Welcome, 2023! If buying a home is on your new year’s resolution list, then we have a lot of work to do! But I’m here to help simplify the process before you start house-hunting. Sure, scrolling on MLS for your “dream home” makes it all that more exciting, but there are some steps you must take to prepare yourself for this next big adventure in 2023.
You should start saving for your down payment YESTERDAY. The sooner you start, the better!
Now that the holidays are over, it’s time to budget, budget, and, yes you guessed it, BUDGET! The average amount you want to put aside for your downpayment is 5 – 20%. So if your “dream home” is $850,000, on the 20% side, you will want $170,000 set aside. Sounds like a lot, right? This is the most stressful part for many people, and the hardest step to put behind you. 5% is an easier starting point but, don’t forget to save a little extra for your closing costs. If you can it’s smart to aim somewhere in the middle of the 5% – 20%. Opening a Tax-Free Savings Account to put your money into is a great way to start saving for your down payment while gaining a little extra. There are also many government initiatives that you can use as a first-time home buyer so be sure to check those out HERE.
First and foremost though: get your credit score up to par
Your credit score is one of the first things that will be reviewed by your mortgage lender. A credit score is a 3-digit number that represents your credit information at one point in time. In short, it tells lenders the risk of lending money to you. 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.
The Canada Mortgage and Housing Corporation recommend that at least one applicant in a mortgage has a minimum credit score of 680 if you are making a down payment of less than 20%. Having a higher credit score means you may have some flexibility on the amount of down payment you will need to provide upfront to secure your home loan. A credit score of 750 or higher is considered excellent and better for lending to secure lower interest rates.
Next up: reduce your debt, before you add to it
You know that phone bill you never paid a couple of years ago? It can come back to haunt you. Make sure you pay off all your loans (or as much as you can) before adding on a new large purchase. This will help increase your credit score.
If your debt-to-income ratio is above 43%, it is unlikely that you will be approved for a mortgage. This is why you need to diligently review your debt, monthly payments, budget, and cash flow along with taking a look at your credit score early on in the house-hunting process.
And, the biggest to-do on the list: get pre-approved for a mortgage
If you’ve followed these previous tips, then you’re almost ready to get pre-approved for a mortgage! A mortgage lender will want to know…
- whether you have a stable job to make money to pay back the loan
- whether you make enough money to realistically afford to pay back the amount you have borrowed in the time frame outlined in the loan
- whether you have bad credit or good credit – so they are confident you will pay them back
- whether you have any money set aside to cover costs in addition to your mortgage loans like your closing costs, land transfer tax, or other monthly expenses
- whether you have any existing loans or loans in the past that you haven’t paid back
A mortgage lender will need these items checked off your paperwork collection list to get you pre-approved for a mortgage at the best interest rate possible.
- identification – like a copy of your driver’s license
- employment verification – like a copy of your last 3 paystubs
- proof of income – like a copy of your last income tax return
- proof of assets – like a copy of your RRSP investments or a copy of your bank account statements
- credit score verification – your mortgage specialist will need to run a credit check for the lender
- other documentation – like a copy of existing student loan documents or car loans, etc.
Once you have collected the documents above, you’ll be ready to take a look at the numbers with an experienced mortgage broker, like me, Darren Robinson. Together we will determine how much of a mortgage you can afford, what the interest rate on that mortgage will be, and what your next steps are. To get a head start, check out my mortgage calculator to get a rough estimate of what your mortgage will be, depending on the cost of the home you’re thinking of buying in the new year. In the meantime, book your free mortgage consultation with me or give me a call at 705-315-0516 and let’s find you the best rate out there. Let’s make buying your dream home in 2023 a reality!