Financial Ready Before Taking Steps To Buying a House

Do You Financially Qualify For Buying A House?

Last Updated - December 18th, 2024

The 3-minute montage in the last film you watched, which has led you here, is just that-a montage. Homeownership is one of the biggest steps you can take. There are down payments, a humongous pile of paperwork and an affected bank account. Before jumping into buying a house or even looking at one, it is important to thoroughly analyse your financial situation and study various steps to buying a house. Once you understand the process and your financial status, start looking at listings, mortgage providers, and the interests aligned with your pocket. This article focuses on the necessary steps to buying a house.

Table of Contents

What are Down Payments?

A down payment is the first payment you put down for your home. In Canada, down payment ranges between 5%-20%. You must pay the mortgage insurance if you put out less than 20%. The premium is added to your mortgage payments, significantly increasing the money you would pay to buy a house. For example, paying a 10% deposit would be 3.1% of interest which would be included in the interest of your mortgage. The more you shell out during the down payment, your mortgage and the interest you would have to pay overtime would be less.

How To Save For A Down Payment?

The best way to save for a down payment would be to make conscious financial decisions. You can shift your money from your checking account to your savings account. The down payment is one of many things that you are saving for. There could be repairs and upgrades that you want to make to your new house. This is where you would want to decide how much deposit you will pay. You do not need to if your pocket doesn’t allow you to pay a direct 20% deposit. You can work well with 5% or 10%, or any feasible number. The government has introduced a Tax-Free First Home Savings Account plan. The programme allows first-time buyers to save $8,000 on taxes up to $40,000. Contributions to the Registered Retirement Savings Plan (RRSP) will be eligible for tax deductions, and withdrawals to purchase a first home will be tax-exempt, similar to the Tax-Free Savings Account (TFSA).

The First-Time Home Buyers Tax Credit enables homebuyers to assert a non-refundable tax credit of a maximum of $1,500. You can save up to $6,500 annually in your Tax-Free Savings Account (TFSA) without incurring any taxes on the growth. Subsequently, you can use these savings to fund buying a house. Furthermore, the Home Buyers’ Plan (HBP) permits each buyer to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP). The HBP provides a 15-year timeline for repayment, after which any outstanding amount may have tax implications.

There is More After The Down Payment

Down payments are just one of the steps to buying a house. If you have decided on the percentage of the down payment you will be paying, make sure you have set aside some cha-chings for property taxes, legal fees, insurance, maintenance fees and the cost of any repairs or flips you decide to make. Keeping a buffer amount for these expenses will give you an accurate estimate of the money you must set aside.

Mortgage, Mortgage Everywhere, Which One To Choose?

Shopping for a mortgage is tough. You need a trustworthy company with the best interest rates and mortgage terms. Before you start the home-buying process, conduct proper research and compare various options for mortgage companies. Consult a mortgage specialist who can provide insights and help you find the best mortgage rate that aligns with your financial situation.

What Else Do You Need To Know About Mortgages?

Understanding the types of mortgages available is essential for making an informed decision. Fixed-rate mortgages offer predictable monthly payments, while variable-rate mortgages may provide potential cost savings if interest rates remain low. Another aspect to consider is the mortgage term, ranging from a few months to several years. Each option has pros and cons, so choosing the one that fits your financial goals and risk tolerance is vital.

Picked Your Lender? Now Let’s Get That Mortgage Pre-Approved

After you have chosen your lender, getting a mortgage pre-approval is the next steps to buying a house. This step involves providing your lender with all the financial information so that they can decide the money they are willing to lend you. Pre-approval of a mortgage helps the seller to take you as a serious buyer and allows you to set a realistic budget.

Your Checklist For Lenders To Consider You

A lender will look into your financial history before sanctioning the loan amount. The checklist for what you need to remember for this part of the home buying process is given below.

- Employment history
- Credit score- Preferably at least 680 or more out of 900
- Income

If you have a steady income and a good credit score, you should not have a problem securing the mortgage.

Pre-Approval Doesn’t Assure Your Rate Or Lending Amount

Prior approval does not guarantee the final mortgage rate or the amount of credit. The rates and the amount can be changed during the steps to buying a house. The change can hinder the final approval. You need to maintain financial stability to avoid hiccups when buying a house.

Not New To The Process? Refresh Your Information

Even if you have purchased a property before, budgeting is always important. Analyse your existing financial standing concerning the price of buying a house. You can borrow funds from your TFSA or use the value of your current house as an additional source of down payment cash, but you are ineligible for federal programmes or tax breaks designed for first-time home buyers. If you intend to purchase before listing your current house, consider the possible effects of having dual mortgages.

Buying a House Before Selling Your Current One?

Well, it’s risky business. Carrying two mortgages might affect your credit score. Having two homes weigh heavy on your pocket and your credit score, otherwise it might strain your ability to make both payments. If you plan to write up an offer before you sell your old house, the bank will monitor your financial stability to manage both homes.

How Do Two Mortgages Affect Your Credit Rating?

Having two mortgages on your property may affect your credit score. It might not have a significant negative impact, especially if you can manage both mortgages responsibly and make timely payments. Your credit rating could suffer if you have trouble making payments or your debt-to-income ratio rises too high. Before taking on two mortgages, it’s crucial to carefully assess your economic situation and capacity for the increased expense.

Conclusion

Becoming a homeowner is a major milestone, but it also requires careful analysis of your finances. Before you go for your first open house, evaluating your financial readiness and understanding the intricacies of home buying is crucial. Financial preparation is paramount whether you’re a first-time homebuyer or a repeat buyer. Carefully assess your financial standing, the loan methods you might want to go for or any federal scheme you want to benefit from. Make sure you thoroughly check all your finances before you decide to apply for a mortgage. Maintain a healthy credit score for a smooth process of buying a house. If you have doubts, consult a financial expert or a realtor who can guide you regarding down payments, mortgage, maintaining a credit score and any such issue regarding your financial health before buying a home.

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