When buying a home for the first time, it helps to start by considering what you can afford right now. As well, to take into account life changes during the term of your mortgage. Unexpected changes could include a new addition to your family, relocation, or major property repairs and home improvement.
A home purchase is a major investment, and it’s not always clear when the best time to buy is. As a buyer, you may have concerns of whether you have the sufficient down payment and the closing costs.
If you aren’t sure you can afford to buy your forever home, is it a good idea to try to jump into a home purchase right now? How does the first-time home buyers help me? Consider these helpful tips in securing your first property.
1. Get A Pre-Approval for a Mortgage
Buyers who have used an online mortgage affordability calculator prior to seeing a mortgage lender are often in for a surprise for better or for worse when the actual affordability is determined. The initial quotes are not accurate because they don’t reflect the complicated process that lenders complete to determine if a buyer is qualified to get a mortgage.
There are several factors that go into the process. For one, the lenders review the applicant’s debt to income ratio to determine if they have the income to pay for a mortgage. If the debt to income ratio exceeds a certain threshold set by the lender, the applicant may not have the income to afford the mortgage amount desired.
Another factor is the applicant’s credit score and credit history which play a role in whether they qualify. In order to qualify for a mortgage from one of the main financial institutions, you will likely need a score 600 or higher. According to Equifax, one of 2 national wide credit bureau, a good credit score is between 670 – 739. The lender must review the scores and examine how well the applicant has repaid their debts. If the applicant has a history of late payments, this is a major risk the lender will take into account in their decision.
The question on every applicant’s mind is finding out the maximum mortgage amount they are qualified for. Sometimes, the lenders set specific conditions as part of the pre-approval, therefore be sure to check them thoroughly.
When starting a home search, Vancouver real estate agents, including Kim Lee strongly encourage buyers to get a pre-approval before they get started. The information streamlines the property search and prevents the buyer from wasting their time with properties for which they can’t afford. The process is also helpful for the agents since the agents can identify their ideal property faster and without major delays.
2. Know Your Numbers
First-time buyers can purchase a home with a smaller down payment as low as 5%. However, this doesn’t mean you should use all of your savings solely on the down payment.
There are other costs to consider such as the home inspection that shows you unknown issues in a property. Most lenders require a home inspection before they will release the mortgage amount to the buyer to purchase the property.
Having extra savings available following the home purchase is helpful when unexpected accidents occur. This is certainly possible with older properties, and no one wants to move into a home and not have access to all of the features that come with the property.
In addition to possible repairs and maintenance expenses, the buyer will face property taxes and needs to plan ahead for these expenses.
If you find that all you can afford right now is a 5% down payment and other costs are out of reach, considering waiting a little longer before you jump into homeownership. You should create breathing room in your budget, and you shouldn’t use every dime you have in the beginning. A home buyer who has zero cash immediately following their home purchase could face more difficulties later.
3. Don’t Let FOMO Become Your Main Motivation
The fear of missing out should never be a home buyer’s primary motivation for buying a home. The truth is, even if they don’t buy right now, there will be other properties in the desired area in the future, and other opportunities to buy a home that meets all their expectations.
Buying for the wrong reason in a hot real estate market can also lead to overpaying for a property.
4. Keep Future Plans in Mind When Buying
A great rule of thumb when planning to buy a home is to assess how comfortable you will be for the next few years. Think of your plans, for example, do you have career aspirations that require you to relocate? Would you rent out the property or decide to sell? Separately, do you have plans for kids? What is the ramification to the cashflow? Will you need to factor in the cost for daycare? All important questions worth addressing.
As your lifestyle changes, it helps to plan through some of the future life events that may arise.
5. Seek Parents for Help
It’s a known fact that some of today’s buyers rely greatly on the bank of mom and dad for the down payment. With the high living costs in Vancouver, first-time buyers, even those with good income can find it difficult to save for the down payment which is initially the biggest challenge. The down payment becomes even more daunting when you factor how home prices have outpaced the rate of return from your savings over the last 2 years during the pandemic.
This is where the parents step in for those that have this option to receive help to come up with the required down payment. According to CIBC, parents gifted an average of $180,000 in 2021 to their children to help them buy in the Vancouver real estate market. Vancouver realtor Kim Lee noticed 50% of her first time home buyers in 2021 received parental support.
In today’s competitive real estate market, accepting help from parents can be a great way to enter the Vancouver housing market.
6. Don’t Worry About Achieving a 20% Down Payment
Buyers who can achieve the 20% down payment can avoid getting the mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC), but this is not possible for all first-time buyers. If you have a lower down payment, you must pay the mortgage default insurance that increases the total cost of the mortgage payments by anywhere from 2.4% to 4.0%. For example, if you buy a property worth $750,000 and your down payment is $75,000, the default insurance is 3.1% which comes out to $20,925. This amount will be added to the total mortgage amount. The purpose of the coverage is to protect the lender in case you default on the mortgage.
While this increase in mortgage payments could seem like a losing situation, buyers should know that an insured mortgage comes with better interest rates and savings on the monthly payments. Keep in mind that despite the discount, it is financially more beneficial to put the 20% down payment over taking CMHC default insurance in the long run.
Another consideration to take advantage of the home buyer’s plan (HBP) that allows a first time home owner to withdraw up to $35,000 from the retirement savings plan (RRSP). As long as the buyer meets certain conditions, the buyer with either their spouse or common-law partner can each withdraw for a combined total of up to $70,000.
7. Shop around for the mortgage
Before you accept a mortgage, consider shopping around the different lenders. It isn’t always the case that your local bank will offer you the best rate. Same way you shop around for your ideal property, it only makes sense to the same for a mortgage that has long term implications. The difference in rates will affect your regularly monthly payment and the overall interest you will pay for the duration of the mortgage.
The debate is fixated between fixed and variable-rate mortgages. The fixed rate mortgage provides consistency in payment during the duration of the term agreed upon whereas the variable will fluctuate depending on the direction of the prime rate.
Historically, the variable rate has been the better option over the last 25 years in the declining interest rate environment; however, with rates expected to rise moving forward, more factors need to be considered in choosing the right term. Some of the factors include your cashflow situation, your plans for the property, and your risk tolerance.
9. Continue Saving
As you learn more about buying a home, you discover that the monthly mortgage payments and the initial down payment are just the tip of the iceberg. The home purchase process involves expenses beyond the down payment to include legal fees, land transfer tax, home inspection, property tax, CMHC insurance, and appraisal fees. Continuing to save and setting aside 1.5 – 4.0% of the purchase price is a good idea to handle all of the closing costs.
Summary as a First Time Home Buyer.
A home purchase is one of the biggest purchases one makes in their life. Having a good understanding of the different options and of the government plans available will help with the purchase. By following these 8 tips, buyers get practical advice for buying a home. For more information on the Vancouver real estate market and current trends, contact Kim Lee PREC* – your local Vancouver Realtor.