Preparing For Your Mortgage

Buying a home is an exciting time, being prepared can help to make the process easier with less disappointments and delays. The following tips can help you be ready for buying your first home.

Determine how much you can afford

Before you start budgeting for your mortgage, it's important to determine how much you can afford. First of all, use a mortgage calculator to get a ballpark idea of what your payments will be. Then consider your monthly expenses and work out how much you can afford to pay each month. Finally, get an idea of what is available in your area and set a realistic price range that fits both your current financial situation and the potential growth of your future finances.

Save for a downpayment 

Your down payment is the portion of the mortgage you are responsible for paying upfront. The larger your down payment the less your mortgage will be. Larger down payments will reduce your monthly payment which can help meet your debt ratio amounts.

Down payment for a primary residence can be as low as 5%, but down payments lower than 20% will require CMHC insurance. This is an additional cost that can usually be rolled into your mortgage.

Make sure your credit score is in good shape

You'll want to make sure your credit score is in good shape before applying for a mortgage. Lenders use it to assess your ability to pay back money you borrow. Your credit score is influenced by several factors, including how much money you owe, how long you've been borrowing money, and whether you pay the bills on time. A higher score suggests less risk of default, which lowers a lender's likelihood of losing money when they extend a mortgage loan to you.

Your credit score also helps determine what interest rates will be available to you. In general, the better your credit score, the lower your interest rate will be. And as we’ll discuss later in this guide, lower interest rates can mean substantial savings over time.

Before applying for a mortgage loan, take some time to improve your individual credit score by following these steps:

Make sure lenders can verify that all of your income comes from legitimate sources and that it's stable enough for them to trust that it won't disappear soon after you get approved for the loan.

Pay all of your bills on time each month and stay current with any existing loans or other forms of debt that appear on your credit report.

If possible, bring down the balance owed on any outstanding loans or lines of credit listed on your report—including paying off any remaining balances on store-specific cards and consolidating multiple accounts if necessary—to lower the amount owed relative to total available limits.

Manage your debt

Before you can buy a home, the bank will assess your debt ratio. That’s simply how much of what you make goes to paying off debt each month. This includes credit card payments, car loans, student loans and any other type of monthly bill. Generally speaking, lenders prefer to see a debt-to-income ratio of less than 36%. So if you bring home $5,000 per month for example, your total monthly debts should not be greater than $1800..

To improve this ratio and increase your chances of approval for a mortgage loan:

Pay down balances on credit cards and other revolving accounts

Consider consolidating some of those smaller debts into one larger monthly payment (This is called refinancing.). Obviously that only works if the interest rate you pay on the new loan is lower than what you were paying before so it is worth doing a little research before making any sudden moves.

The other way to improve that ratio is simply increasing your income but as most people don't have much control over their salaries in the short term then it's best to focus on reducing debts rather than trying to work overtime at work or getting some side hustles going

Save up for closing costs

Next, get ready for closing costs. These are the expenses that aren’t included in your mortgage, but are due when you close on the house. They can include various taxes and fees such as land or property transfer taxes, HST/GST, title insurance, legal fees and more.  Some of these costs have to be paid up front; others you can roll into your mortgage balance.

Average closing costs in BC are about 3-5% of the purchase price.  So if you're buying a $500,000 home, expect to pay between $15 000 and $25 000 in closing costs (much of which will go toward all those fees listed above). And remember: The higher your down payment is, the lower your loan amount will be--and therefore the less you'll pay in interest over time.

Save a little more than you need, then put it into a rainy day fund

We all know that a large part of getting approved for a mortgage is having enough savings to meet lenders' requirements. But as you accumulate more and more cash, it's easy to get tempted by the idea of using every last cent to put down on your new home. We think it's key to resist this temptation and save just a little bit more than you need, then put it into a rainy day fund.

Having an emergency fund is important for everyone, not just people who are buying homes! It means you'll be less financially stressed if something unexpected happens (like your car breaks down or you lose hours at work). If nothing does happen, then hey—you can use the money for something fun!

Get a pre-approval for your mortgage

Once you have established what you feel you can afford, cleaned up your credit score, and lessened your debt load, make sure you get a pre-approval from your bank or mortgage broker.

This is a very important step before viewing homes that can save you time and money. Getting a pre-approval means the lender has reviewed your finances and determines what you can afford. This can strengthen your future offers as it shows you are a serious buyer.  It can also speed up the closing process.

Buying your first home should be a memorable experience.  Though it can be complicated, there are experts to help you each step of the way.  Feel free to call me with any questions.

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