Over the weekend I caught up with some good friends that are currently renting and thinking about taking the plunge to purchase a new home. As first-time homebuyers, they had the foresight to request a mortgage preapproval. This quick process provided them with the peace of mind that they were seeking: they now know what price range of home they hunt for based on their current income, the downpayment funds that they had saved up and their monthly budgeting.
Great! “Now what? We don’t know where to go next!”
Wow. I’ve been working in the financial services for 10 years and have purchased real estate in the past – it seems second-nature from my perspective. In thinking about it, it dawned on me: From the outside, purchasing a home seems so simple… at first blush it’s as simple as do a few walkthroughs of some properties, negotiate an offer on the home that you can’t live without, go to your lawyer and sign off, get your keys and move in, right? Well, sort of. This really IS the process – with a whole LOT of smaller steps and things to think about in between! When boiled down to the nitty-gritty, there are at least ten major steps and a heck of a lot of planning that has to take place between the house-hunting phase and moving in.
In today’s post, I’ll start to help walk first-timers and pros alike through first two of the 10 main steps towards purchasing a new home. Although my friends had already completed today’s steps before and part of the preapproval process, we’ll still review them here:
Step one: Are you at the stage of your life where buying a home for the first time makes sense?
Let’s analyze where you sit in your life cycle – are you stationary in the same place for the foreseeable future? Will your career or lifestyle move you about? Have you recently changed jobs or been laid off from your current employer? Are you single but soon to be married? How far away is retirement? Can your monthly budget of income vs. expenses afford the monthly and annual costs of owning a home? When you compare the monthly costs of owning a home versus renting, which “makes more sense” to you at this point in time? There are plenty of questions that need to be digested before taking the leap into home ownership – the answers are different for everyone and change over time!
Step Two: Are you financially ready to purchase a home?
When we compare current income rates (and savings rates) against current property values in Canada, it is quite common for homebuyers to require financing to complete the first-time homebuyer transaction. This is most commonly in the form of a mortgage from a financial institution.
Three of the main cornerstones of a mortgage application involve analyzing your unique personal financial “big picture” are your credit score, your employment and income, and finally, your down payment funds. These main factors help lenders assess your stability and personal ‘risk quotient’ in the sense that you are vouching your overall stability and likelihood of repaying the mortgage loan to the lender in order to obtain the loan.
Credit: Have you ever seen your credit bureau?
If so, where does your beacon score sit? In general, this ‘historical track record’ of credit management will help lenders on these reports to gauge your personal track record of repaying your loans and credit accounts over time. Speaking of beacon scores, the general rule of thumb is: the higher, the better.
If you don’t have a long credit history, or if you’ve missed a few payments here and there (or more rather than less), you may require a family member to cosign with you. Cosigning is a process where your file is reinforced and vouched for by the stronger financial situation that your cosigner has. In many cases, lenders allow your cosigner to be ‘released’ from the file after a full year of consecutive payments and as your credit rating strengthens.
Downpayment: Where is yours coming from?
For the most part, the 0%-down mortgages of 2008 and earlier have disappeared; the programs that currently exist don’t really make a heck of a lot of financial sense to carry forward with (higher rates and fees make it a redundant option). Having said this, in today’s marketplace, there are several ways that you can source your downpayment for your mortgage:
- Your own resources: Savings, Mutual Funds, Stocks
- RRSP investments: you can withdraw your RRSP savings tax-free through the Government’s Home-Buyer’s Plan (HBP). To learn more about this, please click here. If you are making periodical deposits to your RRSP investment accounts, please note that the money has to be “in” the plan for at least 90 days to be eligible for the HBP withdrawal program.
- Loans: If you have a beacon score of at least 680 (that’s quite strong), you can actually borrow the funds from bank loans, credit cards, lines of credit or family loans. Please note that the payment relative to these borrowed funds would be included in the debt-servicing calculations as your “mortgage math” is computed (more on this here) .
- Family Gifts: Your direct family members (Husband/Wife, Parents, Children, Siblings, next-of-kin) can give you money for your down payments in the form of a non-repayable gift. Lenders will request a signed gift letter and proof of the funds having arrived in your account to prove this.
Employment and Income: Is your employment stable?
Lenders and mortgage insurers (CMHC, Genworth Financial) like to see that you have at least three months’ history of employment with your current employer; it’s no small wonder that this figure coincides with most companies’ probation policies with relation to new hires. This helps to provide confidence that you are full-time employed and that you have stable income flows.
Have you recently changed jobs or shifted to being self-employed from a previous work history of working as an employee? This isn’t necessarily a deal-killer! A main point of the mortgage underwriting process is consistency in your income and occupation. If you’ve been working for a solid amount of time (3-4 years) and you have now shifted to a similar role in the same or a related industry, this reinforces consistency and helps to instill an image of ‘growth’ as well as ‘specializing’. Although these are rough guidelines, everyone’s situation is unique.
Over the next few days, I will complete the 10-steps to homebuying series. Nest up: How much does home ownership really cost? … and more!