So you want to buy your first home — time to go shopping, right?
Unfortunately, buying a home isn’t like purchasing a sweater at a department store. You can’t just walk up to a counter, hand over your credit card and walk out bag in hand – it’s a much more intricate process than that.
For veteran home buyers, the process is familiar. But for first-timers, knowing where to start, where to go and what to do can be an overwhelming experience.
But before you go looking up listings and visiting open houses, there are a few things you must do first.
And as Wade Stayzer, vice-president of sales and service at Meridian, puts it: it’s a big decision and move to make, so it’s best not to cut any corners.
“This will be an exciting experience for a first-time home buyer and it’s one of life’s greatest milestones,” he says. “This is a significant purchase so this is one you don’t have to do on your own. There are professionals working in the field that can provide you with the guidance and answer the questions that you need. Don’t make the mistake of not asking until it’s too late.”
So if you want to set yourself up for a successful first buy, here’s what you need to do before calling your realtor. Hint: it’s all about the money.
1. Save up for a down payment
Before anything, start saving up for a down payment. This is a very important move that will help you with your mortgage payments in the long run, Stayzer says.
While buyers should save up at least five per cent of the price of the home (should the purchasing price be less than $500,000), Stayzer adds that the more you can put down, the less you’ll have to shell out for your regular mortgage payments.
“As a first-time home buyer, obviously the more you put down, the lower your mortgage is going to be,” Stayzer explains. “If you’re able to put more than 20 per cent down, your mortgage won’t be deemed a high-ratio mortgage – which means you won’t have to pay for high-ratio mortgage insurance.”
Saving for a down payment may be easier said than done – but there are ways.
For example, pay off your credit card debt. This will free up some money and help you secure a mortgage.
If you’re serious about saving, you may have to make some lifestyle changes. Do you have two cars? Getting rid of one will give you some more cash to play with. Other suggestions include downsizing the home you’re currently renting, and making some sacrifices (do you really need that new gadget?).
2. Calculate your initial costs
Saving up for your down payment is not enough. You have to consider other costs associated with the move and save up for those as well.
These costs are often overlooked, Stayzer says, are what take first-time buyers by surprise.
“There are legal fees, property transfer fees and a number of other fees that aren’t included within the purchase price of the home,” he says. “That’s why we estimate that you should save an additional 1.5 to two per cent of the total purchase price to cover those types of closing costs.”
Stayzer also advises that people “stress test” their own mortgages. Essentially, it’s assessing your finances and having a plan in place should anything happen down the road.
“It’s important that you understand the impact of rate increases on your payment at maturity,” Stayzer explains. “When your mortgage comes up for renewal, what happens if your mortgage rate becomes two per cent higher? What happens if you’re a contract employee and you lose your job, or if you’re starting a family and your spouse is going to be on maternity leave with a reduced income? It’s understanding what shocks, if they were introduced into the system, and how you can accommodate them.”
3. Get pre-approved
“We encourage anyone who is looking for a home to see a financial adviser to find out what amount you can be pre-approved for in your mortgage,” Stayzer says. “So really this is the first step for your house hunting adventures.”
The amount you’re pre-approved is calculated by taking several factors into account, including the amount you have saved for a down payment, your credit score, the type of dwelling you want to purchase, your income and more.
“There are metrics and measures that lenders use to guide affordability and frame affordability,” Stayzer says. “It’s really important that you see an adviser and have that discussion so you know what you can afford … so it enables you to go out and look for homes in the right price range.”
If you don’t get pre-approved – either through choice or not – the buyer runs the risk of not being able to put a solid offer on the home they want.
“You can put a conditional offer, but if there’s a home that you want and you’re asked to waive conditions, you could go in and not even know what you can afford from a mortgage perspective or what you would qualify for,” Stayzer says.
Stayzer also advises to hold off on accepting pre-approval offers that are beyond what you can afford.
“You may qualify for a higher amount but what you really have to do is talk to an adviser to see what kind of impact that mortgage will have on your lifestyle and payment,” he says. “No one wants to be house poor.”
Home buyers should also note that because a pre-approval only lasts for 60 to 90 days and is based on certain conditions (like income), the approval can be taken away at any time should anything change.
4. Know your options
There are tools and help out there that can help first-time buyers put money towards their new home.
For example, the Canadian government offers a First-time Home Buyer Tax Credit of up to $750. This can go towards a mortgage payment, Stayzer says.
The government also allows first-timers to borrow up to $25,000 from their Registered Retirement Savings Plans to fund the purchase. (But, like all loans, you have to pay that money back. You’ll get 15 years to do it. But if you miss a repayment, it will be included in your income and you will have to pay tax on it. On top of that, you will lose that RRSP contribution room.)
All this can go towards optimizing your down payment, Stayzer points out.
A first-time home buyer does not necessarily mean it’s the first time you’re buying a home: it can also include anyone who has not owned a home in the previous seven years. So people who have not owned a home during that time may qualify for the options above.
5. Shop around
Different institutions offer different mortgage rates, so don’t be afraid to look around and see which one best fits you.
“Mortgages are not all created equal and rates are not all created equal,” Stayzer says. “What’s really important for you as a consumer and purchaser of a new home and mortgage, it’s to understand what’s important to you. Do you want to pre-pay a certain amount on your mortgage? Some mortgages allow that while some do not. Is it important that your mortgage is flexible, meaning it grows as you grow. If you move properties, can you port your mortgage to another property?”
Also. If an offer sounds too good to be true, it most likely is, Stayzer says.
“Buying online for cheaper doesn’t always mean you’re getting the right mortgage for you,” he says. “Especially as a first-time buyer, you likely don’t know what you don’t know and that’s why you should be consulting someone who would be able to walk you through that process.”
— With files from Heather Loney]