Here are 10 steps to take before buying your first home:
Save up for your down payment
In Canada, if you are buying a house with a purchase price of $500,000 or less, you need a minimum down payment of 5%. For a house above $500,000 but less than $1 million, the minimum down payment is 5% for the first $500,000 and 10% for the remaining portion. For homes with a purchase price of $1 million or more, the minimum down payment is 20%.
When you put down less than 20% down payment, your mortgage is considered a high-ratio mortgage. High ratio mortgages must be insured by a mortgage insurer such as the Canada Mortgage and Housing Corporation (CMHC) – this insurance cost adds up to increase your overall debt. The more the down payment you can save up, the better.
Get your finances in order
When you’re planning to buy a house, it is important to start getting your finances straightened out well before the purchase. Reduce your other debt loads, do not take out any new loans, pay your bills on time, ensure your credit score is in good to excellent shape – request your credit report and go through it to ensure there are no discrepancies.
Utilize online calculators and tools
There are several calculators available online that can assist with simulating what your home ownership costs may add up to. Calculate your debt load (it should not be greater than 40% of your gross monthly household income). Calculate your PITH (mortgage principal and interest, taxes and heating) which should not exceed 32% of your gross monthly household income.
Compute how much you will potentially be spending on a monthly basis in overall expenses and try to part with that amount for a couple of months to see if you can cope.
Get mortgage pre-approval
After ensuring that your finances are in order and that you are able to bear the increased expenses, costs and responsibility that come with home ownership, it is time to approach your bank or mortgage broker. Get a mortgage pre-approval before house hunting begins.
Research the neighbourhood and type of home you want
For the home, you want to research things like square footage? building type? garden? finished/unfinished basement? age?new or existing home? etc. For the neighbourhood, important details include LOCATION (!!!), crime rate, availability of parks and recreation, school system, infrastructure, character, and so on. Scope out the area during both day and night times to ensure the area suits your kind of lifestyle.
Don’t let anyone rush or pressure you
A home is a huge investment! Don’t let anyone pressure you into buying anything. Take your time to look at as many homes as you need before making a decision. Your realtor is an expert salesperson and they are not always your friend. When my wife and I were looking to buy a home, our realtor initially appeared to be looking out for our interest, but it became apparent that after a while of not picking one of the ones he had ‘recommended’ that he just wanted to make a sale.
Don’t get yourself into a tight corner. Plan ahead. Do not wait until you have a month or so left to renew your apartment lease to start looking for your new home.
Find a support system
This may be easier if you are a couple. If you are buying a house as a single person, it is a good idea to share your plans with a family member or a friend. A second person is helpful in ensuring you stay on plan, stay within your budget and do not get carried away. People become very emotional when house hunting. Use your head, not your heart.
Get a home inspection
It does not matter how much you like a house or how it gets the butterflies going within your guts or how good it looks… If you are not an expert and this is your first home, get a licensed home inspection done! Always go with an independent inspector, not the one recommended by your realtor. If possible, solicit references from others who have had good experiences working with them.
Ask yourself – “Do I plan to live here for the next 5 years?”
If less than that, you may be financially hit when you sell because you will not have built up a lot of equity in your home.
Prepare to put on your reading glasses
When buying a house is not the time to skim over documents. Prepare to read all contracts carefully. [bctt tweet=”Read the small prints. Read the fine prints. Read, question, and read again!” username=”SavvyCanadians”]