Monday, April 1, 2019
12 Tips for First Time Home Buyers
Welcome to April folks. Birds are chirping, the snow is brown, and realtors are licking their lips. It is officially home buying season here in Canada. It is the time of year where moves are made as everyone gets an itchy trigger finger. For first time home buyers, this kind of environment can be nerve-wracking, to say the least. So many questions and so few trusted voices to give answers. Let’s face it, there is a whole industry out there trying to put you in a home, any home, even if it’s not right for you. Today I am going to give you my 12 tips for first time home buyers to follow to make sure they make the right move this spring. Owning a home is a beautiful thing, but only if done the right way. Let’s get started.
1) Save Money…. Duh
We need to escape the notion that you can buy a home if you can afford rent. What matters more than what you pay for rent is what you make and what you have saved. If you cannot save money, you cannot own a home. Period. The first home is always the hardest to get because you have no equity. All you have is what you have saved and if you think that rolling around with a 5% down payment is good enough, you’ve lost. Sure, you can buy a home with only 5% down and there is nothing wrong with that. The problem is that if your life’s savings is that small down payment you have left yourself very vulnerable. You need to be ready for life’s “what ifs” and that means having an adequate emergency fund, ideally 6 months salary. Taking an extra year to save more is not a bad thing and do not let anyone tell you otherwise.
2) Be debt free
The largest debt you will ever have is a home. Very few of us have a couple hundred grand lying around, so a mortgage is necessary. The problem is that when you apply for a mortgage one of the key factors is your debt service ratio. This means how much debt can you handle paying back on a monthly basis. The largest payment will be or should be, the mortgage itself. If you are adding on other payments like high-interest credit cards, lines of credit, buy now pay later crap, and anything else, you are making it tough to get a mortgage. Even worse you are making it tough on yourself to survive every month. Having savings and being debt free are 2 essential “no compromise” points for first time home buyers. That’s why I put them 1 and 2.
3) Truly understand your budget
Again, we need to escape the notion that if you can afford to rent, you can afford to own a home. That is completely, utterly, deceivingly false. Owning a home is much more expensive than renting. Things like insurance, taxes, and higher utilities will be added to your monthly budget. Even more troubling is the maintenance bill that will be coming your way. You must have to begin with and continually put money away for regular home maintenance. Firstly, things will need to be repaired all the time. Water heaters, leaks, cracks, landscaping, the list never ends. Secondly, if you do not put money into your home on a regular basis you can see your investment dwindle in value. Use a tool like my mortgage broker friend Shawna Ireland, Money Momma, uses with her clients called the backward budget. This is where you take everything you must pay and work backward from your income for the month. If you get to what’s left over and that number is less than 25% of your total income, red flags should arise. Chances are your standard of living won’t go down when you buy a home, ie: nights out, vacations, being fabulous in general. Make sure you know your budget like the back of your hand, so you don’t have a huge house with no furniture.
4) GET PRE-APPROVED
Yes, I am yelling. I don’t for the life of me understand why people even go look at houses when they are not yet pre-approved for a mortgage. It’s like window shopping Ferraris, you know it ain’t happening. Getting pre-approved is so blatantly easy. It only takes maybe 30 minutes and you can go into home shopping in the ballpark of where you stand. I will say this about getting pre-approved, however. Certain people in the industry will overshoot you for what you actually qualify for. Yes, you may be able to “afford” a 400K home, but that is just on paper. This is where your budget becomes vitally important. ONLY YOU know what you can truly afford. Get the pre-approval but then understand where you want to be and should be as well.
5) Stop doing stuff with your credit
So, you are shopping around for a home. Right now, isn’t the time to finance a car. Probably shouldn’t open 2 more credit cards either. Long story short, don’t do anything while you are trying to get a mortgage that will ding your credit even slightly. The algorithm used for underwriting a mortgage is very finicky and even slight credit variations could cost you a higher interest rate or even not getting the mortgage at all. It’s walking on eggshell time folks and I say this not because of horror stories, but rather first-hand accounts of mortgages falling through and people being devastated.
