Are you thinking about buying your first home? How exciting! Before you choose your paint colours and home decor, ask yourself these 6 questions to see if you can buy now, or if you should wait a little longer.
Learning the process of becoming a homeowner will make you less stressed about this huge financial decision you are about to make. Knowledge and working with a professional will also help to prevent unwanted mistakes. The first step is to connect with a mortgage broker, like myself, Darren Robinson, to find out how much you can afford to spend on a home. You can also check out my mortgage calculator HERE, and in case you need a little help using it this article walks you through each calculator so you’ll know which to use and why.
Aside from buckling down and starting a budget for your new home, these are crucial questions to think about throughout the planning stages.
1. Do you have a stable income?
In order to get pre-approved for a mortgage, you must prove to the lender that you are not a risk and will be able to pay your bills on time. If self-employed, it may be harder to qualify for a mortgage because you lack a consistent income. Some months may be slower than others, so you should work with a mortgage broker to dot your I’s and cross your T’s when applying for a mortgage.
Lenders will ask to see at least two years of tax returns or pay stubs as proof of income. Lenders also like to see the money you will use for a down payment deposited in a bank account for at least 60 days. It tells them you have the money to finance your mortgage.
2. Do you want to stay in the area long-term?
What is your plan for the future? Do you think you’ll have to relocate for your job? If you plan on starting a family, do you want them to raise children in this house? These are questions you should ask yourself if you plan on staying long-term. If you answer no, consider renting until you know where you want to end up. If using monetary gifts from family and friends to help with a down payment, make sure you get the cash in hand well before you apply for a mortgage and deposit it into a bank account so there is a paper trail.
3. Are you good at managing your debt?
Think about what other monthly bills you are paying. Now add on a mortgage, electricity bills, house insurance, etc. Make sure you are actively checking your credit score as well. A credit score is a 3-digit number representing your credit information at this current moment. It is an indication of your financial responsibility. Private mortgage lenders and banks use it to consider what loan you may qualify for or if you qualify for a mortgage loan at all. Some people are surprised to learn that an unpaid cell phone bill from 6 years ago appears on their credit history and is damaging their rating. Also, you’ll have to resolve any errors in a credit file before you can scrub the issue off your record.
The minimum credit score you want is 680. Having a credit score of 750 is considered excellent. A high credit score indicates to lenders that lending you money for a mortgage is a low-risk investment for them. When your credit score is low, it tells a mortgage lender that you might default on your loan payments.
Check your debt-to-income ratio as well. Your debt-to-income ratio is the difference between how much you owe and how much income you make. Your lenders will review this to see if you can handle the mortgage loan. If it’s over 43%, you will most likely not get approved for a mortgage. The lower the percentage, the better.
4. Do you have an emergency fund?
You never know when an unexpected leak in the basement or needing a new roof will sneak up on you. Make sure you budget to have money put aside for home improvements or other financial emergencies.
QUICK TIP: Open a tax-free savings account to help put money aside.
5. Do you have enough for a downpayment?
Lenders recommended you have a 20% down payment on your home although depending on your situation you might be able to squeak by with a 5% down payment if the cost of the home you are purchasing is $500,000 or less.
There are many government incentives for first-time home buyers for you to utilize. The First-Time Home Buyers Incentive helps first-time homebuyers cover 5% or 10% of the purchase price through an interest-free loan. You must pay the government back the same percentage of your home when you sell or after you’ve owned the home for 25 years. To qualify for this loan, you will have to review your household income, mortgage amount, and the location you plan to buy in. And, lucky for first-time buyers this program has been extended until 2025.
6. Are you willing to make sacrifices as a new homeowner?
I hate to break it to you, but your weekly dinners, hockey games, and shopping sprees need to tone down when you buy a new home. You will need to create a budget, so you don’t run into financial distress. The most important thing before you start searching for a dream home and fall in love with a property is to get pre-approved for the mortgage you will need beforehand. This ensures you are looking in a price range you can afford, so you can plan to start budgeting accurately for your first home. I can help you find the lowest interest rate possible for your mortgage as well as walk you through every step in the process so it’s not so overwhelming. Whether you’re looking in Barrie, Simcoe County, Toronto, or the other side of the country, I’m excited to go on this home-buying journey with you. Give me a call at 705-315-0516 or book a consultation today to get started.