Buying a new home is exciting, but it’s also likely the biggest purchase of your life—and one of the most stressful. This pressure is compounded when the market is sizzling hot, homes are selling for well over asking and competition for properties is fierce.
And with high demand and lower housing inventory, those high selling prices can feel unachievable. Despite all of this, houses are being snapped up as soon as they hit the market, so you’ll want to have all your ducks in a row when you’re ready to start house hunting.
While it’s easy to rely on your real estate agent for financial advice when buying a home, keep in mind that a realtor is not a lender. That’s why it’s important to do your homework and know your credit score, your debt-to-income ratio and what you’re comfortably able to afford.
Here’s what to consider before you start house hunting:
1. Check your credit score
If you don’t know your credit score or haven’t checked in a while, pull your report from one of the major credit reporting agencies. Scores start at 300 and go to 900 (the average Canadian credit score increased to 667 in 2021), so having an understanding of where your credit score lands is beneficial. Knowing your credit score can help you figure out your financing options for a new home.
However, it’s worth noting that your score itself is not the whole picture, as the credit report has other valuable information for the lender to review. Check for mistakes or fraudulent activity to avoid any surprise, and have an idea of what’s on your report before you start talking to lenders. Overall, the better your credit history, the better your chance of securing good terms and rates.
2. Don’t forget to consider new costs
Aside from a down payment for a new house, you’ll also need enough money for closing costs (in major centres like Toronto, this can be 4 to 7% of the overall purchase price of the house), as well as ongoing costs over and above your mortgage payments. This could include the standard items such as property tax, homeowner insurance, condo fees (if applicable) and maintenance and repairs.
But there are more costs that might come into play. This could also include items you may not have considered upfront, such as new windows, better insulation, upgraded heating or A/C, refreshed landscaping, new roofing or a WETT inspection—plus additional insurance costs for that charming fireplace.
3. Prove your income (from all sources)
Before talking to lenders, you’ll need to know your income and be able to prove it from your various income sources. This is easier to do if you’re a full-time employee with an annual salary. But if you’re an entrepreneur, self-employed or work in the gig economy, traditional verification methods might not work—because your paperwork shows after-tax income. In these instances, you may have other options to prove your income.
4. Understand your down payment options
How much can you afford as a down payment? If it’s 20% or more, you won’t have to pay an insurance premium on your mortgage. If you only have, say, a 5% down payment, you can still get a mortgage, but you’ll have to pay an insurance premium, which is rolled into your principal—and you’ll be paying for that premium over the course of a 25-year mortgage (there are stricter rules around insured mortgages). The good news is that most insured mortgages have a better interest rate because the lender takes less of a risk.
5. Get a mortgage commitment letter
While many lenders provide ‘pre-approved’ mortgages, that doesn’t mean your mortgage is guaranteed. It’s simply an estimate of how much you could be eligible to borrow, based on the information you provided (often through a few clicks on a website).
It’s better to work with your lender to secure a “mortgage commitment letter.” This is a more thorough process requiring documentation and a bit more time to give you confirmation that you’ll have access to the funds. Essentially, the commitment is based on a set of items you agree to meet in order to obtain the mortgage.
Read related: Get more details on mortgage commitments along with other tips on how to qualify for a mortgage
6. Know your local mortgage and purchasing rules
Depending on where you’re buying a home, there may be provincial rules and legislation that could impact your plans, for better or worse. For example, in British Columbia, the government will be introducing a “cooling off” period in the spring of 2022, which could allow you, as a homebuyer, to back out of an offer. This buyer protection may work in your favour if you’re feeling a lot of pressure in a competitive market, although the details are still to be announced. Keep in mind that mortgage rules, rates and impacts can change, so it’s important to consult with your mortgage and real estate professionals along with your lawyer.
7. Plan for the “new normal”
Many people have been working remotely, and depending on the job, this may continue on a more permanent basis. You may also need to consider having adequate office space and extra room to feel comfortable as your work and personal life intermingle. Adapting to the “new normal” may be part of where you choose to live—and whether you can afford to move upmarket, but in a different location such as a smaller town or rural location. Just keep in mind, you’ll want to check the Internet connection first!
8. Consider your long-term goals
How long do you plan to live in your new home? Consider whether you need additional space if your family is growing, or to eventually take in your parents or in-laws as they get older. Also think about whether you can age in place in your next house, and whether or not it will be possible to make required renovations in the future. Modifications often include adding ramps, making bathrooms accessible for everyone and limiting stairs for family members with mobility issues.
9. Research resale prices and home equity
Even if you’re searching for your forever home, it’s still a good idea to know your options if you ever have to resell. For example, over time you may make upgrades that can increase the equity in your home. But how much will you have to spend on those renovations, and will the increased equity you build in your new home match the comparables in the market?
Do your research — or work with your realtor to help get accurate data — and find out how pricing compares to similar home sales in your neighbourhood, factoring in square footage, number of rooms, property size and so on. Speak with your real estate professional to learn if your reno costs could be recouped in the long run.
Happy house hunting
A mortgage is an important purchase in your life, so it’s a good idea to work with an experienced mortgage lender. A trusted partner should be able to walk you through the process and find the best fit for your financial situation and lifestyle. Be sure to ask about first-time homebuyer programs and other incentives that might be available to get you in your new home faster.
How Wyth can help
Wyth can help with mortgage advice and solutions, whether you’re looking to refinance your current home or find a new one.
Talk to us if you’re self-employed or looking to buy a second home or rental property. We can help with that too.
The content of this article is provided for general information purposes only and is not intended to be investment or legal advice. While this article provides tips for you to consider, it does not reflect the multitude of factors that can contribute to your individual situation. Seek counsel from your trusted professionals when making any investment, legal and financial decisions. While we strive to offer help, we accept no liability for any loss or damages arising out of your use or reliance of the information in this article, including liability towards third parties.