In today’s economy, every penny counts, and when it comes to buying your first home… well, that’s a lot of pennies! Today’s buyers are seeking solid financial investments. They are looking for the best mortgage options, environmentally-friendly homes, energy efficiency, and well-constructed homes for their families.
This particular generation of buyers relies on the internet for all the resources they feel will help in the purchasing process. However, once a buyer starts looking, the amount of conflicting information out there can be mind-boggling!
Buying your first home is exciting- it’s the first step to freedom from the rental world of annoying landlords. Buying a home offers a sense of security, and an opportunity to make your own choices in style, color, location and landscaping. It’s a place to grow, a place to relax, and a place to call your own. Knowledge is the key to success, but without proper knowledge, things can unexpectedly arise and hinder your home buying experience completely. If you’re in the market for a new home, take a moment to ask yourself a few key questions about what you should be looking for, how much you can comfortably afford to spend, and whether homeownership is right for you at this time.
What Do I Need To Know About Buying A New House?
Many first-time buyers get so excited about the prospect of buying a home, that the first thing they do is start looking online the excitement builds as they view home after home. Going to open houses is even more exciting. Prospective buyers tend to get wrapped up and emotionally-involved in picking out what features they like and the ones they don’t, and then it happens… they find the home of their dreams.
But is this the best way to start out? Professionals in the real estate industry would suggest that this is one of the worst approaches to home buying there is. Why? As a home buyer, it’s heart crushing to find out the home of your dreams is not a reality for your budget or financial buying power. Any home you see after this point is sure to seem like a disappointment. In order to avoid this kind of emotional defeat, first-time home buyers must start out with a more realistic approach. One of the very first things to be addressed is your financial plan and financial abilities.
1. What’s My Budget?
Run the numbers! Conduct a financial plan to determine whether you can really afford to take the plunge into the home buying experience. Take into account every aspect of your current debt load. Pull out your bank statements and have a look at what the true numbers are as far as spending habits. Many home buyers insist that they will not squander any extra funds if they buy a home. The reality is that you don’t want the house to run your life… you want the house so you can have a life! Many first-time buyers make the huge mistake of buying more house than they can afford. This may sound ridiculous, but it’s true. The lender looks at the debt ratio, not your lifestyle habits. There is nothing worse than giving up everything you love to do in life just to own a house. In this industry, we call that “house poor”. You may own the house, but you can’t afford to do anything else. No trips, no eating out, no shopping, etc. I think you get the point.
Once you can be honest about your financial spending habits, decide on a monthly payment (range) that you can comfortably afford each and every month without hardship. Keep in mind property taxes, house insurance and utilities. Once you have decided on what is realistic and what is not, there is the question of what’s in your savings account. When applying for a mortgage to buy a home, the lender will require a down payment.
As a general rule, to help you calculate your total monthly housing costs (including mortgage payments, property taxes and heating expenses) the total should not exceed more than 32% of your gross household monthly income. As well, your total monthly debt load (meaning your housing costs plus any car loans, credit card payments, personal loans, line of credit payments or other debts) shouldn’t exceed 40% of your monthly income.
The CMHC has a Mortgage Affordability Calculator on their web site. This and other tools can help you determine the maximum home price you can afford, how large a mortgage you can borrow, and what your future monthly payments will be. If your down payment is less than 20% of the value of the home (which is the case in over 40% of new buyers) mortgage loan insurance helps Canadians buy a home with as little as 5% down payment in order to make the purchase more affordable.
Now, here’s where many first-time buyers go wrong. They may forget to include the additional fees associated with buying a home. While knowing your monthly limits in order to cover the mortgage payments is very important, there are also costs associated with the purchase itself. When assessing your amount required as a down payment, don’t forget that there are many up-front costs, which may include a contract deposit, appraisal fees, legal fees, home inspection fee, title insurance, land registration fees, water or septic tests, house insurance, etc. These fees will have to be paid above and beyond the cost of the down payment. After you have completed all these calculations, if the numbers don’t look encouraging to your budget, wait a little longer and pay off some other loans, save for a larger down payment, lower your target home price, or take a look at your budget to see where you can spend less.
2. Arranging Financing
All financing starts with a credit report. Get a copy of your credit report if you haven’t done so in a while. Your credit score is a number that illustrates your financial health at a specific point in time, so you need one to reflect where your credit rating stands of today. It will also indicate how consistently you pay off your bills and debts.
