Buying your first home is one of the most important decisions you will ever make. Stepping forward into this significant rite of adulthood can seem daunting and somewhat intimidating but careful preparation ahead of time can help you be confident when it finally comes time to buying your first home.
Follow these steps and you'll definitely be ready when you enter the market as a first-time home buyer.
Figure Out What You Can Afford
Buying a home isn't like eating a meal at a fancy restaurant. You don't calculate how much cash you have on hand and go forward from there when buying a home. You'll need to calculate what you can afford to pay on a recurring basis.
The simplest formula for calculating your home buying budget is to multiply your yearly annual income by a factor of three. If your gross annual salary is $80,000 then your initial target price for buying a new home will be around $240,000.
Another important consideration is your monthly mortgage. Each mortgage has its own interest rate and other factors, but your mortgage payments will be broken down into how much you will owe each month. Roughly speaking, you want to keep your monthly payments under a third (33%) of your take-home income, or as close to that as possible.
Some experts believe that 28% of your monthly income should be the ceiling for mortgage payments but what is absolutely essential is that you never cross the 50% line with half your income going towards just having a place to live. If your gross monthly income is $4,000 then your ideal monthly mortgage payment should be between $1,120 and $1,320 (or even less!).
Another important factor to consider when figuring out what you can afford is to add up how much cash you have on hand right now. Simply put, the more cash you can put towards your new home, the more house you can afford. Most housing experts recommend having a 20% down payment on hand as well as 3% of the house price to cover closing costs.
However, you don't NEED to have 20% as a first time home buyer.
There are a wide variety of programs available for first-timers and you only need to have a minimum of 5% for your down payment. Keep in mind: you will need to get mortgage default insurance if your down payment is less than 20%. The cost for this is added to your monthly mortgage payment.
Start Saving For Your Down Payment
There are a lot of ways you can save money; some you know and some you might not have thought of.
One of the most important things you can do is to pay off debt. Not only does this increase your cash flow, but it also helps with your credit rating. It's a win-win. To do this effectively, make only the minimum payment on all of your debts except for your smallest debt. Put all available cash towards paying that debt off as fast as you can. Then move onto the next smallest debt and put all available cash towards that one, PLUS the minimum payment amount from the debt you just paid off. Keep moving forward and repeat the process. The key to doing this successfully is to avoid accumulating more debt while you're going through the process.
As we mentioned above, look into first time home buyer programs like using your RRSP's in conjunction with the First-Time Home Buyer's Tax Credit program.
Something else to keep in mind is to cut costs. There are many ways to do this. The extra money you save buy not buying that coffee every morning or eating more meals at home should go into a tax-free savings account. Bonuses and commission cheques from work should go into this account as well. This is "extra money" you weren't expecting or planning on so it's easier to put it into that savings account immediately and pretend it didn't exist.
Shopping Around for the Right Mortgage
Now that you've got a rough idea of how much house you can afford and how much you can safely spend on your monthly mortgage payments it's time for the next step.
You need to find the right lender.
At Connect Homes, we have a list of preferred vendors to help you get started. They will walk you through every step of the way (on the financial side of things!) and ensure you understand exactly what all that paperwork means.
Before you start looking at actual houses, you can start the process by getting a mortgage preapproval. Note: a preapproval is different from a prequalification. Getting prequalified is pretty simple - there's no credit check and you get a general idea of a number you MAY be approved for. A preapproval, however, is more involved. You have more paperwork, along with a credit check but you get a more specific amount you ARE approved for, and that's good for 90 - 120 days, depending on the terms.
IMPORTANT: if your mortgage approval expires, you have to start the whole process over again and that means another credit check which can negatively impact your credit score, so timing a preapproval is important.
Now, you don't have to get a pre-approval before you go shopping. It simply speeds up the process when you find the home you love and allows you to save time by not looking at homes that don't fit within your budget.
One key factor in mortgages? The way the interest rates are calculated. Some mortgages come with a fixed-rate mortgage in which the interest rate will remain unchanged throughout the duration of the loan. Other mortgages come with a variable interest rate in which the interest rate can go fluctuate, depending on the market and the conditions of the loan.
If you're looking to build a home then it's really important to speak with the builder's mortgage specialist because you will require a different kind of mortgage such as a draw mortgage. This type of mortgage is designed so that funds are released at certain points throughout the build process.
Decide What House You Want Before You Go Looking
Almost nobody ever gets to buy their ideal dream house right out of the gate. Even before you go looking at actual houses, write a list of what features you consider absolutely necessary. Start with how many bedrooms (and bathrooms) you need and work your way down your list from there.
Another important factor to consider is location; not just the neighbourhood but also proximity to schools and work. If you're planning on having children in your first home, investigate the local school district and see if it meets your needs. You might also want a certain amount of garden space or certain architectural features. It's also important to decide whether your first home will be "move in ready" or whether you are comfortable with buying a new home that will take some time to be built.
Don't worry too much about aspects of the house that you can change yourself, such as interior colour, the landscaping, or outdoor features like a deck or a gazebo.
Let the Hunt Begin!
The final and most enjoyable step is actually hunting for your new home! Take a look online - there are TONS of resources available! New communities often have a website with details of the features and amenities available (both current and future developments). You can also tour some showhomes to get an idea of what you really like. You can also download buyer's guides and other helpful content to assist you with your research.
Once you've followed all of the above steps, you'll be feeling confident and ready to find the right house for you. You'll know how much you can afford, which lending institution will offer you the right loan money for your first home, and how much living in your new home will actually cost every month.