Buying a home is the most important purchase you’re likely to make. You want to get it right.
Making a decision to buy your first home is an exciting but also be a stressful time.
Whether you want to move out of your parents’ home for the first time, own a home after renting for years, or buy a place with a spouse or partner, purchasing your first property is a big step. It takes preparation when you’re in this stage of your life.
HOW YOU KNOW IT’S TIME TO BUY YOUR FIRST HOME
But buying a house? There is no age restriction. Some might argue you can’t buy a house until you’re 18 because a bank won’t let a minor sign a contract, but theoretically, if you had the cash and your parents were cool with it, you could be a toddler. When the time is right you’re going to be somewhere in between those ages -- and you’re going to hear a little voice, that says, “It’s time.”
WHAT TO CONSIDER BEFORE BUYING YOUR FIRST HOME
THE QUESTIONS TO ASK YOURSELF
Regardless of how ideal the market may seem, it’s still a good idea to sit down with your real estate agent and mortgage broker to think about how you see your life in three or five years and ask yourself some pointed questions.
Can I afford it?
Buying a house will have a significant impact on your finances, so make sure you can handle it.
In Ontario since the introduction of the new mortgage rules in the spring of 2018 house price appreciation has slowed down a bit but it is projected that prices will continue to increase given the population growth and immigration. Interest rates continue to remain at record low rates which are continuing to entice home purchases. But purchasing property involves a lot of upfront costs: closing costs, down payment, new furniture, moving expenses. Do you have enough cash?
Create a budget for the monthly mortgage payment and homeownership costs, such as general maintenance if you buy a single-family home or condominium fees if you buy a condo.
Am I mortgage-worthy?
Say you saved enough cash, but what about your credit? It’s not a secret that getting a mortgage these days is harder than it used to be. Lenders are looking closely at all documentation of your income, debts, assets, and liabilities, to make sure you don’t exceed the maximum debt-to-income ratio. And when it comes to credit scores, the most competitive interest rates only go to buyers with credit scores above 700.
The key is to review your financial situation before you check out open houses. I strongly recommend working with a mortgage broker and getting yourself pre-approved before you start looking at homes or condos.
Do I plan to live here for at least five years?
Most personal finance experts say that unless you plan to live in a home for at least five years, you likely won’t recoup any of the expenses associated with buying and later selling the house.
Plus, your first few years of mortgage payments primarily pay off interest, not your principal, so you will not have built up a lot of equity in your home. You may be better off renting if you expect to move in the next couple of years. Just because you live in a buyer’s market doesn’t mean the time is right for you to buy.
If I buy with another person, how will this affect you?
Buying real estate with another person has its perks if you both have stable financial situations. By combining cash and resources, you're likely to get a bigger, better place than you each would as individual buyers. Plus, when you're starting out, it helps to share the financial burden with someone else.
But before you start house hunting together, sit down, lay all your cards on the table and get the answers to these important questions. Whether you're buying with a spouse, domestic partner, relative, or friend, setting the ground rules first will save you both a lot of headaches in the future.
Is it worth the money?
In other words, the place in which you live is an investment and the money will always be relevant, but that old-fashioned moniker “home sweet home” is decidedly modern these days. People aren’t buying houses anymore; they’re buying homes.
THE COST TO YOU
In today’s housing market, we’re seeing monthly mortgage payments rival monthly rents. Keep in mind that securing the “start-up” costs of homeownership is the biggest challenge.
Do I have enough cash?
Buying a property requires a large amount of cash upfront to cover closing costs and down payment. Can you handle it? Will you have enough cash on reserve for emergencies, like an accident or job loss?
How much will I spend on a monthly basis?
Your monthly payment will consist of: Principal and interest (determined by the home’s purchase price and your interest rate), property taxes, and home insurance. Your monthly homeownership budget should also include utilities, cable/TV/Internet, and general maintenance costs.
When buying a condo or townhome, factor in the condo fees and any special assessments.
Will buying a fixer-upper save you money?
If you’re young and driven, you may not mind if your house is a fixer-upper. And if credit is an issue, that may be about all you can afford. But keep in mind that repairs and home improvements still require money, so prioritize your projects and create a budget.
THE HOUSE FOR YOU
The house you buy should at least fit into your five-year vision for yourself. Why spend the time and money on something you’ll outgrow in a couple of years?
How often will I be at home?
If you work long hours or travel a lot, it doesn’t make sense to buy a large home that requires extensive maintenance. That 3-bed, 2-bath home sale with a yard may be priced right, but who will take care of it? A one-bed condo, on the other hand, requires minimal upkeep.
Likewise, home styles like Victorians and Craftsmen are beautiful but need attention. Would a lower-maintenance contemporary home work better for you?
Who will live in the house and will that change soon?
The home should accommodate the current and intended household. But this doesn’t mean you should buy a house that’s more than you can afford.
- If you’re single, but hoping to meet someone special and settle down soon, perhaps a one-bedroom isn’t enough.
- If you’re newly married and plan to have kids, a two-bedroom may not be enough room. Especially, Smock adds, if you were planning to use one of the rooms as a home office.
- If you’re a childless couple and plan to stay that way, you still might want to buy a home with a guest room -- just in case.
- If you have a dog or several pets, a single-family house may work better than a condo in a high-rise building.
- If you’re a 60-something buying a first home and feel that you won’t be one of those “active seniors,” you may want to opt for a ranch house instead of a two-story house with a lot of steps.
THE NEIGHBORHOODS AND AREAS FOR YOU
Many first-time buyers tend to be young professionals or young families who want convenient access to arts, culture, good food, shopping, nightlife, and recreational activities. For this reason, pedestrian-friendly neighborhoods are great for those starting out, in revitalized downtown areas or up-and-coming communities with history and character.
If you’re a first-time buyer on a budget, you may need to make some compromises when it comes to your first place. You may not be able to afford your ideal neighborhood or dream home, but you can get as close as you can to them. Buy a fixer-upper in the best neighborhood in the city, or buy new construction in an up-and-coming part of town. Just be mindful that your purchase price reflects the home’s market value.
Or if you’re going to live in the nicest house in a transition area, that, too, could adversely affect how much your house is worth -- which may not matter to you if you plan to live in the place for years to come and see it as a place to live and not an investment.
If you have decided to take the first step in home ownership make sure you are working with a real estate agent that can hold your hand and educate you along the way and a mortgage broker that can guide you on what you can afford.
