Questions to Ask Before Buying a House
August 1st, 2017
Buying a home may be the largest, most satisfying financial transaction of your life. Finding the right house and getting a good deal, however, can mean the difference between living in your dream home or in a dwelling that consumes too much of your income, leaving you with little money to enjoy your house.
Here are four important questions to ask before you buy:
1. Is the house worth the asking price? Keep emotion out of the equation or you may pay too much. Ask your real estate agent for a comparative market analysis (CMA), which is a recap of real estate activity in the area. It provides a sort of snapshot in time, taking into account three to ten properties of similar size and amenities near the home. This report also gives details of square footage, total room count, and the number of bathrooms and bedrooms for each house. The properties in the report are either currently listed for sale, have pending sales, have recently sold, or were listed but have been withdrawn from the market.
CMAs are helpful but they have one major flaw. They do not take into consideration the condition of the houses listed. That’s why the completed sales are generally the most important portion. Completed sales represent not only what sellers think their properties are worth, but also what others actually paid for them. Looking at the list of expired listings is also revealing: It may indicate that asking prices that were too high. A CMA may not differentiate between actual sales, pending sales, and expired listings, so ask your real estate agent for these details.
On a more personal level: Before shopping, define what value means to you by making a list of the features you want, such as a two-car garage and mature trees.
2. How much house do you need? You should buy as much house as you need and can afford. But keep in mind that the larger the home, the more you will pay to insure, heat and cool it. Don’t forget to plan for the cost of repairs and maintenance, which, depending on the age and condition of the house and the harshness of your climate, could be one per cent to three per cent of its value each year.
Also, if you make less than a 20 per cent down payment, by law most Canadian financial institutions will require you to buy mortgage insurance. The federal government guarantees housing loans through insurance from the Canada Mortgage and Housing Corporation (CMHC) and from private mortgage insurers. The cost can range from 0.5 per cent to 2.90 per cent of your mortgage amount.
From the standpoint of lenders, they generally want you to spend no more than 32 per cent of your gross monthly household income on combined housing expenses. This includes principal and interest payments, property taxes and utilities. It also includes 50 per cent of condominium fees and the entire annual site lease if you are a leaseholder. Bear in mind, however, that you should also leave room to contribute toward such future life goals as retirement and college education for your children.
3. What if a house has problems? Sellers are supposed to disclose any known problems. But even honest sellers may be unaware of latent flaws in their homes. That’s why it’s important to hire an independent home inspector. Ask friends and relatives if they know a good inspector, or visit the Canadian Association of Home & Property Inspectors® (CAHPI®) Web site for a directory. A home inspection will cost between $150 and $500.
An inspector performs several functions, including:
- Examining the heating, cooling, electrical, and plumbing systems;
- Checking the foundation, roof, doors, windows and siding to ensure the structure is sound, and
- Determining if the lot is graded away from the house to allow drainage in the right direction.
Depending on the home’s features, you may need a specialist to examine a pool, septic system, or private well.
The inspector should be able to tell you what repairs are necessary and what may soon need replacing, along with cost estimates. That allows you to decide if you can afford the house or not, and may serve as a bargaining chip when it comes to price.
In addition to a standard home inspection, your lender may require a pest inspection to ensure the home is free of termites and other damaging pests. Many buyers include the right to cancel their purchase agreement pending the results of the pest inspection.
4. Have you budgeted for all the costs? Once you find a house, don’t forget to set aside enough money for loan-related and closing costs. These costs depend on your lender and where you live, but in general, they can amount to between two per cent and six per cent of your loan. Ask your lender for a Good Faith Estimate of the costs you’ll pay. Also, ask your real estate agent for a list of any other expenses. Here is a checklist to help you keep track of those costs:
1 For a typical residential property costing less than $500,000.