4 Do's and Dont's of Buying your First Home
What to do when you’re a first-time home-buyer:
1. Get pre-approved.
Some real estate agents won’t even work with you until you’ve been pre-approved for a mortgage. This is an important first step in the home-buying process. You don’t want to start house-hunting and fall for a home you can’t afford. Especially in a hot market as the house you were about to look at can sell before you get a chance. Plus, there may be problems with your credit that you don’t know about.
Sometimes people are just unaware that they may have an outstanding store credit card with $6 balance that they forgot to cancel and it’s caused a problem on your credit rating.
I know people making half a million dollars a year but they’ve made some mistakes in their financial past and can’t qualify as a result.
Your credit is one of three factors that will be considered before you get approved for a mortgage. The other two are income and your down payment.
A down payment of 20 per cent is also becoming uncommon with the rise in house prices. In Kelowna 20% down on an average detached house is $124,000! It takes a while to be able to save that kind of money. But that’s how much you have to have down if you want to avoid paying CMHC’s mortgage default insurance. It’s calculated based on the size of your mortgage and how much money you have down.
Of course the bigger the down payment, the smaller your loan (and overall interest charges) will be. One way to help boost your down payment is to borrow money from your RRSP. First-time buyers can pull out $25,000 tax-free and have 15 years to pay it back. If you’re buying with your partner, you can contribute $50,000 together.
2. Find a real estate agent.
While having a real estate agent is not necessary when buying a home, it is recommended — especially if it’s your first time going through the process. Having someone who is knowledgeable about the market leading you through the process could take a big weight off your shoulders.
A good realtor will also have a team that they work with such as inspectors, credit counselors, insurance agents, builders, etc. This can save you weeks of time trying to vet each person you’ll need.
3. Stay mindful of your budget.
It is very easy to get too wrapped up in a sale and end up buying a lot more house then you need. Take the time, pick a budget and stick with it. It’s easy to go from 600k to 620k and then use that to justify spending 650k.
Ask yourself what kind of tradeoff is required to buy the house. Are you giving up a few times out a month? Or will you have to sit at home as you can’t afford payments and going out? Then ask yourself how would you survive if you suddenly lost your job and had no salary for 6 months? Plan your budget ahead to mitigate these issues as much as possible.
4. Be open.
We’ve all seen the real estate shows with the gorgeous multi-million dollar properties. Your first home will most likely look nothing like that. Given the high prices of detached home, you may end up in a condo as your first purchase. It’s all a question of the point above; what you can afford.
Look past the details. Ugly wall paper, old cabinets… all that can be replaced for a reasonable price. The fundamentals of the house is the large value. If they layout works for you then it should be of more interest than one that looks pretty but isn’t functional.
What not to do when you’re a first-time home-buyer:
1. Don’t think you’ll be in that home forever.
On average, people live in their first two homes for seven to ten years. So focus on the short and medium terms. The ideal house for your lifestyle now will very likely not the ideal for 15-20 years from now.
They call it a “starter home” for a reason.
2. Don’t be too emotional.
Experts say this can be quite common with first-time buyers. Check the emotions at the door and think with your head. Always keep in mind the re-sale value of the home you want to purchase, and remember that in real estate it’s all about location, location, location.
3. Don’t make big purchases before getting approved for a mortgage.
That may seem fairly obvious, but you’d be surprised. Fairly often people are thinking of buying a house and run out a buy a new car. Suddenly your debt ratio went up making it harder to qualify for a mortgage. Remind yourself that an approval depends on your current income, credit and savings remaining the same.
4. Don’t forget about closing costs.
Closing costs can add up. The CMHC recommends putting aside anywhere from 1.5 to four per cent of the purchase price to cover them. For me that includes over assuming expenses and under assuming revenues (or your salary) to ensure that you are covered if things in life start to go wrong.