Buying your first home is exciting, but it can also be stressful if you are not familiar with the procedure and the right steps. With the right knowledge, you can move through the home buying process with confidence. In this guideline, we have broken down the buying process into easy-to-understand steps.

Mortgage, old or new construction homes tips

1. Know Your Buying Power

The first step involves reviewing your finances to understand what house you can afford.  Most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt which includes housing as well as things like student loans, car expenses and credit card payments.  The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month.

Example: Let's say your monthly income is $6,000. To calculate how much mortgage you can afford, you simply multiply your monthly income by 28.

$6,000 x 28% = $1680/month

Still not sure about how much house you can afford, use this mortgage affordability calculator to determine what you can afford.

2. Know Your Preferences - Buying an Old Vs New build Homes

In order to prioritize and help you choose, here are some pros and cons of buying a new house or an older home.

Pros of buying new construction home:

  • Design your dream home your way.
  • New construction homes are generally backed by a builder warranty.
  • New construction homes require less maintenance.

Cons of buying new construction home:

  • New build homes are often more expensive compared to older homes.
  • New build homes don’t usually come with a ton of yard space. New homes are competing with already developed neighborhoods.
  • No matter how well your home was built or how nice the soil is, homes need to settle. This means you might hear your home making a lot of creaking sound during the first few years.

Pros of buying an old home:

  • Old homes usually have bigger yards than newer ones.
  • When buying an old home, you are moving into an established neighborhood with people who are there for a while so it is comforting.
  • They come with landscaping that has had the time to mature. Trees that offer the shade and flowers that bloom every spring,

Cons of buying an old home:

  • Old home requires more maintenance.
  • Old home has gone through a couple of owners and that means it has gone through all of their crazy designs and repair choices.
  • Old homes have small closets.

Financial planning tips

3. Work On Paying Off Your Debt

Debt to income is a major factor in determining if you qualify for a mortgage because a high DTI could indicate that you don't have enough money to pay all of your debts, including your mortgage. DTI is basically a personal finance measure that compares  an individual's monthly debt payment to his monthly gross income. Experts suggest that an acceptable DTI ratio should sit at or below 36%.

4. Save For A Down Payment

The minimum down payment in Canada depends on the purchase price of home. If the purchase price is less than $500,000 the minimum down payment is 5%. You can make a personal saving account, an investment account, mutual funds or even a tax free savings account. Your down payment can come from any of these sources.

5. Build An Emergency Fund

It's essential when you are going to own a home. This fund is solely for any emergency or unexpected expenses so you don't have to dip into your life savings or take on more debt. When determining how much you should have in your emergency fund, a good rule of thumb is about 3 to 6 months' worth of living expenses. That way, if you or your spouse lose your job, you'll have enough money to cover the bills until you find a new one.

6. Become Familiar With Different Types Of Home Loan

Home loans can vary gently when it comes to interest rates and fees. Be sure to look into the potential advantages and disadvantages of various features of loans you're considering. For example, some loans may allow you to make extra repayments, redraw funds, or use an offset account which could help reduce the interest you pay with time.

7. Determine If It's The Right Time To Purchase

Even if you meet the qualifications requirements, have a hefty down payment saved and a healthy emergency fund, you still might not be ready to purchase a home. Buying a home is not just a financial endeavor, it's also a big responsibility, you'll need to make sure you're up for maintaining the home, handling utility bills, taking care of landscaping, maintaining your appliances and performing home repairs.

House hunting tips

8. Start Your Research Early

Start reading websites, newspapers, and magazines that have real estate listings. Make a list of the particular house according to your preferences. You can set up alerts on various websites to get notifications or can use gross yield extensions to find real estate deals.

9. Hire The Right Buyer Agent

You should contact at least 3 real estate agents or brokers for interviews in the city where you want to buy a home. Search the website of the local chamber of commerce to find real estate agents with at least 3 years of experience or do a google search for real estate agents in your area. Read their reviews and visit their websites or you can inquire from your relatives, friends, etc. for a referral to local real estate agents they respect.

