Are you living with Mom and Dad, couch surfing, or paying someone else’s mortgage every month (aka renting) and getting kind of tired of it? If you have been thinking about wanting to join the world of home ownership but are not sure how to go about it, this blog series was written just for you!
Whether you want to lose your property virginity in a couple months or in a couple years, this practical 8 step guide to joining the Proud New Homeowner Club will help to make sure you achieve your goal and that there are no unexpected surprises in the process.
So read on, and if you have any questions, let’s grab a coffee (or iced tea if you’re like me and don’t drink coffee) and we can gab about the process of buying your first home.
Step 1: Get Your Finances in Order
While it’s not the most fun stage of the process, before you begin house hunting it’s essential to get an accurate picture of what you can afford.
It’s ok to admit that you’ve been creeping realtor.ca daily for a few months now and you’ve fallen in love with several homes that you think might be a little outside of your price range. While we all want to believe we can afford the $800,000 home in our dream neighbourhood as our starter home, this is not the reality for most people (and if it is your reality, please share your secret). Not to worry, there is an awesome home out there for you that is in your budget, allowing you to be a proud new home owner without being house poor. Win-win!
Get a copy of your credit report
Knowing your credit score well in advance of when you apply for a mortgage allows you the opportunity to improve your score and fix any errors on your credit report.
Your credit report is a major factor in how lenders will decide on your eligibility to get a mortgage. Visit Equifax.ca to get your credit report mailed to you for free (or if you’re impatient you can get it right away electronically for $15). Your credit report will show any outstanding loans, your current balance on your credit card(s), and will report on your credit score. The maximum score is 900 which means you are a financial rock star! Don’t worry if your score is not 900. The average person is in the 600-750 range. If your score is on the low side, now’s the time to work on improving it.
Take a look at your credit report and make sure there are no errors on it. If there are any errors you will want to apply to have them corrected. If your credit score is low, follow the advice on your report for ways to improve your score. The most common ways to improve your credit score are:
- Pay all your bills on time
- Pay your bills in full by the due date
- Keep your credit card balance well below your credit limit (so if you have a credit card limit of $5,000, keeping your balance below $2,000 would be a good idea)
- Keep the number of credit applications you make to a minimum (Anytime you apply for a loan the lender will pull your credit report. Each time this happens your score goes down a bit. So resist the urge to submit applications to five different lenders for your car loan because it will only help with pulling your score down.)
- Establish a good credit history (see below)
Keep in mind that your credit score will not improve overnight. However, if you follow these tips for improving your credit score for a year you should see a substantial improvement in your score. Easier said than done, I know. But it’s worth it, I promise!
Give yourself some credit
Although it sounds counterintuitive, if you are a first time home buyer lenders will want some proof that you are capable of handling debt responsibly.
If you have never had a credit card, car loan, or student loan before most lenders will find it hard to trust that you can all of a sudden handle the large debt of a mortgage. My advice would be to speak to your bank or a mortgage professional about how best to establish a credit history that a mortgage lender would approve of. This may mean getting a credit card with a $500 limit which you use and pay off in full every month for the next year.
This way when it comes time for you to apply for a mortgage you have proof that you have been able to handle debt responsibly.
Pay down existing loans and credit card balances
If you already have a credit card or loan now is the time to be super diligent about making consistent and complete payments towards these debts. To get a mortgage you don’t have to be debt-free, but you do need to show that you have your existing debt under control.
In order to help you qualify for a mortgage you will want to make sure that your existing debt is as low as possible, because the more debt you have before you buy your home, the smaller the mortgage a lender will approve you for (more on debt service ratios below).
Get out your calculator
A lender has two primary calculations they use to help determine how much they will lend you for a mortgage. These two calculations are called Gross Debt Service Ratio and Total Debt Service Ratio.
Lenders will take into account the existing debt you have (car loan, student loan, credit card balances, etc.) and play around with the expenses associated with your potential future home to figure out how large a mortgage you could sustain when combined with your existing debt payments.
Currently, the industry standard for Gross Debt Service Ratio is 32%, which means that your total housing costs of your new home (mortgage principal, mortgage interest, property taxes and heating) must represent less than 32% of your gross income. Your Total Debt Service Ratio takes into account all of your debts, such as car loans and student loans in addition to your housing expense, so the limit is a bit higher at 40%. Check out the article by RateHub to learn how to calculate your Gross and Total Debt Service Ratio.
Are you asleep yet? Fun stuff I know!
Figure out where you spend your money
With all this talk of expenses, now is a good time to take a look at what you spend your money on in an average month and how you can be directing more of your income towards paying off existing debts (and saving for your down payment) and less on your favourite drinks at Starbucks. If you want to buy a house, it may mean you have to make the non-fat, vanilla soy, double shot, decaf, no foam, extra hot, Peppermint White Chocolate Mocha a weekly treat instead of a daily occurrence. The pay off is worth it, I promise!
Start adding up where you can cut back on your spending and start dumping that money on your existing debts instead. Remember, when your existing debts go down, your mortgage eligibility goes up.
Up next - Step 2: Get a Mortgage Pre-Approval
Do you have questions about the home buying process? That's what I'm here for! Drop me an e-mail or give me a call and I'd be happy to help.