Thinking about purchasing your first home? There are many benefits to owning your own house, particularly on the financial side. Instead of paying rent without gaining worth, your monthly mortgage payment goes toward building up your net worth and earning assets. But as you know, since you’re reading this, buying a home is not a lickity-split decision. There is extensive planning involved, from where you’d like to live to the features you’d like in your house. But the very first thing a potential new homeowner should understand is the money-side of purchasing a home. You know that you’ll be paying for your house. But there are hidden costs and more steps to planning than just for the price tag. Get in-the-know with this guide to financial prep for first-time home buyers.
If you haven’t been keeping track of or following a household budget, you’ll want to start. Look back at your previous 3 month’s bank statements and get a rough estimate of how much money you spend and where. What you really need to focus on here are the non-negotiables and essentials.
Items to Track in your Budget
- Utilities (if separate from rent)
- Loans (student loans, vehicle loans, etc.)
- Subscription services and memberships (magazines, Internet, streaming services, etc.)
- Parking/travel expenses (gas, oil changes, etc.)
- Medical prescriptions
- Pet care
- Banking or credit card fees
- Daily Incidentals
- Emergency Fund
Once you establish your essential budget, you need to decide what you can afford in regards to a monthly mortgage and still live comfortably. Keep in mind that once you own a house, you will no longer have rent to pay! One major issue many homebuyers run into is that they splurge on their monthly mortgage but can’t afford general life comforts. No one wants to sit on the floor of a beautiful home because they can’t purchase furniture! Understanding your budget before you buy will set you up to live comfortably and enjoy your new home.
When you know your monthly financial capabilities, it’s time to take a look at your savings account. Most real estate professionals will suggest a 20% downpayment. In Canada, if you purchase a house for $500,000 or less, you must have a minimum downpayment of 5%, but may be required to purchase mortgage insurance to ensure you can make your monthly payments. Depending on what your accounts and assets look like, you may need to have a substantial amount of money saved up for your down payment.
Get Preapproval for Your Mortgage and Loan
All of the work you did to understand your budget is crucial for this step. You will take your financial information to your mortgage lender or your bank’s mortgage specialist. They can give you the cold hard numbers for the mortgage amount you will be approved for as well as the loan amount the bank will give you. This is what sets the stage for you being able to begin your home search! If you are approved for a $400,000 loan, you can eliminate homes above that price and focus-in on homes at or below that number.
Here are some examples of paperwork you may be required to bring to your appointment with your mortgage lender:
- Tax returns (1-2 years prior)
- Proof of income: This can be pay stubs, a W2, or other documents with your gross and net income
- Bank statements: If your mortgage lender is connected through your bank, they will have access to any accounts you have with their bank. Many banks have mortgage specialists on-site, so check with yours!
- Credit history: Credit reports are on of the key factors in deciding your interest rates and how much you will be able to borrow!
- Renter’s report: This is a simple way for lenders to learn if you are able to pay on time. If you’ve been consistent with paying your rent and utilities on time, this gives lenders peace-of-mind when it comes to deciding on approving your loan.
Purchasing your first home is a big milestone, and it should be celebrated with the knowledge that you are well-prepared to handle the financial side of things. At Sweetly, we believe in delivering a better experience to our clients. We work with a variety of real estate professionals who can help you at each step in your home-buying journey. If you are a first-time buyer searching for the perfect home, reach out to us via email at email@example.com or give us a call at 780.477.9338. You can also fill out our general inquiry form here on our website!