgeable about your new home from the outset.
What if I run into a problem with my new home?
Keep in mind that "settling" is common during the first year and may result, for instance, in minor cracks or nail pops. If you have questions about your home, encounter any problems or need service, follow the process set out by your builder. In the event that your builder is not responsive to your needs, the warranty provider will ensure appropriate action, including mediation between you and your builder.
Warranty providers also offer detailed consumer information, including home maintenance, so visit their websites. Many warranty providers also have excellent advice on home buying, such as what to look for in a builder and the steps involved in home ownership.
The Purchase Contract
Once you have found the right builder and decided on the home you want, it’s time to work out the contractual arrangements. With large builders, this is usually done at the sales office, where you and the salesperson together work through the items that go into the sales contract. Alternatively, the builder may write up the sales contract on their own and present it to you for consideration. Or you may choose to have your lawyer prepare the contract.
Commonly referred to as the Agreement of Purchase and Sale, the contract is a legally binding document that outlines the terms and conditions of your purchase. There is no mandatory or standard contract form; many professional new home builders use forms adapted from model contracts developed by their provincial Home Builders' Association or new home warranty program.
What Should the Contract Cover?
The contract will describe the lot, the model, the selected upgrades and other obvious items such as the price and financing terms. In addition, it should include information on restrictions and obligations that may affect your rights and responsibilities as a home owner, such as:
- Rights of way or easements registered against the lot. For instance, will there be a fire hydrant on your lot, or an electrical box?
- Subdivision requirements. For instance, there may be restrictions on the number or kinds of trees that you may plant. Or restrictions on parking commercial vehicles, trailers and boats or performing general automotive maintenance in the driveway. Or on installing a satellite dish.
- Municipal bylaws that regulate activity in the neighbourhood. For instance, are there any restrictions on nanny or in-law suites, home businesses or storage buildings?
All of the above should be covered in "Schedules" which form part of the Agreement of Purchase and Sale.
Making the Offer
Often, the Agreement starts with your offer to purchase the home from the builder. Once you sign the offer, it is binding on you, i.e. you have agreed to all the terms and conditions set out. If your builder accepts the offer and signs the Agreement, it becomes binding on both parties. Similarly, if your builder presents you with a contract, it is an "offer to sell" that becomes legally binding on both parties once you accept.
When you are not dealing directly with the builder, the sales representative may not be able to "close the deal" on the spot without a review by the builder. Approval or counter-offer is usually quick. However, you may consider adding an irrevocable date to your offer—a deadline for the builder's response, after which your offer is no longer valid.
Before signing anything, you need to carefully review the contract document. Take your time and make sure that all points are covered and that all Schedules are attached and noted in the Agreement.
It is also recommended that you have a lawyer review the Agreement of Purchase and Sale before you sign it. Alternatively, you can make your offer conditional on a favourable review by your lawyer. It is sometimes wise, and less costly, to agree with the builder on price and terms before involving a lawyer. (If you cannot reach an agreement with the builder on these fundamental points, there is no need to pursue the contract any further.) This condition, like all other conditions, should be written into the main body of the Agreement of Purchase and Sale, or attached as a separate Schedule with a brief notation in the main text.
From Offer to Contract
The process from first offer to final agreement can be quick, or it may involve several steps over a longer period of time. It can be an intense time, but bear in mind that you and the builder are aiming for the same goal.
Your signed offer is presented to the builder who, by the irrevocable date, will either:
- accept it as written. His/her signature on the offer results in a contract that is binding on both parties. Or,
- counter your offer (by changing the price, terms, closing date or other points). Changes are made directly in the Agreement of Purchase and Sale document. A new irrevocable date is set, by which you must respond to the builder's offer, failing which the offer is no longer valid.
If your builder makes you a counter offer, you may decide to accept it or you may wish to re-counter.
This process continues until an agreement has been reached between you and your builder, or you determine that an agreement cannot be reached.
If your accepted offer was conditional on financing, you now need to apply and receive approval for a mortgage within the time specified in the contract. If you are unsuccessful in obtaining the necessary funds, the contract is no longer valid or binding, and your deposit will be returned to you in full. The same process holds true for all other conditions written into the contract.
Bring a copy of the Agreement to your lawyer. When it includes a condition for a legal review, the lawyer may suggest changes to the wording and the clauses of the contract to further promote your interests. The builder should be notified immediately of these recommendations, allowing enough time for a review by the builder and/or the builder's lawyer before acceptance or possible counter.
Once your offer has been accepted and all conditions have been waived, you have a firm contract.
The Role of Your Lawyer
You need to arrange for a lawyer to look after the legal aspects of buying a home, or a public notary if you buy in Quebec. It is a good idea to contact a lawyer early, even before you actually begin to look at properties. Your local and provincial bar association can refer you to a lawyer who specializes in real estate. Ask for an estimate of costs in advance so you know what to expect.
Your lawyer will represent your interests throughout the process of buying your new home:
- reviewing the Agreement of Purchase and Sale
- advising you during the counter and re-counter process of the offer
- making sure that you get clear title to the property and verifying, preparing and executing transfer documents, deeds and your mortgage
- registering the change of property ownership and obtaining legal possession for you.
What are Change Orders?
Signing a contract to purchase your new home is a major milestone. However, this may not be the end of your decision-making. It is not uncommon for homeowners to continue to decide on additional items for weeks afterwards.
For instance, a visit to the lighting supplier may trigger a desire for a fixture not included in the contract for your new home. Or you may decide to include an optional fireplace after all, or make other minor changes not reflected in your contract.
Professional new home builders will attempt to accommodate any such changes or additions you want to make before construction of your home begins, or even when it is in progress. But before you make any decisions, talk with your builder.
Sometimes even small changes can have a significant impact on cost or scheduling, particularly if construction is already under way. It may mean changing some aspect of the construction—for instance, a change in floor coverings may call for a different sub-flooring. Changes can also result in delays. A professional new home builder works with a tight construction schedule and subtrades who move from one task to another according to a timetable.