Here’s what you need to know about the steps to finance the purchase of your first home.
After your arrival on the job market, you plan to take the leap and go from renting to owning your own home.
The monthly costs of a property, such as municipal taxes and mortgage payments also generally increase less rapidly than the price of rents.
Before setting out to find your first home, however, you need to make sure you can finance your purchase. From mortgage pre-approval to final loan approval, here are the essential steps you need to know to get there simply.
Make your budget and determine your own borrowing capacity
Establish your current and future budget
To get off to a good start, it is important to take stock of your financial situation by drawing up a portrait of your expenses and income. By having a better overview of your current means, it will be easier to estimate your future budget, following the acquisition of your property.
Be careful, it will not just be the mortgage payments that will be added. There will also be municipal taxes and, perhaps, condominium fees, for example. The expenses when buying a house are very different, so know them well!
Also take into account any changes in your family or professional situation that could affect your income, such as parental leave or a new job. By including everything, you can better predict your future budget and determine the savings you may be able to make today.
You also have to look up your credit report and keep a check by listing all your savings, debts, car loan, etc. Your current savings will also allow you to estimate the amount of your down payment. If you can do more than 20%, you will not be obliged to contract mortgage loan insurance.
Your debts and credit history could impact your ability to take out a loan or get a better mortgage rate. By knowing this now, you will have time ahead of you to improve certain situations and clean up your finances, if necessary.
Assess your borrowing capacity
Estimating the amount you can borrow is not always easy. Fortunately, lenders provide us with calculators to help us assess our borrowing capacity. However, time should be taken to consider different scenarios, as the results can often be overestimated.
Indeed, these do not necessarily take into account your lifestyle, your preferences and your other projects, such as dinners at the restaurant, trips or small romantic outings. By always comparing your budget and testing different prices and interest rates, you will be able to see what best suits your reality.
To remain realistic and comfortable, it is good to remember that the mortgage debt ratio and the expenses associated with the house should not exceed 30% of your total gross income, that is, before even paying taxes. Of course, a financial advisor can help you organize your finances and build a picture of what you could afford.
A good tip from SPV mortgages is to assess your borrowing capacity and live with your projected budget for a while as if you were already a homeowner. You will quickly see if it really suits you!
Pre-authorize then negotiate your mortgage loan
Once you have determined the mortgage amount that is right for you, you can confirm your borrowing capacity by having your loan pre-approved, even before you start viewing homes! This will come in handy because pre-authorization will allow you to:
- Have precise confirmation of the maximum amount you can borrow
- Direct your search to properties that you could actually buy
- Demonstrate your seriousness in your approach to sellers and real estate brokers
- Accelerate the acceptance of your purchase offer and get ahead of other potential buyers
- Set for 90 days the negotiated mortgage terms, such as the frequency of repayments, the interest rate or the chosen amortization period.
You can even use your mortgage pre-approval to shop and negotiate with other lenders, showing them the terms you’ve secured.
It is very simple to obtain a mortgage pre-approval by meeting with an advisor at your financial institution or even directly online. They will go over the details of your budget with you, such as your income, debts, assets, etc. They will also confirm the amount of your down payment and verify that this amount of money has been yours for at least 90 days, or that it is a gift.
In addition, it might be a good idea to gather all the documents necessary for your financing at this stage, such as your pay stubs, bank statements, tax accounts, etc. So when you finally find the coveted home, your financial institution will have everything it needs to approve your final financing request.
By making sure you’ve budgeted and prepared your paperwork well in advance, you shouldn’t have any surprises!
Pass the stress test
Once your budget is in order, you have properly assessed what you can borrow and the property you want respects your ability to pay, there is only one step left to obtain your loan: pass the stress test., ie the banking stress test. After that, you’re ready to buy a mortgage.