84% of Canadian millennials believe homeownership is an important life milestone. I couldn’t agree more. After my husband and I got married, we were excited to buy our first home together; it felt like the next natural step to our marriage. But looking back, we didn’t fully consider the massive commitment we were making.
Part of my job as a realtor is to make sure you’re ready to buy a home before we decide to work together. So, here are some important questions every first-time home buyer should ask before starting to search for their dream home.
It’s so important to ask yourself if you’re ready to stay put in one place for at least 3 years. Are you becoming more established in your career and ready to make an investment that will benefit you and your family in the long term? You don’t have to find your forever home now, but make sure you’re ready to find a home that you won’t outgrow in a year or two. Think about where you see yourself in the next few years before committing to a mortgage.
Home ownership is an opportunity to gain wealth through home equity, which can help you move into a larger property in the future, but don’t ever feel pressured into becoming a homeowner or moving too quickly to buy. Your decision needs to make the most economical sense, so write out the pros and cons for renting vs. buying and weigh your reasons.
A big part of your financial health going into home ownership weighs on your credit score. The lower it is, the harder it’s going to be to get approved for a mortgage, let alone a good mortgage. It can still be possible to get approved with poor credit, but be ready to pay higher interest rates and have stricter rules in regards to payment penalties.
This is THE most important question you must ask yourselves. It’s so important that I had to break it down into three more questions. Look at your spending and saving habits and talk to professionals to make sure you are financially ready to make the plunge into homeownership.
Depending on the price of your home, you’ll need a minimum downpayment of 5% to 20% in Canada:
There are multiple ways you can save up for a downpayment and closing costs: setting up automated deposits into your savings account each time you get paid, selling stocks, having a side hustle or reaching out to your family and friends. The Home Buyers’ Plan (HBP) also allows first-time homebuyers to withdraw up to $25,000 from their Registered Retirement Savings Plans (RRSP) for a home, tax free. My husband and I tapped into ours when it came to buying our first home together.
Besides the down payment, there are a few fees associated with the closing process like inspections and lawyers. The rule of thumb is to save 2-3% for closing costs.
Most banks and lenders want to see that you’ve had a regular, steady income in the last two years. And rightfully so. They want to know that you can make your monthly mortgage payments.
The first affordability rule, as set out by the Canada Mortgage and Housing Corporation (CMHC), is that your monthly housing costs – mortgage principal and interest, taxes and heating expenses (PITH) – should not exceed 32% of your gross household monthly income.
The CMHC’s second affordability rule is that your total monthly debt load, including housing costs, should not be more than 40% of your gross monthly income. In addition to housing costs, your total monthly debt load would include credit card interest, car payments, and other loan expenses. The sum of your total monthly debt load as a percentage of your gross household income is your TDS ratio.
If you exceed these ratios, you might have a tough time keeping up with your expenses. And the last thing you want to be is house poor.
Plan for maintenance costs, but also for repair costs. These are the costs to homeownership that will surprise even the best of planners. Remember that crazy wind storm we had in the GTA that blew off every other homeowner’s roof? Who was prepared for that?
It can take a while to build an emergency fund, but it’s so necessary. You can start with small monthly amounts and work your way up. If you don’t have extra money to cover the unexpected, you may want to hold off on purchasing a home.
At the end of the day, you need to find a realtor that you like and trust. Just because a realtor successfully buys and sells real estate doesn’t necessarily mean that they’re the right agent for you. You want someone that will take the time to truly understand your needs and your family’s needs, someone who is easily accessible, in your corner and working hard for you.