Buying your first home is exciting. With such a big decision, it can be easy to get caught up in the hustle, especially if you live in an area where real estate is booming. To keep yourself from making an emotional decision you may regret, take the time to answer these easy questions before you make your move.
1. Why Do You Want to Buy a House?
84% of Millennials believe that purchasing a home is a good investment and are leading the pack among those who intend to buy a home in the next two years in Canada.
2. How Long Do You Plan to Be In Your Current Location?
Purchasing a primary residence should always be a long-term investment. There are friction costs associated with moving that make it incredibly difficult to break even, never mind make money, when you buy and sell in a short time frame. Closing costs, for example, range from 1 1/2% to 3% of the home value.
The general rule-of-thumb offered by real estate agents is to make sure you plan to be in one location for at least five years. This allows you to build some equity in the home and hopefully see a bit of price appreciation, even if you aren't in a fast-moving market. Consider how you want your life and family to look several years into the future and make sure the house you buy today can accommodate your longer-term needs. If you think you may be headed out of town, you may want to hold off on your home purchase.
3. Do You Have a Real Estate Agent You Can Trust?
Unless you're a residential real estate investor, you may not know what to look for when you walk into a house. You'll be relying on your real estate agent to provide you with the right questions to ask. Plus, a great agent can supply other insights beyond helping you get the best price today. The agent might notice flaws in the layout or property that might make resale hard in the future or early signs that a neighborhood is improving.
Before hiring a real estate agent, be sure to interview a few different people. Find someone that has substantial experience and seems to understand your needs. As a first time homebuyer, always find your own agent. Even if the seller's agent offers to represent both parties, it is tough for them to be impartial. The seller was their client first, of course. Working with your own agent doesn't cost you anything and puts someone in your corner.
4. How Much House Can You Afford?
The basic rule of thumb for determining how much you can afford is a maximum of 3 times your gross household income (before taxes). Most lenders will calculate your "debt service ratio" in order to determine how much you can actually afford to pay each month. They look at your Gross Debt Service (GDS) and Total Debt Service (TDS). "GDS" is the percentage of your income that is needed to pay all required monthly housing costs such as mortgage payments, property taxes and heat. "TDS" is the percentage of your income that is needed to cover housing costs PLUS your debts and other monthly financial obligations.
Sit down and review your budget before starting your home search. Determine how much you are comfortable committing to housing, without sacrificing your other goals, then use that figure to back into your target price range. The pre-approval figure from the lender may be a lot more than your budget can handle.
Also, don't forget to consider maintenance in this conversation. Over the long-term, home maintenance costs are around 1% of the home value each year. For example, a $400,000 house should expect $4,000 in maintenance expense each year. However, actual costs year-to-year will vary greatly. Know what types of maintenance you plan to handle yourself, and how you'll cover the costs of other issues.
5. What Is On Your Must-Have List?
A valuable tool to have as a first-time homebuyer is a written must-haves list.
It can be all too easy to lose sight of the things you want when you're walking through beautiful homes perfectly cleaned up for eager buyers. If you start to get emotionally attached to a house, you may begin to ignore some of the core needs that made you start your home buying process in the first place.
Have some fun and sketch out what you want in a house. Then break down the list by what items are genuinely make-or-break, what things would be nice to have, and what is just fantasy. Check it with your real estate agent to ensure that your desires are realistic for your price range. If they aren't, decide if you want to revise your list or wait until you can afford the home you want.
Even with a list to use as a focus point, you may not end up with everything you want. But if you're patient and practical, you'll find the perfect home for you.
Bonus Question - Are you properly pre-approved?
A fully underwritten mortgage pre-approval is the process of determining whether you meet the lenders' and insurers' guidelines. A pre-approval will give you confidence that you are a qualified borrower, you will know the maximum purchase price you qualify for and it will show the seller that you are a serious buyer. It is best to get your mortgage pre-approved first, before you begin shopping for a home.