4 SIMPLE STEPS TO BUYING A HOME

STEPS TO BUYING:

While it’s so easy to get excited with our goals and plan of home ownership, it is extremely important to know what we can afford. This can be accomplished by having a budget. The first step in getting yourself in financial shape to buy a home is to know exactly how much money comes in and how much goes out. While it is a good investment to own a home, it is not considered wise to just work for the house and be “house poor”. When you have figured out the number that feels comfortable, use it to establish your goal. Establish what you “need” in a house and work within your budget.

To be successful in your home search, it is important to follow these simple steps:

1. Assess your budget, needs and goals.

2. Get Pre-Approved For A Mortgage

3. Consult with a Professional

4. Search homes like a Pro

5. Make An Offer

6. Prepare for Closing

 

For example, You have a spouse and 2 kids. You need to get a 2-3 bedroom house. You have a car so you will need a place to park. If your current budget will only allow you to get a basic house to start with, would you rather wait until you can afford the ones with the bells and whistles or be a homeowner now? Your needs and wants should be aligned with your budget and expectation to begin with or you will be wasting your time looking.

Use this worksheet to list your income and expenses.

 

INCOME

Take Home Pay (all family members)

Child Support/Alimony

Pension/Social Security

Disability/Other Insurance

Interest/Dividends

Other
Total Income

 

EXPENSES

Rent/Mortgage (include taxes, principal, and insurance)

Life Insurance

Health/Disability Insurance

Vehicle Insurance

Homeowner’s or Other Insurance

Car Payments

Other Loan Payments

Savings/Pension Contribution

Utilities (gas, water, electric, phone)

Credit Card Payments

Car Upkeep (gas, maintenance, etc.)

Clothing

Personal Care Products (shampoo, cologne, etc.)

Groceries

Food Outside the Home (restaurant meals and carryout)

Medical/Dental/Prescriptions

Household Goods (hardware, lawn, and garden)

Recreation/Entertainment

Child Care

Education (continuing education, classes, etc.)

Charitable Donations

Miscellaneous
Total Expenses

Remaining Income After Expenses

(Subtract Total Income from Total Expenses)

 

 

 

 

FINANCING

Financial considerations and preparation are central to any home purchase. Getting pre-approved before looking for a home not only will save you time, but also the heartache. A buyer who has already put their financing in place is in a better negotiating position when it comes time to make an offer to a seller.

There are 5 Cs (criteria) that a lender looks for to determine if you will qualify for a mortgage.

1. Character

2. Capacity

3. Capital

4. Collateral

5. Conditions


Step 2 – Assess Your Finances

Now that you have figured out that your credit is excellent, ask yourself this: Do I have a stable income to pay for my mortgage? A good rule is at most 30% of your income should be spent for housing costs. If you are currently renting and you’re having a hard time making the ends meet, maybe you’re not ready yet. There are costs associated with buying a house.

 

FINANCING

Financial considerations and preparation are central to any home purchase. Getting pre-approved before looking for a home not only will save you time, but also the heartache. A buyer who has already put their financing in place is in a better negotiating position when it comes time to make an offer to a seller.

Step 1 –Assess your credit worthiness

It is important to obtain an up-to-date credit report to verify that you are in a suitable position to buy a home.

Credit scores range between 300 and 900, with scores above 680 (nowadays, 720) considered desirable for obtaining a mortgage. Credit scores are calculated using information in your credit report , including your payment history; the amount of debt you have; and the length of your credit history. Credit scores help lenders, and other creditors determine if you’re suitable to get a loan. There are a lot of factors that can affect your score and some are written below. When it comes to determining if a lender will extend a loan is dependent on these factors and over-all history, not just the score. 

The main factors involved in calculating a credit score are:

  • Your payment history (35%)

  • Your used credit vs. your available credit (30%)

  • The length of your credit history (15%)

  • Public records (10%)

  • Number of inquiries into your credit file (10%)

1. Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Did you miss a payment? How many times? Bankruptcy filing, consumer proposal, liens, and collection activity also impact your history. Your credit history will also detail how many of your credit accounts are delinquent (not paid on time or missed) in relation to all of your accounts on file. For example, if you have 10 credit accounts (known as “tradelines” in the credit industry), and you’ve had a late payment in 5 of those accounts, that ratio may impact your credit score.

