The buying process might appear straightforward to any first-time buyer\u2014 you find the house you love, sign on the dotted line and get the keys. But prior to those months of browsing MLS and late-night offer negotiations, are months \u2014even years\u2014 of carefully coordinated financial planning, budgeting and discipline.<\/p>\n
Financially preparing for homeownership can never happen too early. It can take over eight years for some Toronto residents to save enough for their first down payment. For other new buyers, it can only take eight months\u2014savings timelines hinge on a number of factors. We asked Andrea Jolly, a broker and Lead Planner at Mortgage Architects, and Dan Washington, a financial advisor at Raymond James Limited, to dish out their best advice for first-time homebuyers on how they can plan ahead for their real estate dreams, no matter when you\u2019re planning to buy.<\/p>\n
1. Forget whimsical budgets and tell your money what to do<\/strong><\/p>\n When Washington begins a savings plan for a client thinking of homeownership, one of the first things he evaluates is their spending habits.<\/p>\n \u201cIf they\u2019re renting now or living at home, there\u2019s a lot of latitude in the money that they\u2019re bringing in for some discretionary spending,\u201d he says. \u201cIf that\u2019s not well controlled, that it can be tough for one to achieve homeownership and excel in it once you\u2019re there. It tends to speak for a large portion of our paychecks.\u201d<\/p>\n Washington is not a believer in \u2018whimsical budgets\u2019\u2014the kind where untamed spending creeps in and eats up your savings. Instead, he recommends setting a budget where every penny is accounted for and has a purpose. As a result, you\u2019ll have the ability to alter your budget when needed more easily, creating more intentionality in your spending.<\/p>\n \u201cYou can adjust the plan in the month. If you overspend a little bit on groceries, you\u2019ve got to cut from somewhere else,\u201d says Washington. \u201cEssentially, you want to achieve more or less what your plan was for the money. It\u2019s about telling your money what to do.\u201d<\/p>\n Setting up a monthly automatic transfer of funds into your savings account should also help you to get more familiar with allocating a portion of your budget to your homeownership fund.<\/p>\n \u201cOnce you get used to that money disappearing and not being there, you\u2019ll get comfortable with it not being there,\u201d says Washington. \u201cAnd yet, a year later, you\u2019ll have $12,000 saved up.\u201d<\/p>\n 2. Keep tabs on your credit<\/strong><\/p>\n Jolly has worked with clients who have no credit history at all, meaning they\u2019ve steered clear of credit cards and loans. While this may sound like a sure way to prevent debt pitfalls, Jolly explains that having credit history and up-to-date knowledge of your credit score is instrumental to getting pre-approved for a mortgage down the road. A balanced credit score with healthy spending limits allows brokers to provide flexibility in their mortgage rate offerings.<\/p>\n \u201cWhen you have a credit score over 680, we are allowed to use extended ratios and affordability,\u201d says Jolly. \u201cIt gives you a little bit more room because you\u2019re trusted with your credit. It\u2019s not just score. It has to make sense. If you only have a $500-limit Visa, but your score is 700, it\u2019s not enough for a lender to judge you on.\u201d<\/p>\n Jolly not only recommends paying your credit balances off frequently, but to check your credit score twice a year. In doing so, you can screen for errors that can hamper your credit history.<\/p>\n \u201cYou\u2019d be shocked at how many errors are on a credit report,\u201d she says. \u201cAt one point, I had three mortgages listed, and I only had one property!\u201d<\/p>\n 3. Learn what the right kind of debt is<\/strong><\/p>\n As many as 18% of Canadians have delayed major life milestones because of their debt. The specific type of debt you owe can impact how much a mortgage lender would qualify you for. Washington warns that consumer debt, like high balances on your credit card, could indicate that you\u2019re prone to overspending.<\/p>\n \u201cIf you\u2019re a Millennial and you have credit card debt that you can\u2019t pay at the end of the month, or a line of credit that you couldn\u2019t pay outright completely, that\u2019s a symptom that you\u2019re not living within your means,\u201d says Washington. \u201cIt\u2019s not that disastrous when you\u2019re still living at home, but if you\u2019re renting and you can\u2019t pay your rent that\u2019s an issue. If you can\u2019t pay your mortgage, that\u2019s a bigger issue.\u201d<\/p>\n Healthier forms of debt, such as student loans, are tolerated and viewed more as a personal investment to your future.<\/p>\n \u201cYou\u2019ve invested in yourself,\u201d she says. \u201cHowever, if you\u2019ve maxed out the bank credit card and your Canadian Tire Mastercard, that\u2019s a concern. It\u2019s about walking that balance.\u201d<\/p>\n Washington explains that it\u2019s only an ideal to have no student debt prior to homeownership. Instead, he advises to focus on building your down payment and to avoid costly, high-interest consumer debt.<\/p>\n 4. Tunnel vision will cost you<\/strong><\/p>\n When a down payment can run you thousands of dollars, it\u2019s easy to get savings tunnel vision and forget about other important home expenses.<\/p>\n \u201cA lot of people, when they get down to the down payment stage, take all of their savings and throw it into the house,\u201d says Washington.<\/p>\n If a roof leaks, or a bathroom pipe explodes, you no longer have a landlord to pay out for the repair: it\u2019s the homeowner\u2019s responsibility. Hence, Washington reminds prospective homebuyers to also build a healthy rainy day budget in the event of a home emergency. Tucking your savings away in a TFSA, he says, should help keep those funds for life\u2019s surprises.<\/p>\n 5. Test drive your mortgage<\/strong><\/p>\n As part of preparing for the financial tightness of homeownership, Washington suggests working with the disposable income you\u2019d have under a mortgage. By testing the budget beforehand, Washington says it will determine if a client is comfortable with the financial constraints of a home.<\/p>\n \u201cI like people to set themselves up as if they own the house today so all the money that would be going towards the house, [we would] essentially make that their savings today, so they can feel what it\u2019s like to live on the remainder,\u201d says Washington. \u201cIt either confirms that they want to own a home, or they say, \u2018I don\u2019t want to be house poor.\u2019\u201d<\/p>\n Jolly calls this \u201ctest driving your mortgage,\u201d whereby playing out your future lifestyle will help you figure out what you can comfortably afford pre-mortgage.<\/p>\n \u201cIf you know you\u2019re not buying for three years, this is the time to set yourself up for that eventual purchase,\u201d she says. \u201cAnd while three years feels so far out, it really isn\u2019t.\u201d<\/p>\n