Buying a home can be a good investment, but you are wise to take some time to get your financial house in order first. Whether it be learning about budgeting, cleaning up your credit or saving for a down payment (or all three) taking time to plan ahead will help you make your home investment successful- and not a source of financial trouble.
“Having good credit isn’t just about being able to qualify for a mortgage. Your credit score will also determine what kind of interest rate you’ll be eligible for, which can make a big difference with overall costs. Similarly, having a sizeable down payment will help to keep your costs down as well by reducing the amount that you need to borrow,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Do you dream of owning a home, but your debt load is standing in your way? Paying down your debt and learning how to manage your money responsibly with a budget is the first step towards achieving that dream. Our trained credit counsellors can look at your debts and make suggestions on how best to pay them off. Call us today at 1-888-294-3130 or get started with our free online debt analysis
Contemplating buying a house? Make sure that you’ve done all of this first.
Check your credit
Before you even think about trying to get a mortgage, you should know exactly what kind of shape that your credit is in. The best way to do this is to get a copy of your credit report and to find out what your current credit score is.
Checking your credit history will alert you to any problems, as well as let you know exactly what condition your credit is in. This will not only let you know what you need to improve on, but the likely timeline to do so. You can get a copy either from Equifax or from TransUnion.
Criteria will vary from lender to lender as to what the minimum score is to qualify for a mortgage, but most traditional banks and credit unions require at least a credit score of 650. They would generally prefer something closer to 750.
If you have a credit score below 650, you may still qualify for a mortgage, but you may have to go the alternative lender route, which could mean much higher interest rates and more restrictive lending policies.
Fixing credit problems
If your credit score is low, why is that? The biggest factor in determining your credit score is your payment history. If you’ve got a track record for late payments, that is going to drag your credit score down substantially. Other factors that influence your credit score are if you are maxed out (or close to your limits). If you don’t have a very long credit history, that can negatively impact you as well as lenders aren’t able to properly assess the level of risk that they’ll take on when they lend you money.
Develop a credit clean-up plan. Be aggressive in paying down existing debt, with a special focus on making debt payments on time each and every month. By making timely payments and reducing your overall debt load, you will increase your credit score and get yourself in a better position to manage homeownership financially.
Do you have a budget?
If you haven’t been living by a household budget, now is the time to do so. Experiment with different budgeting apps and systems that work for you, so that you can stick to it over the long term.
Break out all of your current expenses in detail and be sure to track your spending. Earmark some of your monthly income not only for your mortgage down payment but for emergency savings as well. You’ll need to have money on reserve as a homeowner to take care of emergency repairs, which may cause you to turn to credit to cover, which can make you financially vulnerable.
“Budgeting is essential when you become a homeowner because homeownership is expensive. Not only do you have to manage a mortgage payment and property taxes, you will have to pay for maintenance and repairs over time as well. Get in the habit now before you are a homeowner of living by your budget. Spend within your means now, and it will be second nature when you are juggling the extra costs of home ownership,” says Schwartz.
Meet with your lender
There is no harm in meeting with a lender now to see what sort of mortgage you might qualify for so that you can plan ahead. Establishing a relationship in advance is a good idea because it is your benefit to work with a financial professional that you trust and that will happily answer all your questions. The more you know about the financial responsibilities around mortgages and home ownership, the less likely you are to be taken by surprise.
You can also discuss a pre-approval. Realize that a pre-approval amount is a maximum amount that you can borrow, and in reality, you should aim for a much lower price point in order to build in extra wiggle room. Build your budget on this amount to begin house hunting. Don’t go house hunting and then try to get your budget to match your desired house; it needs to be the other way around.
You may need to compromise on your house hunt on location or housing type. You will also have to be patient. It can take time to find a home that meets your needs and your budget. Don’t get caught up in bidding wars and blow your housing budget because of the “fear of missing out”. Take your time and make smart financial decisions.
Build up your down payment
It’s wise to put down as much as you are able as a down payment, as this will reduce your mortgage. Find ways to save extra money, either by delaying your house purchase to pad your savings or by tapping into things like the First Time Home Buyers Plan, where you can withdraw money from your RRSP for a down payment.