10. Research Neighborhood For Best Fit

Be sure not to make a decision based on property alone. Ask your real estate agent for information on crime rates and the quality of schools around your prospective neighborhood. Visit the neighborhood at different times and days to check for traffic conditions and noise levels.

11. Attend Open House And Think Long Term

Once you have narrowed down your neighborhood, attend a few open houses. Looking at homes that are for sale even if they are not a perfect fit for you. When you do eventually find a house you love, you will know how your place compares to better or worse homes in that neighborhood.

12. Make A Competitive Offer

Let's say you found the home you want and can afford. Since you're already pre-approved for a loan, you are ready to make an offer. Because you are a first time home buyer, it may be hard to know how much you should offer. That's when you can rely on the expertise of your real estate agent. Ask them to help you make sure your offer is competitive but also within your budget and the home's value.

First time home buyer mistakes to avoid

13. Getting an agreement in principle, also known as an approval in principal for a mortgage

One of the biggest mistakes first time buyers make is setting their sight on a home before they've applied for a mortgage. Because even if you've looked into what you can afford, you might find when you come to apply that your budget doesn't stretch up to the mark, so getting a mortgage pre approval before home hunting will give you a better indication about what kind of mortgage rate you'll be offered and a more solid figure of what you can borrow.

14. Don't Miss Home Inspection

Home inspection of the property you're considering will alert you to serious issues that may not be visible like asbestos, termites, electrical, ventilation, and serious plumbing faults. These problems could eventually cost you a whole lot more than the home inspection itself.

15. Not Budgeting For Closing Cost

Closing costs including taxes, inspection fees, etc. generally run between 2% to 5% of your loan amount. You can shop around and compare prices for certain closing expenses such as homeowner insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agents commission.

16. Not Saving Enough Money

Saving up enough money to put down on a home is quite an accomplishment. The high price rent in today's economy has made it difficult for anyone to transition over from renters to buyers. Most first-time homeowners don't save enough for what comes next. It's not a bad idea to have at least two to three months of mortgage payments in reserve. Neglecting to account for these costs could be devastating.

17. Searching For A Home On Your Own

The advent of technology and the internet has made searching for a home a lot easier than it used to be. I recommend using real estate websites as a research tool but there is always the possibility that you will find the home of your dreams on your own. However, I'm afraid that is the exception rather than the rule, so it's better to let your agent search homes in your place.

18. Paying Too Much Private Mortgage Insurance

To prevent more people from defaulting on their loan, mortgage guidelines have adapted a new rule which requires buyers to pay private mortgage insurance on any property that they were not able to put at least 20% down on.  The buyer can compare and choose the best mortgage insurance. He can also get the balance of sale in order to avoid mortgage insurance.

19. Avoid Making An Emotional Decision as a first time home buyer

It's okay to fall in love with a property but remember not to let your emotions dictate your decision. I recommend looking at several homes, to prevent yourself from becoming too attached. Here are some pieces of advice to prevent you making an emotional decision. If you and your family find a house that seems to check all the boxes, providing you with all the space you need and the right aesthetics, you might become convinced there’s no other option. Accordingly, you might be willing to overextend your budget to acquire it. Unfortunately, this can set you up for financial ruin if you aren’t careful.

Before you even start looking for homes, set some firm boundaries for your purchase. What is your budget? Set a strict upper limit here, so you’ll know not to pursue a home that pushes that budget further. Your emotions will have less power over you as you look at a greater volume of homes. It’s hard to fall in love with a home immediately when you’ve seen 100 others, and you’ll be less likely to overlook critical flaws or excessively high prices when you know how many other contenders there are.

20. Paying Too Much Attention To Surface Level Features

Most sellers are going to do their best to pretty up their properties to attract buyers. So, you should make a list of significant components that need to be in good working order for the home to be livable. In case, if you are buying a house in cheap prices which is not meeting your requirements, you can invest a bit for its decoration purpose to make it look livable, but if you are  buying a fair price home your focus should be on other significant compliments for e.g. the roof, the plumbing systems, the electrician system and the HVAC system.

Finally, you should be fully prepared in every aspect before buying a home as it’s a big financial step in your life.