Buying a home is arguably life's most expensive purchase. It can be very overwhelming, especially as a First Time Buyer. A REALTOR® can help simplify the process for you, and ensure you understand everything. Expert guidance is so important with such a large decision.
To help you get off on the right foot, here are some great ways to prepare for your first purchase.
1. Understand Pre-Approvals
A pre-approval should be the first step to take when you think you're ready to buy a home. Lenders will determine the highest amount they will loan you by calculating your total debts and comparing them to the income for everyone that will be on Title.
An online "pre-approval" calculator is NOT good enough. You must actually speak with someone who will go through your financial history and run a credit check to get a true amount. If you have not given consent to someone to pull your credit, you are NOT pre-approved.
Once you are pre-approved, you can start the home buying process, but it is important to know that your pre-approved amount does not necessarily mean you can comfortably afford a home at that price. Purchasing at your max will leave you very little for disposable income.
There are great tools that can help you, like this Mortgage Calculator. After inputting your figures, you can determine what payments would be to make sure you can comfortably afford that. with. Consider ALL your spending habits
Helpful Tip: Put the estimated mortgage payment into a savings account each month. Pretend you're already a homeowner and responsible for that mortgage payment. If you're renting, use the difference between your monthly lease rate and potential mortgage payment. You will then see how affordable that payment would be compared to your current spending habits. As a reward, that accumulated money could be added to your Down Payment, or to help offset costs associated with your purchase.
2. Don't Put Everything Down For Your Down Payment
Some people believe that putting 20% down is required before buying a home, and that is not at all the case. In Calgary, Alberta, as of February 2024, the average home price is about $583,000. The minimum amount to buy a home is 5%, which based on that average is roughly $29,000. Waiting until you have 20%, or $116,000 is next to impossible for the majority of Albertans. The length of time it takes you to save for you a 20% Down Payment would almost certainly be offset by the escalating house prices. The quicker you can get into the market, the better.
There is nothing wrong with a 5% Down Payment. If you overextend yourself on the Down Payment, you can quickly become overwhelmed by the unexpected costs that comes with the first year of home ownership. Make sure you have additional savings above your Down Payment for any surprises and to furnish your new home.
The 20% belief comes in because people want to avoid paying Mortgage Default Insurance, commonly referred to as CMHC. It is required on purchases with less than 20% down. However, most First Time Buyers don’t know that this cost is added on to your total mortgage amount and amortized over the life of the loan. It is not due on closing. Another benefit to having this insurance is since the loan is protected, lenders will typically offer a slightly lower interest rate than those with more than 20% down.
3. Use a Mortgage Broker!
Don’t settle on the bank you currently do business with out of convenience. A mortgage broker is a fantastic resource to use that won’t cost you a dime. They work with dozens of banks and other lenders and will do all the hard work for you.
There is a lot of paperwork you need to submit to be pre-approved. If you approach banks directly, you will need to submit these documents to every lender, and have all the lenders pull your credit. Working with a Mortgage Broker, you'll only need to talk to one person who will reach out to dozens of lenders to find you the best interest rate and the most favorable terms.
They are patient enough to make sure you understand the financial side of being a homeowner, and if you are not quite ready, they can offer guidance for what you can do to improve your financial situation and increase your pre approved amount.
4. The First Year Will be Expensive!
Don't kid yourself. If you are a First-Time Buyer, there are a TON of things that you will likely need to buy. This is another reason to make sure you have enough money in your Savings account after your Down Payment. You need to be prepared for closing costs, repairs, furniture, tools, outdoor items, holiday decorations for each occasion, and many other surprise expenses.
5. Your Purchase Price Vs. Bank Appraisals
Appraisals are becoming more common as house prices continue to rise. With bidding wars and firm sales over the asking price, lenders are doing more due diligence with their lending. The specific house you're buying plays as big of a role in acquiring the funding as your finances.
Regardless of the Purchase Price, Lenders will only loan up to the Appraised amount. Your Pre-Approval does NOT matter.
Example: You are pre-approved for $600,000. You purchase a home for $575,000.
The bank orders an Appraisal, and values the house at $500,000.
They will only loan you $500,000, and you must come up with $75,000 on your own.
You would need to seek out additional lenders for a second mortgage, or borrow from friends or family to be able to complete your purchase. This is why a financing condition is so important. It gives you an option to back out of a Purchase Contract if you cannot finance the home.
Let's Get Started!
No matter where you are in the process, speaking with a local REALTOR is a great starting point. A quick conversation can give you an idea of what to expect with the home buying process, as well as connect you with a qualified and trusted Mortgage Broker.
I live in Cochrane, Alberta, and happily Buyers and Sellers with all of their Real Estate needs in Cochrane, Calgary, Airdrie, Chestermere and anywhere in Rocky View County. Reach out to me anytime.
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