How to prepare for homeownership
So you have decided this is the year you are going to purchase your first house, but you are not sure where to start? You are going to want to get every aspect correct, as buying a home is most likely going to be the largest purchase of your life.
Kendra and I decided this was the year we will look seriously at our first house. Sure, real estate prices are sky-high, but interest rates are not. We decided it was the time our $1000 + rent payment went to good use. If you are in the same boat, read below, and I will go through the essential steps of purchasing your first home.
Pay down your debt
I have said this in multiple other articles, but it is the most important component of personal finance. If you are carrying balances on credit card with rates as high as 26%, you need to pay that off first.
What about your other debt? Student loans and car loans are okay, however, look at the balances. If you owe $70,000+, you should take a closer look at how much that debt is costing you.
Paying down debt also lowers your debt-to-income ratio, which is the calculation lenders use when deciding how much money to lend you, as well as your interest rate.
Here in Canada, you need a minimum of 5% of the purchase price as a downpayment. Getting approved for a mortgage with only 5% down will require strong credit, and you will also have to pay CMHC insurance, which protects the bank in case you default. 20% down will get you an uninsured mortgage with the lowest possible payment.
I recommend you set up automatic withdrawals from your chequing account into your savings account every month. This way you will not miss the money, and you will not have to transfer it yourself. Automation is critical here.
Do your research
Many people rush into the largest purchase of their life, but why?
Take the time to go through all your savings and expenses, and see how much you can afford. If you need help figuring this out, try the TD Mortgage Affordability Calculator.
You will also want to learn how mortgages work, and the different mortgage products available to you. If you have a good relationship with your bank or someone else in the industry, ask if you can pick their brain.
Prepare your real estate team
Many people do not realize there are a lot of parties involved in the purchase of your house.
You will need someone to arrange your mortgage. Some people recommend mortgage brokers, but unless you know a trusted professional in your area, I suggest you go to your bank first.
You will also need a realtor on the buy-side of the purchase. Research trusted names in your area and reach out to them. Make sure the person you choose knows the area and frequently closes deals similar to yours.
Last but not least, you will need a real estate lawyer. The lawyer will close the transaction, disperse the cheques and finalize the paperwork. Do not underestimate their value. Again, do your research for a trusted name in your area. You can always ask your mortgage professional for recommendations.