2 Your used credit vs. your available credit. How much you owe? If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits. For example, if your credit limit is $10,000, how much of this have you used up? When you used up more than 50% of your limit, your score begins to decline.

3.The length of your credit history. In general, the longer you have had accounts opened, the better. In general, lenders want to see that you have a handle on your financing and debt repayment over a long period of time.  New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.

4.Public records. Those who have a prior history of bankruptcy, or have had collection issues or other derogatory public records may be considered risky. The presence of these events may have a significant negative impact on a credit score.

5.Number of inquiries into your credit file. Every time a new financial account is to be created with an institution or company for the purpose of saving or borrowing, an inquiry is being made to your account. If you are applying for a car loan or car lease, a deferred loan (“Don’t Pay Until … loans”), most likely than not, an inquiry will be sent to check your file. This is called “hard hit” and affects your score. These requests are logged on and goes to your inquiry history. So, if you’re shopping for a car loan and you went to 5 lenders, there will be 5 “hard hits” in that short period of time. From time to time, institutions make a “soft” inquiry on your file to offer you a loan or pre-approved credit cards. These, as well as your personal inquiry do not affect your score.

Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example. If you pay all of them promptly, it will show that you are a responsible and low-risk borrower and the chance of extending you a mortgage is higher. If you always pay your goods or services using your debit card, and you have no credit lines, chances are, when it’s time to getting a mortgage, you will not have a “credit history” and this can cause your application to get denied. If you are thinking of buying a home and need help re-building your credit, contact us with Subject: Help Rebuild My Credit.

Step 2 – Assess Your Finances

Now that you have figured out that your credit is excellent, ask yourself this: Do I have a stable income to pay for my mortgage? A good rule is at most 30% of your income should be spent for housing costs. If you are currently renting and you’re having a hard time making the ends meet, maybe you’re not ready yet. There are costs associated with buying a house.

 Get Pre-Approved for a Mortgage

There’s a reason we put this section first: the first step to buying a house or condo in Toronto should be finding out how much your bank is willing to lend you. When you pre-qualify for a mortgage, your lender will look at your income, your debts and your down payment. It’s important to take that pre-qualification to the next level before you fall in love with a house by getting pre-approved for a mortgage. A mortgage pre-approval will be in writing (generally valid for 90 or 120 days) and will require you to prove your income and credit history. Pre-approvals will include an interest rate guarantee.

Of course, a pre-approval is not a guarantee that a lender will lend you a certain amount of money for any home. Lenders want to know that the home they are purchasing with you (by lending you the money) is worth what you paid. In Toronto, banks generally order independent appraisals of a home before they advance the mortgage money.

Getting pre-approved will ensure that you know how much mortgage you can get, which in turn will help you know what price range of homes you should be targeting in your search. It allows you to focus your house hunting efforts, and eliminates the risk and uncertainty of financing once you find your perfect home.

Step 2 – Mortgage Decisions

Mortgages can seem intimidating, especially for the first-time buyer. Once you’ve qualified for a mortgage, there are some basic decisions you will have to make before you take possession of your house or condo: Mortgage term, amortization, interest rate and type of mortgage. Read on to find out what all of that means and use our handy Mortgage Calculator to estimate what your payments would be.

Mortgage Term and Amortization

The mortgage term and amortization period affect the amount of money you can borrow (and thus the price of the home you can buy), and dictate how much your monthly payment will be.

Mortgage term

This is the amount of time a lender will loan you money for – typically from 6 months to 5 years. When the term is up, the remaining amount is payable in full unless you arrange new financing for another term.

Choosing a mortgage term is tricky and requires you to be knowledgeable about trends in the marketplace, as well as having a sense as to the amount of risk you’re willing to endure. If you choose a 6-month term, and interest rates increase drastically in that time frame, will you still be able to afford your home?

Amortization

Few (if any) of us can pay off the entire principal of a large mortgage in a six month or even a five-year term. Imagine how big your payments would be! To help you out, lenders calculate or amortize, the mortgage payments over a much longer time, often as long as 25 years. They aren’t loaning you the money for a single 25-year period–they’re just calculating the payment schedule as if it will take you that long to pay back the principal plus interest. You will probably renew the mortgage several times during the amortization period, and you always have the option to change the amortization depending on market conditions or your financial situation. The longer the amortization period, the lower your individual payments will be – but this also means you’ll be paying more in interest.

