Money moves to make when planning to buy a home

Buying a home is one of the most exciting things that will happen in your life. It's also one of the most expensive purchases you'll ever make. Before you drop hundreds of thousands of dollars to become a homeowner, make these money moves so you're in a better financial position.

Get your credit score over 680

Having a good credit score is always important, but getting yours to at least 680 has never been more critical when it comes to buying a home. The Canada Mortgage and Housing Corporation (CMHC) recently introduced a rule where potential homeowners who need CMHC insurance must have a credit score of at least 680.

This rule could potentially affect anyone who has a down payment of less than 20%. The good news is that there are plenty of ways to improve your credit score including:

  • Lowering your credit utilization ratio
  • Avoid applying for new types of credit
  • Use different types of credit
  • Pay your bills on time
  • Settle any delinquent bills

It's always in your best interest to have a good credit score, so strive for more than 680. Once you get in your credit score into the very good range (735+), you'll likely get better rates when it comes to loans including your mortgage.

Reduce debt

Keeping your debt to a minimum is always advised since you want to keep your finances in order, but this is especially important when it comes to buying a home. The amount of debt you have will directly affect how much home you can afford.

Most mortgage lenders don't want you to have a total debt service (TDS) of more than 44%. What that means is all of your housing expenses, plus any outstanding debt, can't exceed 44% of your income before tax. If you're getting CMHC insurance, your TDS needs to be 42% or lower.

Let's say your combined monthly income is $12,000. Your TDS will need to be less than $5,280 a month with most lenders or $5,040 if you need CMHC insurance. If you want to be able to afford more, you need to reduce the amount of debt you have.

At first glance, having a TDS of less than 44% will seem easy, but keep in mind that calculation is based on before tax dollars, whereas you get paid with after tax dollars. If you don’t prepare yourself, you could end up in a cash crunch.

Get pre-approved for a mortgage

Knowing how big of a mortgage you can get is vital since it'll determine how much home you can afford. A pre-approved mortgage doesn't cost you anything, nor does it affect your credit score, so you should always get one. Once you know how much you've been approved for, you can start looking for a home in your price range.

Remember, lenders calculate how much you can afford based on how much of a down payment you have and your TDS. What they don't factor in are other expenses and saving goals that you may have such as vacations, retirement savings, your child's RESP, home and auto insurance, or even home furnishings. In other words, it's probably best to not max out your budget when buying a home.

Speaking of mortgages, working with a mortgage broker is advised. When you go to a bank to ask about mortgage rates, they can only give you what their institution offers. With mortgage brokers, they'll shop around for you since they're not exclusive to anyone. What that usually means is that you'll likely get better rates and terms when you're ready to sign. Mortgage brokers get paid by the lender, so there's no cost to you.

Make a new budget

For many people, the additional expenses that come with owning a home can be shocking. There will be things you'll be spending money on that you've never had to pay before, but that's the price you pay when becoming a homeowner.

To ensure that you don't end up house-poor, create a budget with all your projected monthly expenses so you have a clear picture of how your finances will look like. Some costs that you may need to factor in include:

  • Your mortgage
  • Condo maintenance fees
  • Property taxes
  • Home insurance
  • Life insurance
  • Home maintenance fees
  • Utilities

Those are things that are related to your home. As mentioned, you'll also want to factor in any other expenses or saving goals you may have. There’s also the one-time fees that you’ll need to pay such as closing costs, moving fees and new furniture.

Final thoughts

Becoming a homeowner is an important milestone in your life, but preparing yourself begins way before you get your keys. By getting your finances in order early, you can ensure that you'll be prepared for all the additional expenses that may come your way.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.

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