4 Steps To Take Before You Write an Offer
Purchasing a home is exciting! Ok…and a little stressful. Finding the right house combined with finding the right mortgage can feel like a lot of work. Taking a little bit of time to plan accordingly can reduce that stress and help the overall process to be more enjoyable. When taking on a substantial financial commitment, you want to make sure you have crossed all your “T’s” and dotted all your “I’s.” Here are 4 key things you can do to try and be organized as you start the process.
1. Collect Your Down Payment
Putting in the work and taking the time to gather enough savings for a down payment before you start shopping for a home is important. Many Canadians believe that you need at least 20% of the purchase price to pay a down payment. That is simply not true; only 5% of the purchase price of the home is required for your down payment. (Mortgage default insurance is required for any down payment of less than 20%).
Down payments can come from
- Your own savings and chequing accounts
- Your RRSP’s (First time home buyers, divorcee’s and Canadians that have not owned a home for 4 years can participate in the RRSP withdrawal program with CRA – CLICK HERE for more info). –
- A gift from an immediate family member
- Your tax return (many Canadians max out their RRSP’s and then receive a great tax return in April).
- Early Inheritance
- And the list goes on!
Condos vs. Single Family Homes
When you’re considering a condo, not that each $100 in required condo fees reduces borrowing power by about $10,000. Simply put, your available income to pay the mortgage is reduced by condo fees. The more significant the condo fee, the bigger the impact. Some clients are searching for condos, so this is great. Other clients are right on the cusp of purchasing a condo or a duplex. In Calgary, an example would be a purchase price of $300,000. If the client qualifies for a $300,000 purchase price, but the unit requires monthly condo fees of $300 per month, the borrowing power of the client is reduced to $270,000. If the client opts for a duplex, without condo fees, their purchasing power would remain at $300,000.
2. Decide on a budget
How much money do you WANT to spend each month on a house? This is a super important conversation to have with yourself or your partner. If you’re comfortably paying $1500 per month in rent, do you want to increase your monthly expenses to $2500 when you consider your mortgage payment, property tax payment and insurance? How much disposable income do you want to have available for movies, restaurants or online shopping? Getting clear on this point will help you determine a home price that will work for you.
3. Get Pre-approval
A mortgage pre-approval lets you know what mortgage amount you will actually qualify for and the maximum purchase price for your future home. Meeting with a mortgage professional to look at your “debt servicing ratios” and evaluate your income situation will help you determine if your goals and purchasing power are aligned.
A mortgage preapproval will estimate your monthly payments, and help you understand if any additional work on your credit is required prior to writing an offer.
4. Collect your Documents & Obtain a Rate Hold
In this step, you’re really taking your initial conversation with that mortgage professional to the next level. You’re providing your employment and down payment documentation and really getting clear on the mortgage that you’d qualify for. At this stage, make sure to ask your mortgage professional to send a rate hold. Lenders can hold a rate up to 120 days. This allows you shop for a home for 4 months without the worry that your monthly mortgage payments will change.
A mortgage is likely one of the most significant financial commitments you will ever make. Take the time to make sure you are fully prepared as you dive into the process. Ask as many questions as possible of both your mortgage professional and yourself to make sure you are equipped with all the information you need as you dive into home ownership.
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