Buying your first home can be a major milestone, but it’s also one of life’s top 5 biggest stressors alongside death, illness, divorce, and unemployment. Most of this stress comes from the innumerable factors to consider when buying a home, so being prepared and organized from the start will make the journey smoother all the way through. The sooner you start planning, the better off you’ll be -- time is your friend when it comes to getting ready to make a move. Here are a few ways to ace the home-buying game.
Know your numbers
Firstly, it is important to know the main costs that you will be working towards saving up for in advance of the purchase. Here are some of the costs you’ll need to be prepared for:
➔ The down payment
The minimum down payment will depend on the purchase price of the home. If the price is $500,000 or less, a typical minimum down payment will be 5% of that. If the purchase price is between $500,000 - $999,999, the minimum down payment required is typically 5% of the first $500,000, plus 10% of the portion of the purchase price beyond $500,000. Purchasing a home for $1M or more will generally require a 20% down payment. It is important to note that putting less than 20% of a down payment may also require you to purchase mortgage loan insurance. Knowing these figures will allow you to figure out how much you can afford and plan a savings strategy accordingly.
➔ Closing costs
These are the fees and expenses used to finalize the mortgage, including land or property transfer taxes, lawyer fees and house inspection fees. Closing fees are paid upfront upon finalizing the sale and usually can’t be incorporated into the mortgage. Closing costs typically range from 3-4% of the purchase price of the home.
➔ Moving expenses, repairs, renovations, furnishings
It’s a good idea to include an estimation of these costs into your home buying budget. A good rule of thumb is to add at least 25% to your projected expenses here. There are often lots of things you can’t plan for when buying a home you’re unfamiliar with.
Follow the formulas
Now that you have an idea of what to budget for, you can figure out how much house you can afford. Most financial advisors will suggest following the 28/36% home affordability rule which establishes a baseline for how much buyers can afford to pay each month. This means that buyers should aim to spend no more than 28% of their gross monthly income on housing expenses and no more than 36% on total debt which includes housing as well as credit card payments, student loans, car expenses etc. Also keep in mind that lenders prefer to see that your money is “seasoned,” meaning your funds have been stable in your accounts for 60-90 days before applying for a mortgage.
Going in knowing what you want to spend and what you need to save will help you stick to your budget. Lenders may offer you more, and you may feel pressure to spend more, especially if you wind up in a bidding war, but making a purchase within your budget will prevent you from becoming “house poor.”
Check your credit
Another step to take right at the beginning of the home buying process is to check your credit score. Doing this as early as possible will give you time to strengthen it, if necessary. Credit scores factor heavily when qualifying for a mortgage and will affect the interest rates that are offered. You can keep your credit score high by following these guidelines:
➔ Pay all your bills on time.
➔ Try to use less than 35% of available credit - if you use most of your available credit, lenders may see you as higher risk even if your credit card payments are made on time.
➔ Increase the length of your credit history - it is more favorable to have long standing credit accounts. Consider keeping ones that you don’t need (or rarely use) open and active.
➔ Limit the number of credit checks in your history. Too many credit checks may convey to a lender that you are urgently seeking credit or that you are living beyond your means.
➔ Using different types of credit is a good idea. Credit scores may be lower if you only have one type of credit product. Credit diversification can include car loans, student loans, lines of credit or credit cards.
Once you’ve got the financial essentials covered, you can move on to the fun stuff. At this point, figuring out what you are looking for in a home and neighbourhood is important. It’s easier than ever to research neighbourhoods online, but it’s always good to experience the vibe of the areas you’re interested in in person. Walk around the neighbourhood, visit the local restaurants, grab a coffee and stroll around to get a sense of the community. This is also a good time to create a list of your “non-negotiables.” Whether it’s a fenced yard for Fluffy or access to transit systems, be clear on the features you can’t live without. Start going to open houses to determine what home features you do and don’t like - you may find these will change from what you initially thought.
Enlist an expert
Finding a real estate agent can be a daunting task if you don’t have any personal referrals but this isn’t the time to choose the first face you see on a bus stop bench. Try to find someone that you connect with. You’ll be spending a fair amount of time together so it’s essential that you feel comfortable with who you choose. A good real estate agent will listen to you, respect your budget, communicate with you in a timely manner, and be able to work with your schedule. Your agent’s communication skills are very important since they will be coordinating with a number of other professionals throughout the process.
It is a good idea to interview several agents before deciding. This will enable you to get a sense for their professionalism, experience and areas of expertise. Extra points go to the tech-savvy agents - a strong real estate agent will be able to use technology to their advantage, to stay current and engaged with the industry, and help to keep you organized and on-task.
Prepare your paperwork
Lenders are very particular and will require a lot of due diligence before handing over large amounts of money (fair enough). Simplify the process by collecting these items in advance:
➔ Tax forms for the last 2-3 years
➔ Pay stubs
➔ Credit cards and loan statements
➔ Vehicle loan documents
➔ Bank statements
➔ Prior addresses in the last 5 years
➔ Investment statements
Lock it in
At this point you can begin to shop around for mortgage pre-approval. This is essentially a lender’s offer to loan you a certain amount. It is not a guarantee, but having this done in advance will let you know the maximum amount of a mortgage you qualify for, it can allow you to estimate your monthly mortgage payments and it can lock in an interest rate for 60-130 days depending on the lender. Having mortgage pre-approval shows sellers that you are a serious buyer and can give you an edge if you’re up against competition for a house with multiple offers.
It is recommended to compare lenders before settling on one. You can ask family and friends for referrals, try searching online, read reviews or use a mortgage broker. The better the deal you get on your mortgage, the less money you'll spend in the course of repaying that loan so shopping around is important. Collecting multiple offers will allow you to choose the best option and also gives you more negotiating power with lenders who are willing to compete for your business.
Look before you buy
From here, you can seriously start looking and ramp up your open house visits. Virtual tours are a great feature, especially during Covid times but they have drawbacks as well. It's hard to get a true feel for the home through your device screen and won’t give you a good read on the neighbourhood. Also, wide angle lenses, photoshop and virtual staging can often be misleading. When you visit a house in person, you can listen for noises, look for stains indicating water damage, or pick up on any quirks of the house which aren’t captured in photos. When you attend open houses you’ll be given statistics and features of the home but it's also a good idea to inquire about the age and condition of the roof, heating, electrical and plumbing systems.
It sounds like a lot, but remember that investing the time will pay off in the long run. This is a journey you’ll remember forever, so give yourself the room to really enjoy it by going in as prepared as possible. All that’s left is to pick up your keys - you’re home!
Amanda Ashford is a Brand & Communications consultant building brands with purpose and using business as a force for good. As a global traveller, Amanda is constantly inspired by the sounds, scenes and stories found around the world, and our shared passion for purpose that connects us all.