Buying a home is probably the largest single investment you will make in your life. It can be intimidating and overwhelming but I will try to break it down into less intimidating bites and share some tips along the way.
Quick tip #1 – the earlier you make the decision, the better as it gives you a longer time to repay thus resulting in smaller monthly payments.
Let’s say you are a new graduate…you just completed your first degree and started your first job. You’re earning $8,500 a month and living at home with your parents and siblings. You blow your first few paychecks on stuff just for the fun of it. But after a few months you start thinking that sharing your room is not so much fun and it might be nice to have your own place.
Great…everything begins with a thought! Check around and see what’s on the market and within your budget. Most mortgage lenders will lend:
- up to 90% of the lower of cost or valuation of the property
- up to 30 years or retirement whichever comes first
- at market competitive rates – which means that their interest rates will all be close and there may be some room for negotiation depending on the strength of your application
- with debt service ratios of 30/40% which means that the mortgage payment should not exceed 30% of your salary before tax and total debt service payments (all loans) should not exceed 40% of your before tax salary.
With this in mind, at a salary of $8,500, your monthly mortgage payment should not exceed $2,550.00 and this will qualify you for a loan of approximately $430,000 over 30 years at 5.75%.
What can you get for $430,000? If you have land (maybe a gift from your parents) you may be able to build a nice starter home for that amount or alternatively buy land. Some banks offer loans on “interest only” terms with a condition that you start construction of your home within 3-5 years.
If you buy land, in 5 years it will appreciate in value so you will have earned equity in your property. You will likely also have an increased income which will allow you to borrow additional funds to build your home.
If you deferred acquiring your home, don’t despair! This simply means that you would have moved further along the experience and income scale. You likely know exactly what kind of home you want, have some savings and an income that will allow you to get it, so, go for it!
You’re probably wondering what is the purpose of the debt service ratios? Simple, these ratios are a guideline that lenders use to ensure that a borrower’s debt servicing is kept to a level that will allow them to live comfortably after making their loan payments.
Remember to put aside funds for closing charges such as legal fees and stamp duty and of course you need money to furnish the house! If you’re purchasing a home for around $1.25 million with a mortgage of $1 million, you should have at least $40/45,000 put aside to cover legal fees, stamp duty and other closing charges.
Quick Tip # 2 – A home is a long term investment so think long term when making this decision.
Over the course of your mortgage loan, your salary will increase so the percentage of your income going towards your mortgage will reduce over time. The value of the property is also likely to increase over time which means that you will be able to use this equity to finance future expenses such as university expenses for your children or major medical expenses.
The appreciating value on your home may also enable you to sell it and acquire a larger or more upscale home as your family and career grows.
Your mortgage loan is also a long term commitment so be sure that your choice of mortgage provider is a party you will be comfortable doing business with over a long period of time.
Quick tip # 3 – Check your credit score!
Mortgage lenders will do a credit check on you as part of the loan assessment process. It is a good idea to check your credit score periodically so there are no unpleasant surprises when you are ready to apply for the mortgage loan. All local banks subscribe to a credit reporting agency and individuals can also obtain a copy of their personal credit report from the agency’s office in Woodbrook for a small fee.
Quick tip # 4 – Check their credentials!
Before you sign on the dotted line and hand over your hard-earned cash, ensure that the people you are dealing with are qualified and legitimate.
Attorneys, Valuers, Surveyors and Real Estate Agents all have to be qualified and registered with professional bodies. Check that your people are registered. Most professionals display a copy of their certificates and practicing certificates in their offices. Some professional bodies also list their members on their websites.
The small investment in time spent checking your business associates’ credentials could save you a lot of stress later and safeguard you from falling into the clutches of fraudsters.
Quick tip # 5 – Be time conscious
Most Sale Agreements carry a 90 day closing period from the date of the agreement. What this means is that you have 90 days from the date of the agreement to pay the vendor the amount outstanding or you run the risk of forfeiting your down-payment.
Bear in mind that during this period you will have to apply for your loan, get approved and get all the legal work done including the title search. Time is off the essence once you’ve signed the sale agreement so do not delay.
As I started off saying, buying a home is probably the largest single investment you will ever make and it can be a bit overwhelming. However, like any big or important task, the key is to be prepared and break it down into smaller, more manageable bites. Shop around for a mortgage lender you are comfortable with, get pre-qualified and then go shopping for the home of your dreams.
Association of Real Estate Agents (AREA)