Financial Planning for Your First HomeSubmitted by Robert McEachern & Scott McEachern on May 15th, 2019
While owning a home is the quintessential American dream, not everyone is able to purchase a home when they desire. There is some financial planning required. If you’re fresh out of school with a boat load of student debt, it’s probably best to wait until you’ve been working for at least a year before you start looking to buy. You may need longer depending on where you want to buy, what you want to buy and when you want to buy.
You’ll want to make sure that your credit score is where it should be, since the higher your score, the lower your interest rate will be. It’s also important to pull a copy of your credit report prior to contacting any mortgage companies; examining it in minute detail to ensure that everything is correct. If you do find an error, dispute it with the credit bureau immediately and keep the documentation.
Finally, you’ll have to think about a down payment. This is where the real work begins. In Canada, you’ll need at least 5% for a down payment, and given last year’s explosion of prices in the housing market, it can be quite the task. We’ve blogged about ways to save for a downpayment in the past here:
How to Save Money: https://www.mceachernfinancial.ca/blog/how-save-money
Turn Your Savings Into A Habit: https://www.mceachernfinancial.ca/blog/turning-savings-habit
And don’t forget that even once you’ve got your down payment saved up, you’ll still have to pay closing costs, which can vary widely. Most brokers use 1% of the home value as a safe bet. If you are first time home buyer, you may have a little less as you avoid some of the land transfer tax.
Speaking with a Mortgage Broker
If you’re ready to take the next step and apply for a mortgage, here are some of the things that you’ll need. You should also be sure to obtain a pre-qualifying letter from your mortgage company, which will make it much easier to negotiate with sellers or builders when you do find the right home.
Below are a few things you will want to have on hand to make the process go smoothly:
- A year of bank statements. While this is much easier today with the advent of electronic banking, you’ll still want to make sure that you can quickly and easily access a complete year of statements. If not, you’ll have to request them from your banking institution.
- Up to a year of payment stubs. While most mortgage companies only require the last three months of pay stubs, there are some that require more; particularly if you have changed jobs recently. These will have to be updated as the closing date arrives, so if you’re having a home built, you’ll likely have to provide this information twice.
- A written explanation for any unusual items that are currently on your credit report. It can help you immensely to access a copy of your report ahead of time (see above) and prepare a written explanation for anything that is not straightforward, such as collection accounts, past bankruptcies, or any judgements that have been entered against you in the last seven years. You may also have to provide an explanation or documentation if there are several names listed on your credit report.
- A balance sheet or other documentation if own or operate your own small business. While you should have this anyway, it’s best to be prepared for this request in advance. You’ll also need to provide your tax returns for the last two years.
Having just gone through the home buying process myself, even when we had all our ducks lined up, it can still be a stressful time. The more planning and preparation you can complete before you start shopping for your dream home, the better. I work closely with a few realtors and mortgage brokers, who I know and trust. If you think you’re ready to start home shopping, I can connect you.
Home Sweet Home.
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