Posted on October 31st, 2016 at 2:47 am
Buying your first home can be a challenging experience, and new mortgage rules introduced recently promise to make it even more difficult. Here’s what you can do to make your first time home buying experience smoother:
Review your income and expenses. Most families have a pretty good idea of what they spend, but that often won’t be enough when applying for your first mortgage. New Canadian mortgage rules require first time homebuyers undergo a stress test to ensure they can meet payments even if the interest rate doubled. To prove you have what it takes, map out your actual spending (rather than budgets) over the last two years in as much detail as possible. This will let you calculate exactly how much money you have left over once all your bills have been paid. Showing that you have room to handle any unexpected events will make getting your first mortgage much easier.
Review your credit score. Once you’ve mapped out your income and expenses, take a look at your credit score to make sure there are no surprises. Credit scores are not always 100% accurate, and you’ll need to make sure you correct any errors before adding new debt. If you see anything that shouldn’t be there, get in touch with your lender and explain what happened right away! If your score isn’t as high as you’d like, it might be wise to postpone your search for a home for at least 18 months to bring the score up through regular dept repayments. A lower score will result in an increased interest rate, which will cost you substantially more over the lifetime of your mortgage.
Once you’ve reviewed your cashflow and made sure your credit score is error free (and strong enough to ensure a lower interest rate) you can start the process of buying your home! Here is what you should consider:
1) The down payment. You’ll need to come up with a minimum of 5% as the down payment for your home, but it’s recommended that you put at least 20% down to get a mortgage without having to pay for CMHC insurance. Anything above the 20% rate will help reduce the cost of your borrowing, but isn’t strictly necessary. You can tap savings, retirement funds, and gifts from friends and family for the money you need, but it’s important to remember not to stretch too far. If your down payment drains your cash by too much, you might find yourself unable to furnish or fix your new home (and, if something goes wrong, your retirement could also be in jeopardy).
2) Choosing a mortgage (and mortgage insurance). Not all mortgages and mortgage companies are created equal. A wide variety of companies will use down payment amount, interest rates, loan term and length, and special repayment options to attract your business, and you should consider each option carefully. Mortgage brokers can be a helpful source of advice, and you should always take a look at online reviews before making your final decision. Once you’ve selected your mortgage, make sure you insure it using a personal insurance policy. Most mortgage providers will try to offer you their own, but they are often not as comprehensive as a personal plan. It’s important that you’re protected in the event you are unable to pay, and good mortgage insurance will keep you and your family safe.
3) Get pre-approved. The paperwork at this stage will seem endless, but a good mortgage agent will give you a comprehensive list of what is required ahead of time. At the end of the process, you’ll receive a pre-approval letter that lets sellers know the size of the mortgage you can afford.
4) Select a realtor. This is a critical step that most first time homebuyers overlook. In a fast paced real estate market like Parksville, Qualicum Beach, or Nanaimo, a good realtor can help you find the exact property you’re looking for while making sure you don’t overpay for it. When you speak to the realtor listing the house, you’re speaking to someone who is working for the person selling the home. They’re looking to get the largest amount of money for their client, and you need someone on your side to make sure your finances are properly protected. A good realtor will also know all the tricks of the trade to make sure your offer is the offer that is accepted.
When your offer has been accepted, don’t celebrate yet! There are still three things to plan for:
1) Get everything inspected. Before you transfer any money to anyone, schedule a professional home inspection and appraisal. There are other inspections that you can order, but these are the two most important. You want to make sure there are no surprises waiting for you in your new home, and your lender will want to make sure you are not overpaying.
2) Prepare for the finalization process. Your lender will probably request an updated credit report, so make sure you guard your credit rating carefully during the home buying process. Don’t make any large purchases (such as a car), and pay every bill on or before the due date. There will also be a mountain of paperwork involved in this stage, but your mortgage agent should prepare a list of what is needed of you at this stage as well.
3) Move in! Once everything is settled, make sure your utilities, internet, cable, and phone have all been properly set up. The final stage of the entire process is moving, but we’ll have to do another blog post on that!