Your credit score is one of the biggest factors that lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved in the first place, as well as determine what interest rate and payment you will be granted by the lender.
To find out your credit score, contact Canada’s two credit-reporting agencies: Equifax Canada and Trans Union Canada. These agencies can provide you with an online copy of your credit score as well as a credit report, which is a detailed summary of your credit history, employment history and personal financial information. If you find any errors in your report, notify the credit-reporting agency immediately and the get the errors rectified prior to applying for a mortgage.
If your credit rating is not looking so good, you may want to improve your credit score. This can be done by paying your bills on time and in full, paying out existing debts as quickly as possible, and never breaching the limit on your credit cards. If you can, try to reduce the number of credit card or loan applications you make. Once your credit score has improved, you can move on to the next step of working with your mortgage professional to obtain a mortgage that works for you.
3. Get Pre-Approved For A Mortgage
Although you may feel confident that you know what you can afford, the lender may have a different number in mind… Pre-approval will verify exactly the range of your buying power. There is nothing worse than finding the house of your dreams, just to find out later that you can’t afford to buy it. Start by finding a lender who you feel comfortable dealing with, whether a bank, credit union or mortgage broker. There are many options out there, and the internet is full of financial and business information. The trick is to find the lender who offers the best possible rates for your own personal financial position. The bank you have dealt with all your life may not turn out to be the best option, so shop around and compare rates and services before committing to a lender on paper.
When choosing a mortgage, you will have to select between a wide variety of different options. This may include the following: the amortization period (the length of time to pay off your mortgage); the term (the length of time the interest rate will remain in effect); the payment schedule (when each payment is due- monthly, bi-weekly, weekly, etc.); open or closed mortgage (when you can pay it out and what penalties apply); and whether you want a fixed or variable rate of interest (same payment each month or payment changes with the rate changes).
Your lender or mortgage broker can help you decide which options are the best choices for your financial position. Once again, CMHC’s has mortgage calculators on their web site that can help you compare a few options, and show you how much your payments would be given different options.
Depending on your income, you may want to consider getting a smaller mortgage rather than the maximum amount for which you qualify. As we discussed earlier, you don’t want to be house poor! If your budget allows it, you can consider reducing your amortization period to pay off your mortgage sooner.
Finally, when choosing a mortgage, always keep in mind the impact of increased future interest rates on your ability to make your monthly payments. Most first-time buyers prefer a closed mortgage, meaning that the payments won’t change, effectively making monthly budgeting much easier over the long-term.
4. Finding An Agent
Insider Tip: You may find this portion of the article a bit odd given that we are a For Sale By Owner Company, but we would like you to know that “it does not cost a buyer money to use a Real Estate Agent to BUY a home… only toSELL.”However, not all FSBO’s will want to deal with Agents. So the decision is yours and yours alone.
Everyone complains about Agents, but the real estate industry is no different than any other industry out there. Just like mechanics or home builders, or dentists, some are honest, dependable, and trustworthy, and others not so much! When working with Agents, it is best that you are well aware of what these professionals can do for you and why you need to choose the best one. Agents are judged based on their achievements and experiences, thus you can easily find a list of top agents in a particular area. Only those that are members of the National Association of REALTORS® [NAR] can legally call themselves REALTORS® and use the trademark logos associated with the real estate industry. As well, agents registered with NAR are required to follow a strict code of rules and ethics in their field.
The code of ethics states that throughout any kind of transaction, the Agent has the responsibility to represent a side of the game- either the buyer or the seller, for a particular real estate property. That said, what really matters to a client is honesty, integrity, and above all else, experience. Finding a reputable agent can be done by talking to friends and family; a personal referral from someone you know can be more reassuring than picking someone’s name off of a yard sign. The agent’s personality is important as well, since you will be spending thousands of dollars on a home and spending lots of time with this person. Get to know them! Interviews are the best way to accomplish establishing this relationship. When it comes to selecting experience, interview at least three agents. Ask tons of questions like these:
How long have you been in business?
How many homes have you sold in this area?
What help can you offer me as a buyer?
Do you have references?
Can I contact any other home buyers you’ve dealt with, etc.?
Once you have decided on your real estate professional, the rest will fall into place. You are pre-approved, you have professional representation, and it’s time to start house shopping. Happy House Hunting!
For more on buying, check out the Canadian Home Find Buyer’s Guide ...