Whether buying as a primary residence or investment, it can be one of the biggest finanical decisions you ever make, so where is the smart place to start?
1. Budget planning
If you have ever planned to make a big purchase you know that budgeting and saving are two key factors. When buying a house, it is no different. Home ownership comes with a lot of costs that first time home buyers don't think of and may be caught off gaurd by.
To start, take a look at your monthly, quarterly and annual income and expenses to get a better idea of what you can afford and any saving you may have to apply to the purchase.
This will help you discover if you are really ready for home ownership.
2. Pay down your debt
Do you carry outstanding debt, like a student or car loan or even a balance on a credit card? Before you consider buying you first home, consider paying down your deb first. Lenders will consider how you manage your debt. You don't have to be completely debt-free to buy a home, but your debt level will be considered. For most mortgage lenders, this equation is determined by debt ratios. These ratios compare your minimum monthly debt payments to your gross monthly income. If these payments are over a specific threshold—between 32% and 40% in Canada—you won’t qualify for a standard mortgage.
Almost every lender wants a buyer to have skin in the game—this translates into the equity you have in the home, which is determined by how much money you put down when you buy the home.
To put money down, you must save up money, but this doesn’t mean cramming cash under your mattress. Use money you’ve already saved in your RRSP through the federal Home Buyers’ Plan. Family can also give you a loan or a cash gift. You could also review your budget cutting out some expenses and then using the money as part of your home-buying savings plan, or take on extra work to earn a bit more money.
When it comes to borrowing money, credit is king. Your creditworthiness is measured using your credit score—the historical tally of how responsible you’ve been as a credit consumer.
The key to good credit, or favourable credit is to be consistent about paying your bills. Paying at least the minimum monthly payment for each credit card and personal loan where you have a balance is important. Every late payment as a mark against your credit rating. A low score can actually prevent you from buying a home as you may not qualify for a mortgage, place you into a higher mortgage rate.
Take a look at your credit score through Equifax or Transunion, many of the lenders look at these when determining if you qualify for a real estate purchase.
5. Talk to a mortgage professional
Talk to a mortgage professional, this is also called the “pre-approval” processit will give you a better idea of how much mortgage you can qualify for, based on the information you provide (income and debt).
If you need some help finding a lender or mortgage professional, I am happy to help.
Once you have a better idea of how much you will qualify for, it is important to consider all of the additional expenses that you will encounter during your home ownership, this may include property taxes, insurance, utilities, maintenance and incidentals.
You don't want to become 'house poor' so its important to review all costs asssociated with ownership before embarking on the purchase.
7. Give me a call
Once you have gone through the steps, or if you need help determining costs or advice, a qualified Realtor can help you go through the details of some additional costs of home ownership.
Once you are comfortable with an amount that you qualify for and can afford, the house hunting begins!