9 steps you need to become a homeowner
Here is what you need to buy a house before you start house hunting.
If you are planning on buying a home, the process begins at least one year before you purchase your home. The steps to buying a house are there to help you make a real estate investment in a responsible way. Once you get the keys to your new home, all the effort will be worth it.
Here is what you need to buy a house:
Set a budget
If you are serious about purchasing property, this is the first step. Calculating and keeping a budget will help you (and your savings) be on track to homeownership.
To calculate your budget, there are simple guidelines to follow where you can save a big chunk of your salary and have a balanced budget. Divide your income into percentages and allocate 30% to housing costs, 10% to food, 15% to transportation, 20% to savings, 15% to debt repayment and the remaining 10% in whatever you feel like (eating out, going to the movies, shopping clothes, etc.).
Of course, this is a very simple budget. Your income, habits and lifestyle will adjust the percentages and categories. For a more comprehensive budgeting tool go here.
Estimate your affordability
You need to know that you are eligible for a mortgage and ready for a home buying budget. It will also help you keep a clear head on what type of home and amenities you can afford.
To calculate your affordability, you need to take a look at your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS). These are the ratios that lenders will look at when later on in the mortgage application process to see what you qualify for.
The GDS is the percentage of your gross income spent on all housing costs. This percentage should not exceed 32%. The TDS is the percentage of gross income that goes towards the housing costs plus other payments (e.g. debt, credit cards, car expenses), and it should not exceed 40%. Here is how to calculate them:
GDS: Sum your mortgage principal, interest, taxes and utilities. Divide it by your annual income.
TDS: Sum your housing expenses, credit card interest, car payment and loan expenses. Divide it by your annual income.
After calculating these ratios, you have determined if you are ready to afford a home. If you are lazy to do the calculation, merely use the Canada Mortgage and Housing Corporation's (CMHC) affordability tool.
Saving is always a good habit. It takes time and effort, but it is possible. Based on your finances, you can set a goal. To reach your goal stick to your budget, get a good savings account and put down some money every month. It can take more than a year to save for all the expenses, so the earlier, the better.
The first big cheque you should be saving for will go towards the down payment. This will be 20% of the listing price, but there are benefits to giving a larger down payment.
You also need to save for all the other costs of buying a home and even have an emergency housing fund for whatever hits you down the homeownership road like unexpected home repairs. No more landlords to help you out.
Oh, and try to avoid major purchases. Don't go crazy in debt before asking for a mortgage!
Pay any debts
It is good to pay off anything you owe in advance if you can. Owing less money will get you a better rate and free up some space in your budget. Plus, lenders will look at your debt ratio as mentioned before. If your debt ratio is too high, you might not even qualify for a mortgage.
Take this is as a good opportunity to learn how to manage your debt!
Research government programs
According to the CMHC, there are three government programs for home buyers.
First-Time Home Buyers (FTHB) Tax Credit: a non-refundable tax credit of $5,000 on a qualifying home.
Home Buyers' Plan (HBP): allows you to withdraw $25,000 from your RRSP for the down payment.
GST/HST New Housing Rate: allows you to recover some of the taxes paid on new or renovated homes when other conditions are met.
Read over their terms and conditions to see if you qualify to any of these home buying programs.
Take care of your credit score
Credit scores determine your creditworthiness as a home loan borrower.
They will impact your interest rates, so being careful is something worth doing before asking for a mortgage - better yet, do it since you the moment you start building credit.
You can get your credit score through Equifax or Transunion. Remember to inquire about any issues or anomalies you might find. You want everything to be in check and if you see anything that doesn't look right, file a dispute.
Having a good score it about habit and consistency. To maximize your credit score follow these rules, behave for a year, and you should see an improvement.
If you don't have credit, you can start building it by getting a pre-paid card. Use it and remember to pay for whatever you own. It's that simple. After a year, you should have built enough credit.
Research mortgages rates
There are different types of mortgages and you want to find the rate that works for you. It is better to be informed about all the options in the market since it will affect how much you will pay every month. A good rate can save you thousands of dollars a year.
Use Homicity articles or ask friends and family about which type of mortgage might be best (e.g. fixed, variable, open, closed, etc.).
To make a smart investment in real estate, you should also keep an eye on the Bank of Canada's benchmark interest rate, and that way you can lock your mortgage rate whenever they are low.
Research the housing market
The housing market can be volatile sometimes. To make sure you are putting your money into good use, keep up with what the market is up to in the area where you are planning to buy a home. Depending on the trends you see, you can decide whether or not it is the time to invest in real estate.
Get a mortgage pre-approval
Before starting your home search, the last step is to get pre-approved by a mortgage broker. That way you are confident of what you can afford, you seem like a confident buyer to the seller and will be ready to make an offer once you find the house that checks off every item on your wish list.
Get a letter to show the seller you are a serious buyer and that you have solid finances.
Here is what you need to get a pre-approval:
Social insurance number
Your home address
A pay stub or bank statement as proof of income
Value of all assets
Loan statements (student, mortgage, car, credit, etc.)
Estimated value of your home
Housing expenses including property taxes, utilities, and more.
These steps can help avoid any rash decisions and is some of the best advice given to first-time home buyers. By following these steps, you will be ready to search for a home and enjoy homeownership!