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When to buy your first home

first time buyerWhen to buy your first home

The sooner you go from being a renter to an owner, the sooner you can begin to increase your personal wealth. This is perhaps the only legitimate, safe way to parlay a relatively small amount of money into an amount many times larger – and tax free to boot!

First decision – Who is buying?

Are you planning to buy in your name only? Are you buying with a significant other? Are you thinking of going in as partners with friends or relatives?

Second decision – Who will live in this home?

Will you? Will you rent out some rooms or part of the home?

Third decision – Where do you want to buy the home?

Close to work? Close to your family? Close to your social life? Whatever you can afford?

Fourth decision – Decide when you will be ready.

How will you know when the time is right? When will you have saved enough to take the plunge? Will your income be sufficient to qualify for a mortgage? Do you feel you can afford it?

It’s perfectly ok to talk to people with more life experience to figure out how to answer some of these questions. Could be your parents, a family friend, a sibling, or maybe a financial professional whose opinions you trust and respect.

And there is lots of free information out there – whether it’s on the internet, in the bookstores and libraries, or at your local bank, realtor or mortgage broker’s office. Tap into it – it will be the single largest financial transaction of your life to this point in time – so take your time and do it right.

No mortgage – no home

Let’s first make sure you are strong enough to qualify for a mortgage. If you can’t do that, then nothing else matters.

What do lenders want to see?

1) They want to know your employment and income history. Are you in a stable job or still under probation? How much gross income do you make and how does that compare against a possible monthly payment for your mortgage, property taxes, utilities, and perhaps condo fees.

They also assess any other monthly obligations you may have – like student loan payments, car payments, credit card payments etc. They want to be sure you can cover these too.

2) They want to assess your credit history and see if you have demonstrated an ability to manage credit responsibly. Ironically, if you have managed till now with no credit cards, or maybe one little one, you will not be nearly as attractive to the lenders as someone who has been around the block more. They want to see that even when you have credit available to you (from several sources), you can handle it and manage it just fine.

I cannot over state the importance of a strong credit history. When your credit score rocks – like 750 or more, lenders are looking for ways to make this deal work – as opposed to finding excuses to shy away from it.

In fact, with a very high score, lenders will often relax the income requirement rules to some extent – meaning you may qualify for a mortgage otherwise not possible.

By the way, your application may just need a helping hand in the form of a guarantor – someone more established who is willing to show their faith in you and guarantee you will honour a mortgage commitment.

3) They want to know if you have the funds to make the down payment and cover the closing costs. The minimum down payment these days is 5% of the purchase price.

You must demonstrate you have saved up this money – or that you will be gifted the money from a relative. (Note gifted – not loaned)

For closing costs, lenders typically want to see 1.5% of the purchase price – so on a $300,000 home they want to see $4,500 set aside.

Some lenders will even put up your 5% down payment for you – this is called “cash back”. It’s great if you need it – though the catch is you will not be eligible for their lowest possible interest rates.

4) The lender cares very much about what you are buying and where it is located. Some locations are too remote. Some homes are too run down. God forbid you unwittingly buy a grow-op house!

A few years ago, I had a client looking for a mortgage to buy a condo costing only $50,000 in an undesirable part of north Toronto. The area had a bad reputation and the building even worse. The buyer could not get over how cheap the condo was. But the condo corporation was practically bankrupt, and the monthly condo maintenance fees were a ridiculous $1,100 – and nobody would touch this deal with a ten foot pole!

So are you ready for a mortgage?

You can ask your banker or mortgage broker to see if you would qualify for a mortgage in the price range you are thinking of. People refer to this as a pre approval.

Be careful here – the truth is a pre approval is someone’s opinion – not an iron cast contract.

But it’s definitely worth something – if your adviser says no way you are ready, you can be pretty sure you are not. And you will learn what you still have to do to get ready for prime time and when that will be.

To find out for sure if you will qualify for a mortgage, you will have to make an offer to purchase a home through a licensed real estate agent, and have that offer accepted. Typically your realtor will ask for five business days for you to arrange financing. That will give you enough time to get your ducks in order.

No realtor – no home purchase

Okay, I can hear some of you now saying – what if I want to enter into a private sale? Suppose the house I want is being sold directly by the owner?

Sure – there’s no law against that. But I can tell you from experience, mortgage lenders do not like approving mortgages – especially hi ratio mortgages with a small down payment, if it’s a private sale.

They’ve been burned too many times in the past by crooks and shysters – so they often just say no.

Besides, why would you not use a professional real estate agent?

They will be on call for you any time of day or evening; do all the leg work and research; facilitate viewings; present and negotiate your offers, and it won’t cost you a dime. The home seller pays for your realtor – not you the buyer.

I am not saying this is all you have to consider when buying your first home – there is much more. People have written books on the subject. I am simply trying to help you with the thought process.

Related article: 5 ways to buy a home with no downpayment

 

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