Buying a home can be stressful even for seasoned property owners. Purchasing your first home can be downright anxiety-inducing when you don't know where to start. I've met plenty of first-time buyers who were full of questions: Who do I contact first? What do I need to have ready? Can I even do this?
Trust a couple of real estate agents when we say: You can do it. Buying a home is a big deal, but like any other large project, it can be broken down into manageable chunks. Even if it turns out you can't purchase just yet — maybe you need to save up a bit more than you thought, or pay off some debt — you can put yourself in a position to be ready to go as soon as you have what you need.
I've taken the most common advice and answers we've given to first time home buyers in Victoria, and put them together into this series of tips. Whether you just need an idea of how the home buying process works, or want to get started right away, this should be a good springboard to get you going. If you have more detailed questions, feel free to contact us, and David and I will be happy to answer them.
1. Finalize Your Numbers
Start with crunching your numbers. How much do you make a year, before and after taxes? How much debt are you carrying? Do you own any big assets, like a vehicle? Do you have a savings, TFSA, or RRSP account, and how much is in them? Is a partner or friend going to be living with you and chipping in?
Getting recent and accurate numbers for these questions will help you, your mortgage broker, and your real estate agent decide on what's best for your budget. You'll want to collect as many of these documents together as you can:
- your most recent T5 slip,
- your last few pay stubs or cheques,
- account summaries from your bank and/or financial institution,
- any recent loan or credit owing statements, and
- a credit report if you'd like to request one.
Ideally you don't want to spend more than 30-32% of your income on housing. When calculating how much you can afford to pay for a property, you'll need to take into account any monthly debt payments, your projected monthly mortgage payments, the property's taxes, and your projected utility costs (water, electricity, heat, cable and internet), then weigh them against your income. If the home you want to buy is a strata, like a condo, you'll also need to add in strata fees (which may or may not cover some of your utilities).
The more debt you can pay off before entering into a property transaction, the easier it will be to qualify for a mortgage. If taking more time to build up your savings and pay off your loans will put you in a better financial position, make that your first priority. When it comes to real estate, the most important number is your individual or family budget, not what the bank is willing to lend you.
2. Don't Be Afraid To Ask For Help
When calculating your budget, don't forget to talk to family. The "Bank of Mom and Dad" is becoming increasingly important in BC's current real estate market. Family members who are willing to offer financial assistance can help you make bigger down payments, or improve your mortgage qualification options by signing on as a co-owner, co-signor, or guarantor.
Mortgage co-signors help bridge any income gaps in your mortgage qualification by offering their own income as backup for payments. Co-signors need to sign all mortgage-related documents along with you, and their name will also go on the property title, granting them a claim on part of the property. Co-signors are very similar to co-owners, with the exception that co-owners are expected to make property payments together, while co-signors only pay if the primary owner isn't able to. Like co-owners, co-signors will remain on the property title until you can qualify for and renegotiate the mortgage on your own, which can involve legal fees.
Mortgage guarantors help overcome lack of credit or credit score flaws in your mortgage qualification by guaranteeing that the mortgage will be paid if you default. Because they risk taking on your entire mortgage if things go south, guarantors need to be more financially stable than a co-signor. Guarantors also don't get their name put on the property title, meaning they have no claim to the property. On the other hand, if keep on top of your payments and improve your credit score, your lender might release your guarantor from their obligations early, which can be easier than removing a co-signor from a property title.
If a family member is willing to help, the first thing you should do is find out how much they're willing (or able) to contribute and in what way. Communication is key: depending on the amount of money involved and the nature of your relationship, some family members may want to be paid back in part or in full at a later date, have use of a suite, or put restrictions on what you can do with the property while they're assisting you. Make sure everyone's expectations are on the table ahead of time, and you'll be less likely to run into unpleasant surprises later down the line.
Once you have the details hammered out, add them to the financial information you've already collected. Anyone assisting with your mortgage qualification will need their own financial documents ready to present to the bank and/or your mortgage broker, and they should be present at any important meetings about your mortgage.
3. Start The Mortgage Process
Now that you have your documents together and your budget laid out, the next step is to meet with a mortgage broker to get pre-qualified and get a rate hold. Mortgage pre-qualification is a process where your mortgage broker goes over your financial information and determines the maximum amount of money they're willing to lend to you. Pre-qualification amounts are dependent on mortgage interest rates, which shift over time with the property market, so this is also when you want to get a rate hold — a promise from your broker that if you apply for a mortgage within a certain time frame, you'll get the interest rate you've agreed upon, even if the market has changed since then.
Keep in mind that you aren't guaranteed to get a mortgage at the maximum amount listed in your pre-qualification. Factors like the size of your down payment, closing and moving costs, and the overall property value can affect whether you're approved for a mortgage on a specific home. Mortgage pre-qualification is mostly to give you a more detailed idea of what kind of property you can afford, and to show property sellers that you have a bank or broker's backing.
4. Get Some Professional Guidance
With your budget outlined and your pre-qualification in hand, it's time to start looking at properties! If you haven't already gotten in touch with a real estate agent, this is when you'll want to get one on board. You might get referrals from friends or family, recommendations from your mortgage broker, or want to look up local Realtors on your own. Whichever way you go, keep in mind that you'll be spending a lot of time together with your agent, so a good personality fit is a must. Don't be afraid to connect with more than one Realtor before making your decision.
Some qualities and skills you'll want to look for when deciding on a Realtor are:
- Experience with the neighbourhood(s) and type(s) of property you're interested in
- Knowledge of how houses and buildings are constructed
- Experience with reviewing and assessing strata documents, zoning restrictions, and other technicalities
- A high-quality referral network of local professionals (including building inspectors, tradespeople, and/or lawyers)
- Strong knowledge of benefits, bonuses, government programs, and alternatives that might improve your purchasing options
- Genuine interest in helping you reach your home ownership goals
- Great negotiation skills
When you think you've met the right Realtor, sit down with them to create an action plan and to discuss how their agency works. If you're still unsure, you can ask if they'd be willing to spend a test afternoon looking at properties with you. Once everything is worked out, you can formally enter into a working relationship, usually by signing a buyer representation agreement.
5. Keep Communicating
The home buying process can be complicated and isn't really over until the key to your new home is in your hand. A lot of problems can be avoided if you make sure that everyone involved can communicate with each other, and stay up-to-date on what's going on. Put your Realtor, mortgage broker, and any other professionals you're consulting in touch with one another, and inform everyone of any major changes along the way. You're most likely to find and secure the home of your dreams when you're all working together as a team.
Take care of these steps first, and you'll be set to purchase your first home the second it appears on the market. You don't control when the right property crosses your path, but you'll definitely appreciate being able to move on it with confidence when it does appear!