6) Shop around
So, you have the down payment. You are debt free and play that monthly budget like a finely tuned banjo. Your credit is tip-top, and you know what you can afford. Do not be afraid to shop around for the best rates. A good mortgage broker is there to find you the best rate and the best terms for your mortgage. You don’t have to settle for what you are given, and chances are if you are settling, you probably shouldn’t be buying, to begin with. Carry yourself with confidence and do your homework. This is not a time where you should be completely relying on what one person tells you.
7) Forget the banks
I would apologize for swearing, but no, can’t do it. The banks are absolutely terrible. They are not in the business of making you successful. If it were up to them you would buy multiple homes in your life, refinance them on a regular basis, all the while juicing up 4 credit cards and a line of credit as well. Be wary of collateral mortgages also. They are the worst of the worst. They are almost impossible to get out of and can cost you a fortune. A certain Green Bank here in Canada is famous for them. You may not think you want to leave your mortgage before term, but it could be a situation where you should. Job loss, better rates, refinancing, all might be in your future. That’s why the terms are often just as important as the rate you get from the lender. Again, do your homework.
8) Know your hood
Location, location, location. Along the lines doing your research, don’t forget to thoroughly research your city and neighborhood. Certain neighborhoods are up and coming, while others are stagnant. Certain neighborhoods are overpriced because of prestige, while others are undervalued because of the opposite. Are you close to a school? Are you close to a grocery store and other amenities? Are you close to a landfill or sewage treatment facility? It is important to understand where you are buying along with the home that you are buying. A good realtor should know the neighborhoods of your city inside and out.
9) Leave yourself an out, conditions
There has been an astonishing development over the past few years where I live, London, Ontario. People are throwing tons of money over asking price at houses and they are putting in these offers without any conditions. This is troubling to me for many reasons. Firstly, if you put in an offer over asking and don’t have a condition of financing, you could be on the hook for the margin of price over the true value of the home. This means that the house that’s worth 250K that you bought for 320K is going to cost you 70K out of pocket if you cannot get financing for that extra money. Do you have 70K lying around? Many do not. Also, why is there this frenzy to pay more for something than it is worth? Do we live in the Great Depression and are bidding on the last loaf of bread? Are houses not being built daily all over the place? The funny thing about frenzies is that it causes people to do crazy things, like spend too much or shoot themselves in the foot. Don’t fall for it and always leave yourself an escape clause.
10) Know the closing costs
Buying a home is not just the cost of the home. You have realtor fees, lawyers, land transfer tax, utility security deposits, home appraisal or inspection, title insurance, property insurance, and various other costs. They say to budget 3 to 4% for the cost of the home for closing costs. That is not cheap my friends. This again is another reason why having a dedicated budget and savings is so important. You do not want to be caught high and dry after you sign on the dotted line.
11) Get real and be reasonable
Nothing bothers me more than people justifying bad decisions. People will often say, “I deserve this,” or “I have earned this,” or the best, “It is what it is.” Warren Buffett once said, “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” Put buying a home into that box. There is no reason for 2 people to live in a mansion. There is no reason for your first home to cost a fortune. Owning a home is not a right, it is a privilege that you earn. Don’t get me wrong, I believe owning a home is an amazing thing and is a key part of your personal financial plan. The problem is when we take a business decision and make it emotional. Yes, that home is beautiful, but is it “the one?” We drop people all the time from our lives and they are far more unique than homes. Stay within your range and don’t let anyone take you out of it. This bad decision could hurt you for years and even could mean you will be renting the next place you live.
12) Find a good realtor
I leave this one for last because it is that important. A good realtor is worth every penny you pay them. They should help guide you through the home buying process. They should help you understand the neighborhood and city you are buying in. They should be there when you have a question and give you an honest answer. They should let you know of the costs associated with the home like property taxes and condo fees. On the flip side, a bad realtor can completely ruin your experience. I have seen many people burnt by realtors who gave them misleading information or omitted other information. I know many realtors, and most are amazing people trying to help their clients through the process. Take some time and do some background research on the realtor you are choosing. Ask lots of questions and be informed. Remember, realtors get paid very well for their service. The ones that are great at what they do will be hustling to earn every dollar.
As a last note, having a good team to help you with this process is important. Realtor, broker and financial advisor should all be working together to make this purchase as seamless as possible. No stone should be left unturned and no question is too stupid. Buying a home should be a joyous occasion and having all the right information will make it just that.
“It’s easy to underestimate the real cost of homeownership.” – Suze Orman
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