What future home buyers can do to prepare?

4 min read

As you begin to think about buying a home, it may be tempting to fire up those real estate apps and immerse yourself in thousands of home photos, imagining which dream house could be yours.

But before you begin this journey as a first-time homebuyer, you should invest in some logistical groundwork. Doing your homework ahead of time will better prepare you for the home buying process, especially when the housing market is hot and competition fierce.

The following are some steps that will help you get your financial and mental houses in order so you can search for a new home with confidence.

Assess Your Debt

Lenders want to know that you’ll be able to handle the debt you already have, in addition to your new mortgage payment. The Consumer Financial Protection Bureau (CFPB) reports that a maximum DTI ratio of 43% is required to receive a qualified mortgage, which is seen as safer for lenders.

Getting your existing debt under control is imperative before you can begin your mortgage application and your house-hunting process. This includes:

Credit cards: Pay down your credit card balances so you’re using no more than 30% of your available credit. Maxed-out credit cards can signal to lenders that you’re not using your available credit responsibly, which also lowers your credit score.
Installment loans: You might consider paying off or significantly paying down any installment loans (e.g., auto loans) to ease your monthly obligations.
Student loans: If you carry student loan debt, consider how these monthly payments will impact your ability to pay a mortgage. Paying off any credit card debt might give you more leeway in your budget to service both your student loans and a mortgage.

Determine Your Down Payment

How much you’ll put down on your home depends on the type of mortgage you receive. However, the typical mortgage down payment ranges from 3.5% to 20%.

Essentially, the higher your down payment, the lower the risk you are to a lender. Lenders assume that buyers investing more cash up front are less likely to walk away from the money they have in their home. When you put down less than 20%, lenders often mitigate that risk by charging private mortgage insurance (PMI), which is an insurance policy that protects the lender if you default on your loan.

Review Your Budget

It’s important to remember that your budget will change when you buy a home and you’ll have new costs beyond just the mortgage payment.

Property taxes, homeowners insurance and maintenance are just a few of the additions you’ll want to plan for. You may find that your utility bills increase. You’ll also want to make sure you have enough money in savings to cover emergency repairs.

Figure Out the Type of Home You Want

When you know you’re buying power, you can review all the home options available in your area by first understanding the types of homes that are out there.

Single-family homes: These are what most people mean when they refer to a house. These homes aren’t attached to other homes.
Duplexes: These houses are typically two homes with separate entrances in one building and share a single common wall (if side-by-side) or floor/ceiling (if a two-story building).
Condominiums: These are privately-owned units in a larger building or development of multiple units where owners own the interior of the unit, not the exterior building. There are usually HOA fees paid monthly to cover the maintenance of shared areas and amenities.

Research Where You Want to Live

Once you’re preapproved and have an idea of the type of home you’d prefer, it’s time to research your favourite neighbourhoods.

Consider these neighbourhood features when you’re shopping for a home:

Walkability: Amenities within walking distance might be key to help you save a car trip, like playgrounds, grocery stores and public transit.
Parking: If you’re considering a building without parking, pay attention to the availability of street parking, especially at night and on weekends when more residents might be parked. You can also explore rental parking options.
Property taxes: Different neighbourhoods can have vastly different property taxes. Your real estate professional will have this important information.