Are you a first-time home buyer wondering how YOU can afford to purchase a home? Does the whole process seem overwhelming? Does it leave you wondering “How Can I Buy a Home?” In this 2 part series first, we will look at you, then in part 2, we will look at the lenders.
First, let me explain that I prefer to send my clients to a Mortgage Broker, as opposed to a bank directly. I will get into details in part 2, but this is why I keep referring to Mortgage Brokers and Lenders in this article and not Banks.
So let’s look at you. What do you need to apply for a mortgage? There are 3 ingredients to look at: your income, your down payment, and most importantly your credit.
Your income will obviously affect how much you can afford to buy but there are options to consider. First, be realistic. I understand we all want the detached home with the white picket fences in a beautiful neighborhood. I get it. Was your first job the CEO of a multinational corporation? Probably not. You understand with your career you have to work your way up. Think of it as the same with your home purchases. You may need to sacrifice a few wants to get your first home. Don’t be discouraged by a lower budget. Also, if you find a home that allows you to rent out the basement or even a room to a student or friend, this can be added to your income and may increase your purchasing budget.
When it comes to your job you need to consider how long you have been employed as well as your income. Some people may think that they just started a new job out of University that pays $50k and so they put that on their application. Unfortunately, they have been working at a local restaurant as a server for the past 2 years while finishing school and their income has been $30k. Lenders will look at your 2-year history so although your new current job is $50k, your history shows $30k and that is likely what they will go by. There may be exceptions to this so please speak with your mortgage broker. If you are in a contract position though, like many Government Jobs are, it will be more difficult without the 2-year history. Self-employment is another situation where you will need to show a 2-year history of income.
Down payment is important as well. There are several first-time home buyer programs available for you to consider allowing you to offer as low as 5% down. You will need to pay insurance if you are paying less than 20% down, but that is a whole other conversation that you should have with your Mortgage Broker. We will go into different options for lenders in a moment but keep in mind that only “A-level lenders” will allow anything less than a 20% down payment in most cases. Something else to keep in mind is that friends and family can gift you money to help you reach the 20% down payment.
Now, let’s look at Credit. When you are thinking “How Can I Buy a Home?” your most important concern is your credit score. Do you know what your credit score is? Do you know what affects your credit score? Perhaps the best way to learn about your credit is to speak with a Mortgage Broker. They can tell you what your number actually means. You can learn more about your credit on the Equifax website (https://www.consumer.equifax.ca/personal/education/credit-score/) where they have several articles and videos to learn from. I personally monitor my credit for free on CreditKarma.ca but do not know if it is the best option. It does allow me to keep on top of my score for free. One thing to remember is that multiple credit score requests can negatively affect your score so you do not want to have several people checking it.
OK, so you have a steady income, you have a down payment, and your credit is good. You go online and enter all this information into a bank or lender’s website and you are Pre-Qualified. Now you know how much you can afford right? No. Pre-Qualified means exactly as it sounds. They are guessing that the information you provided is accurate without checking it at all. They have not qualified you, hence the Pre-Qualified. It does not mean much more than an estimate to be honest.
You go to a Mortgage Broker and get a Pre-Approval amount. Pre-Approval sounds much better than Pre-Qualified right? Now you know for sure how much you can afford right? Well, no. A Pre-Approval is only as accurate as the amount of information you have provided them. Have you given them all of your proof of income documentation? Provided documentation on any outstanding debt such as a car loan? Once you have provided the proof of all your income and debt, and the Mortgage Broker then gives you a Pre-Approval, that is when you are sure the amount is accurate.
THIS IS IMPORTANT… once you are Pre-Approved do not make any major purchases. Now is not the time to buy a new car. Remember that you are still Pre-Approval based on the information you provided at the time. Adding another large debt may change things and the lender may decide you are no longer Pre-Approved. Problem is, they will not be checking until you have purchased a property and they are doing their final review before approving. No major purchased between Pre-Approval and when you take possession of the property.
Now we have look at you, in part 2 we are going to look at the lenders and some creative alternatives. If you want to discuss how to get you ready to buy a property, please feel free to contact me. I really want to help answer your question “How Can I Buy a Home?”
