For the younger buyer…..How to get prepared for your first home!
“Hey Andrew Young, I’m younger and I want to be prepared to buy a house in a couple of years, what do I need to do?”
There are usually four major components to getting you approved for a mortgage:
- Employment – We need to prove that you have a source of regular income. In general, after you start your new job, you will need to be employed by the same company for a minimum of 3 months or until you pass probation.
- Down payment – We need to see how much down payment you have and prove the source of the funds. The minimum down payment amount is 5% of the purchase price of the home. For down payment proof, we will need 90 days record of your bank account, RSP’s or TFSA. Also, you can obtain your down payment as a non-repayable gift from a direct family member.
- Credit – We need to prove your identity and show that you repay your debts in a timely fashion. We do this by collecting your name, address and Social Insurance Number. We access your credit bureau via Equifax or Transunion. These companies track your payments, balances and repayment history.
- Affordability – We perform a calculation to discover your Total Debt Service Ratio (TDSR). It’s a calculation that takes your monthly ‘must pay’ items (credit card, line of credit, car loan or student loan) and we divide that by your gross monthly income (income before taxes). From that we have a ratio that indicates how much of a mortgage payment you can afford.
Here are some tips for you…
Manage your credit
Do yourself a favor – if you borrow it – pay it back! Credit cards debt is not free money. Pay more than the minimum balance on your credit card debt every month or it will cost you a fortune and take you many years to pay it back.
Keep the correspondence from your student loan provider(s). There are often mistakes on credit bureaus that can be cleared up with the proper paperwork.
Don’t take on more than 2 credit cards. It is redundant to have more than 2. Beware of the ‘in-store’ credit cards. If you don’t pay the balance off monthly, you could be charged 18-28% interest on the balance. The less debt you have, the higher the mortgage amount you could be approved for.
Save your money
Set up an account (High interest savings or TFSA) and make regular contributions. It may be easier to setup a regular deposit amount through your bank. It is best to use the power of interest to help you save for a house. You can use the Home Buyers Plan (HBP) where you can contribute into an RSP and use that money as down payment. Over a 15 year period You do have to pay that money back into your RSP. You get a 2 year grace period where you don’t have to make payments.
- Pay your debt on time and often
- Keep records of the debts you incur
- Don’t take on more credit than you truly need
- Set up a savings account and make regular deposits
If you follow these simple steps, you will be in great financial shape to buy a house.