Payments

Most mortgage payments consist of two parts: principal and interest. This is known as a blended mortgage payment. Each payment reduces the balance owed on the mortgage by the portion of the payment that is credited to the principal. Over time, the proportion of your payment that reduces the principal balance will increase. The faster you can pay down the remaining balance, the less total interest you’ll pay. There are many ways you can pay down your mortgage faster, from accelerating your payments (e.g. paying biweekly instead of twice a month, for 26 payments per year instead of 24) to making lump sum payments on your mortgage; your lender can help define the right strategy for you.

Interest Rates

The interest rate is one of the biggest contributing factors to how much you end up paying for your home, both on a monthly basis and over the life of your mortgage.

Interest is the cost of borrowing money. Interest rates fluctuate with the economy. The interest rate you commit yourself to at the beginning of the term can have a significant effect on the amount you pay each month for your mortgage. There are two basic types of interest rates used in mortgage products: fixed-rate and variable-rate.

Fixed-rate mortgage – Essentially, this means committing to a single interest rate that will not change for the term of your mortgage. This strategy locks in how much of your monthly payment repays the principal vs. going to interest. Fixed-rate mortgages are great in an economy where interest rates are going up, as you never have to risk paying higher interest rates. But in an economy where interest rates are going down, you could be stuck paying more in interest than the going rate. If only we had a crystal ball…

Variable-rate mortgage – With a variable rate mortgage, the dollar value of your monthly payments is fixed for a specific term, while the proportion of interest to principal floats in relationship to the bank’s prime interest rate. If rates go up, more of your payment is applied to interest and less is applied to the principal. If rates drop, more of your monthly payment is used to pay off your principal and your mortgage is paid off sooner. Variable rate mortgages can protect you if interest rates are high at the time you arrange your mortgage; when rates fall, you’re not stuck with high-interest payments, and more of your payment is applied to the principal. But if interest rates increase, that could mean more of your payment is being applied to interest than you bargained for. In some instances, lenders will allow you to convert to a fixed-rate mortgage in this kind of situation.

Types of Mortgages

Conventional mortgage – Aptly named because they are the most common type of mortgage. The lender will loan you up to 80% of the appraised value or purchase price of the property (whichever is lower), and you generally need to come up with the other 20% as a down payment.

Second (and third) mortgages – These are additional financing arrangements behind an existing mortgage, also secured by your property. Secondary financing is generally arranged at a higher interest rate and for a shorter term than the first mortgage.

High ratio mortgage – When you don’t have the 20% down payment required to get a conventional mortgage, a high ratio mortgage can advance you up to 95% of the home’s appraised value or purchase price. However, since you are borrowing more than the usual 80%, the government insists that the mortgage is insured against default and that you pay the cost of the insurance. That cost can be a few percent of the mortgage amount, and is added to the mortgage principal.

Step 3 – Choose a Lender

There are lots of kinds of lenders and mortgages out there. It’s a good idea to go to at least three lenders:

  1. Your own bank. They have your bank accounts, credit cards and investments so they should be motivated to give you a good rate.
  2. A mortgage broker. Mortgage brokers work with a lot of different lenders and will go to them on your behalf to find the best mortgage rate and terms. Usually, broker fees are paid by the banks, so it’s a good way to comparative shop without having to do all the leg work yourself.
  3. RBC (and ideally, our main man Henry Vincent). RBC doesn’t work with mortgage brokers, and we’ve found them to be extremely competitive with rates and mortgage terms. We have yet to find someone who delivers better service than Henry, and he’s always available (unlike the mortgage person who works out of a branch from 9-5). If you call Henry, tell him BREL sent you for the very best experience.

It’s important to note that not all of these decisions have to be made before you start looking for a home; the crucial step is getting a pre-approval from a lender—then you’re ready to start the search! Details regarding term, rate and even which lender you use can be decided—and changed—after the actual purchase, all the way up until reasonably close to your closing date (the date you take possession of your new place). However, the more you understand about your options, the better prepared you will be when that magical day comes.

Steps To Buying:

 

  1. Get pre-qualified for a mortgage, make important financing decisions and choose a lender
  2. House hunt like a pro, online and in person
  3. Make an offer and not be intimidated by the paperwork, negotiations or bidding wars
  4. Be prepared for the closing process and costs so you don’t get caught off-guard

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