Tips for first time home buyers

Are you in need of tips for first time home buyers? You’re not alone. About 300,000 home buyers a year are buying a home for the first-time.

When it comes to financial literacy, we’re on our own for the most part. Unfortunately, we learn very little about getting our finances ready for homeownership in school, that’s why we thought we’d write an article dedicated to buying your first home.

In this article we’ll share some tips for first time homebuyers to help come out ahead on the purchase of their first property. In the second part of the article we’ll look at getting your financial house in order. We’ll look at how to gain control of your spending and automate your savings.

First-Time Home Buyer Tips

Canadians often spend countless hours planning for a summer vacation, so why don’t we give homeownership the same attention it deserves? If anything we’re more guilty of fantasizing about our dream home more so than being practical.

Homeownership is arguably a bigger decision since it often involves hundreds of thousands of dollars. If you get it right, it can set you up financially for the years to come. If you get it wrong, you can be stuck digging yourself out of a financial hole for many years.

Here are some tips for first time home buyers to help come out ahead financially.

Review Your Credit Score

Your credit score will make a big difference in the amount of mortgage money a lender is willing to lend you and how much you’ll have to pay for it. Review your credit history well in advance of when you start looking for a home; ideally six months ahead of time. This should give you enough time to correct any errors or inaccuracies you see on your credit report.

If your credit score isn’t where you’d like it to be, this will also give you enough time to take the necessary steps to build or rebuilding it.

“Contrary to popular belief, checking your own credit score won’t hurt it. If anything it will give you more insight into how credit works, so it’s a smart thing to do,” says Sean Cooper, Bestselling Author of Burn Your Mortgage.

Rejig Your Budget

Going from being a renter to a homeowner not only means a lot more responsibilities; it also means many more demands on your household budget. Before you find a home, make sure you can handle the extra demand.

Take some time to review your budget and create a mock budget for when you’ll be a homeowner. Leave yourself some breathing room. You can use our mortgage calculator to go over the numbers ahead of time. This affordability calculator can help you establish a workable monthly payment

The Unexpected Costs of Homeowner

You’re probably already used to paying rent. However, when you become a homeowner, there are a lot more expenses you’ll need to contend with. Examples of the extra costs of homeownership include property taxes, utilities, home insurance and repairs and maintenance. By budgeting for them ahead of time, you’re less likely to be caught off guard.

The Hidden Costs of Home Buying

If you’re a first-time home buyer, it’s easy to overlook the hidden costs of homeownership. Examples include real estate lawyer fees, land transfer tax, appraisal fees, utility hook-ups and furniture. You’ll be responsible for these costs. Your mortgage lenders won’t cover them, so be sure to hold back some money from your deposit and down payment to cover them.

“It’s generally recommended that you budget between 1.5 percent and four percent of your home’s purchase price towards closing costs,” says Cooper.

Getting Pre-Approved for a Mortgage

If you’re shopping for a home, getting pre-approved for a mortgage is a no brainer. You can get a mortgage pre-approval with mortgage brokers or financial institutions. By getting pre-approved, you’ll save time by only looking at homes within your price range.

You’ll also want to consider other expenses you might have. For example, if you have childcare expenses, you’ll want to realistically ask yourself whether you can afford mortgage payments at this level. Otherwise, you might want to spend slightly less on a home.

Down Payment

If possible try to save at least a 20 percent down payment. By saving a sizable down payment you can help avoid paying mortgage loan insurance. This will help you save money over the long run since your mortgage balance won’t have mortgage insurance premiums added on top of it.

However, in big cities like Toronto and Vancouver where the price of a home is higher, it may not be realistic to save up a down payment. In cases like this, still aim to save more than the minimum down payment. The more you save, the less in mortgage default insurance you’ll have to pay. Default insured mortgages also typically come with lower mortgage rates.

Take Advantage of Government Programs

To help encourage homeownership, the government offers a number of programs aimed at first-time home buyers.

The RRSP Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw up to $35,000 from their RRSP tax-free towards the down payment of a new or existing home in Canada. You have 15 years to repay the amount borrowed starting in the second year, otherwise the RRSP contribution room is lost forever.

Another government program that may be worth participating in is the First-Time Home Buyer Incentive (FTHBI). The FTHBI is a shared equity mortgage where the government shares ownership in the purchase of your first home with you.

If you purchased a home and qualify for the incentive, you’re eligible for five percent of the home’s purchase price if you’re buying a resale home and five or 10 percent if you’re buying a new home.

If you participate in the incentive, it’s important to understand that you’ll need to repay it at some point. Although you won’t pay any interest on the incentive, you’ll have to pay back the incentive when you sell your home or in 25 years, whichever is sooner.

“With the FTHBI you’re giving the federal government an equity stake in your home. Make sure you’re okay with that before signing up for the program,” says Cooper.

Getting Your Financial House in Order

One of the most obvious tips for first time home buyers is knowing where you stand financially. Take stock of your assets and liabilities to get a clear view. By buying a home you’ll get your foot in the door of the real estate market and start building equity.

Buying a home is quite possibly the single biggest financial decision of your lifetime, so you’ll want to prepare for it ahead of time. Before you start attending open houses, here are some tips for getting your finances ready for homeownership.

Gain Control of Your Spending

It doesn’t matter how much you’re making. If you’re spending more money than you’re making, then it’s time to give yourself a reality check. You can do that by doing an audit of your spending.

Start by downloading your last month’s bank and credit card statements and add up where your money is going. You’ll probably be surprised on at least a couple of occasions.

Consider using our free budgeting app to keep a closer eye on your money.

Make Savings Automatic

Don’t be one of the millions of Canadians who didn’t save any money at all last year. Sure, there are plenty of Canadians who are living from one paycheque to the next. If you’re in that boat, it can seem tough to save a decent amount of money. But you don’t have to start with a lot of savings.

After reviewing your budget, see where you can make adjustments in your spending to free up money to send to your savings account. Set it up so that money is automatically moved to your savings account.

“Start with a small amount. Once you get in the habit of saving money, ramp it up over time,” Cooper recommends. “Before you know it you’ll be a super saver!”

Take a Break from Debt

Getting rid of your debt will make it a lot easier to save money for a down payment to buy a home. By focusing on your debt, you’ll save on the amount of your money that’s going towards interest. Aim to pay off the debt that’s costing you the most; that’s the debt with the highest interest rate. That’s usually credit card debt.

“Make a list of your credit cards. Focus on paying off the credit card with the highest interest rate first. Just don’t forget to make at least the minimum payment on the others to keep your credit in good standing,” says Cooper.

Give our credit card debt calculator a go and see how much you could be saving by paying off your credit cards today.

Are you still in need of tips for first time home buyers? See if your budget and credit makes sense for it. Speak to a trained credit counsellor to learn more about your ability to purchase a home.


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