By doing your homework before you buy, you’ll feel more content about your new home.
Most potential home buyers are a smidge daunted by the fact that they’re about to agree to a hefty mortgage that they’ll be paying for the next few decades. The best way to relieve that anxiety is to be confident you’re purchasing the best home at a price you can afford with the most favorable financing.
These seven steps will help you make smart decisions about your biggest purchase.
1. Decide how much home you can afford.
Generally, you can afford a home priced two to three times your gross income. Remember to consider costs every homeowner must cover: property taxes, insurance, maintenance, and utilities, as well as costs specific to your family, such as day care if you plan to have children.
2. Develop your home wish list.
Be honest about which features you must have and which you’d like to have. Handicap accessibility for an aging parent or special needs child is a must. Granite counter tops and stainless steel appliances are in the bonus category. Come up with your top-five must-haves and top-five wants to help you focus your search and make a logical, rather than emotional, choice when home shopping.
3. Select where you want to live.
Make a list of your top-five community priorities, such as commute time, schools and recreational facilities. Ask your REALTOR® to help you identify three to four target neighborhoods based on your priorities.
4. Start saving.
Have you saved enough money to qualify for a mortgage and cover your down payment? Ideally, you should have 20 per cent of the purchase price set aside for a down payment, but some lenders allow as little as five-per-cent down as long mortgage insurance is obtained from Canada Mortgage and Housing Corporation. A small down payment preserves your savings for emergencies.
However, the lower your down payment, the higher the loan amount you’ll need to qualify for, and if you still qualify, the higher your monthly payment. Your down payment size can also influence your interest rate and the type of loan you can get.
5. Ask about all the costs before you sign.
A down payment is just one home buying cost. Your REALTOR® can tell you what other costs buyers commonly pay in your area, including home inspections, Lawyers fees, and land transfer taxes to the province government. Tally up the extras you’ll also want to buy after you move-in, such as window coverings and patio furniture for your new yard.
6. Get your credit in order.
A credit report details your borrowing history, including any late payments and bad debts, and typically includes a credit score. Lenders lean heavily on your credit report and credit score in determining whether, how much, and at what interest rate to lend for a home. The minimum credit score you can have to qualify for a loan depends on many factors, including the size of your down payment. Talk to a REALTOR® or lender about your particular circumstance.
If your credit score isn’t up to snuff, the easiest ways to improve it are to pay every bill on time and pay down high credit card debt.
7. Get prequalified.
Meet with a lender to get a prequalification letter that says how much house you’re qualified to buy. Start gathering the paperwork your lender says it needs. Most want to see forms verifying your employment and income, as well as two to four months of banking statements.
Consider your financing options. The longer the loan, the smaller your monthly payment. Fixed-rate mortgages offer payment certainty; an adjustable-rate mortgage (ARM) offers a lower monthly payment. However, an adjustable-rate mortgage may adjust dramatically. Be sure to calculate your affordability at both the lowest and highest possible ARM rate.
(G.M. Filisko is an attorney and award-winning writer. Reprinted from the National Association of REALTORS® HouseLogic.)