You’ve decided that this is the year you buy a home, but have you ever thought about how to prepare to be a homeowner? This will likely be the largest purchase of your life, so you won’t want to rush things. Owning a home is a serious decision, so you want to get it right.
Okay, so there’s no set formula when it comes to buying a home, but there are a few things you consider before taking the plunge. If you get your finances in order and research your options; you’ll hopefully avoid making costly mistakes when it comes time to close. Here’s how you should get started when you’re ready to buy a home
Pay down your debt
First off, pay down any high-interest debt. If you’re carrying a balance on your credit cards that has a 19.99%+ interest rate, you really shouldn’t even think about buying a home. Those interest payments are insanely high and should always be paid down first.
Now think about your other consumer debt. It’s okay if you still have student loans and say a car loan, but what’s the outstanding balance? If you owe $60,000+, I don’t think it’s a very good idea to think about buying a home (unless you have a high income). You’re much better off reducing your debt first.
Of course, lowering your debt also helps you with the home buying process. Having less debt means you’ll have a lower debt-to-income ratio, which in turn would mean you can afford more home. It might even help you secure a lower interest rate
In Canada, you need a minimum of 5% saved of the purchase price to qualify for a mortgage. If you have 20% saved, you’ll avoid CMHC insurance, but I understand that saving that much can be difficult for many people.
If you want to prepare to be a homeowner, you’ll want to save as much money as possible. The easiest way to start saving more is to cut your expenses. Before I bought my home, I had unnecessary expenses such as cable and excessive eating out. I cut those and diverted that money towards savings.
One trick to make saving easier is to make things automatic. I set up automatic withdrawals for all my savings right when I get paid. Since those transfer happen right away, I never miss the money. I’m paying myself first!
Do your research!
Many people rush into the home buying process without even thinking about it. Again, this is going to the largest purchase of your life, so why rush?
Take the time to figure out how much it costs to be a homeowner. You’ll want to create a budget with all your anticipated expenses. Don’t forget to factor in your retirement savings, vacations, and the cost of having kids. Not sure how much you can afford? Use Rob Carrick’s Real Life Ratio as a reference.
You’ll also want to research how mortgages work. A mortgage broker (more on them below) will be able to walk you through the different options, but you’ll want to have a basic understanding of them first. Choosing the right mortgage could save you thousands of dollars; to learn more, check out my guide on the mortgage basics.
Assemble your real estate team
I talked about assembling your real estate team in an older post, but let’s go over it again. Having the right people work with / for you is paramount when buying a home.
First, you’ll want a mortgage broker. In most cases, they work multiple lenders, so they’ll be able to get you the best rates. As mentioned, they’ll also be able to explain all the different details of your mortgage and help you choose the right one. Remember, the cheapest rate mortgage, doesn’t automatically mean it’s the best option.
Obviously, you’ll want a realtor, but don’t just pick a random person. Don’t use your co-worker who’s a part-time realtor, or that family friend who only does deals in real estate on the other side of the city. You’ll want to work with someone who knows the neighbourhoods you’re interested in.
Finally, there’s your real estate lawyer. You need one to close your deal, but don’t underestimate their value. They’ll look over all the paperwork to make sure everything is good and then deal with all the closing procedures.
Again there’s no set way or formula when it comes to how to prepare to be a homeowner. The best thing you can do is to just prepare yourself and not rush anything.