I’m a first time home buyer... HELP!
First time home buyers often struggle to get their first foot onto the property ladder. You really want to make sure you pick your primary residence carefully. Whether it's high house prices, lack of budgeting experience, or poor credit history, there are lots of hurdles to overcome when you're starting out in the world of real estate. While things might seem difficult during the early days, it's important to remember that everyone has to start somewhere. Let's take a look at the practical steps you need to take to increase your chances of mortgage pre-approval and approval and allow your dreams of home ownership to come true.
Review and improve your credit score
When applying for a mortgage, your credit score carries a lot of weight. Along with your deposit amount and income, your credit score is the top factor which impacts your chances of mortgage pre-approval and approval. Your credit score will also affect the interest rate that is offered to you by lenders, with higher credit scores associated with lower interest rates when all other factors are equal.
Review your credit score in the U.S.
Before you can improve your credit score, you need to review it to make sure it's accurate. There are three major credit bureaus in the United States, with each organization producing their own credit reports: Experian, Equifax, and TransUnion. According to a 2012 report from the Federal Trade Commission, one in five reports had an error, so there are methods to review your score under the Fair Credit Reporting Act.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 550-649
Bad Credit: below 550
Review your credit score in Canada
Canadian credit scores operate in a very similar way to those in the U.S, although there are only two major credit bureaus: Equifax and TransUnion. The scores themselves also operate on a slightly different scale, with credit scores generally ranging from 300 to 900. If you want to get an idea of what to expect, you can view sample credit score summaries from each bureau.
Excellent Credit: 800+
Good Credit: 720-799
Fair Credit: 650-719
Poor Credit: 600-649
Bad Credit: below 600
How to improve your credit score
It doesn't matter whether you live in the U.S or Canada, there are some time-tested ways to improve your credit score and enhance your chances of mortgage approval. From setting up payment reminders and paying down debt through to increasing your credit age and limiting your credit applications, let's take a look at four powerful ways to improve your credit score.
1. Set up payment reminders
Paying down your debt on time is one of the biggest contributing factors to your credit score. Not everyone is as organized as they should be, with payment reminders often available through banking portals, credit card providers, mortgage loan providers, and store card providers. As always, it's important to pay down debt with the highest interest rates first.
2. Reduce your debt
While it might sound simple, reducing your debt is perhaps the most effective thing you can do to improve your chances of mortgage approval. You should always keep your credit card balances low, eliminate revolving credit where possible, and attempt to pay down your debt rather than moving it around. While debt consolidation can make sense in exceptional circumstances, it's normally a better idea to create a budget that works from the outset.
3. Increase your credit age
First-time buyers often struggle to get a mortgage due to a lack of good credit history. While you can't add history, you can improve your credit age to some degree by becoming an authorized user on a friend or family member’s credit card. Your credit age is defined by the average age of your accounts, so it often makes sense to keep old accounts active rather than shutting them down.
4. Get the right kind of credit history
While it might seem counterintuitive, first time home buyers often struggle with their credit score because they've never had a credit card. Opening a secured credit card can be a great way to develop a positive payment history. On the other hand, too many new credit applications can have a negative impact on your credit score, so leave that store credit card alone if you're thinking about getting a mortgage. While the impact of new applications can be small, a hard inquiry can impact your credit score for a full year.
Determine your budget
How much house can you afford? Are you failing to get mortgage approval because you're being unrealistic?
When it comes to getting a mortgage, it's often the simple things that have the biggest impact. The first step in any long-term financial plan is to create a solid budget that leaves nothing to chance. Not only is this the best way for new buyers to improve their credit score and get mortgage approval, it will also prove useful for the next 20 or 30 years when it comes to paying down your mortgage.
How to calculate a budget that works for you
The first step in creating a budget is to add up your monthly income and expenses. While this might seem simple, it's easy to leave out future expenses such as property taxes and homeowner's insurance. Affordability calculations are about setting realistic expectations, both now and in the future. Along with your projected income and expenses, it's also important to include your down payment amount and expected interest rates based on mortgage type.
While nothing is written in stone, there are some well-known rules of home affordability that are worth taking into consideration. Mortgage lenders use qualification ratios to determine how much they will lend to a borrower, which is something you can apply to your own calculations to avoid being rejected. The three following rules can help you to avoid applying for mortgages that you can't afford.
Your monthly mortgage payments should not exceed 28 percent of your gross monthly income.
Your total housing payments (property taxes, insurance etc) should not exceed 32 percent of your gross monthly income.
Your total debt payments (housing payments, credit cards etc) should not exceed 40 percent of your gross monthly income.
Benefits for first time home buyers
First home buyers often find it difficult getting into the property market, with high prices, poor credit history, and bad budget habits often creating stress and discontent. There is often help available, however, with federal and state grants, tax credits, and other options designed to make life easier for first time buyers. Whether you live in the United States or Canada, there are lots of options on the table if you know where to look.
Credits for first time home buyers in the U.S.
Residents of the United States have a number of options available to them when they're looking to buy their first home, including tax credits, tax benefits, IRA withdrawals, and Size Up state programs. It's important to distinguish between tax credits and tax benefits, with tax credits being a dollar-for-dollar reduction in the taxes you owe and tax benefits reducing your taxable income.
The First-Time Home buyer Credit was a specific tax provision made under the Housing Economic and Recovery Act (HERA) in 2008. While this scheme officially expired on April 30, 2010, there are a number of first-time home buyer incentives still available on a state and local level. Payment assistance for first-time home buying, often known as Size Up programs, are available in many states based on income and property expenses.
In order to check availability in your jurisdiction, you can search your local .gov site or the U.S. Department of Housing and Urban Development (HUD.gov). There are also a number of specific options available from the U.S. Department of Agriculture for rural property buyers, with veterans also able to access options from the Department of Veterans Affairs, and Native Americans able to apply for a Section 184 loan.
Every first-time home buyer in the United States is also eligible to take $10,000 out of their traditional or Roth IRA without paying the 10 percent penalty for an early withdrawal. This is more open-ended than you might think, with the federal government's definition of a first-time home buyer being someone who hasn't owned a personal residence in three years. There are also tax benefits available for all home buyers, including home mortgage interest deduction, loan origination fees deduction, and property tax deduction.
Credits for first time home buyers in Canada
Canadian residents have access to a number of tax incentives and financial aid programs to support first time home buying, including the First-Time Home Buyers' (FTHB) tax credit, Home Buyers Plan (HBP), and GST/HST Housing Rebate. While not all home buyers will qualify for these programs, they have proven a useful way to increase first home buyer numbers in some of Canada's most heated markets.
The First-Time Home Buyers' (FTHB) Tax Credit is a $5,000 non-refundable income tax credit on a qualifying home acquired after January 27, 2009. For an eligible individual, the credit will provide up to $750 in federal tax relief. Similar to IRA withdrawals for American citizens, the HBP allows Canadians to borrow up to $25,000 from their Registered Retirement Savings Plan in order to finance a home purchase.
New home buyers in Canada may also qualify for a government rebate for part of the GST or HST paid on a home purchase. This program may also apply for substantial renovations, major revisions, or conversions that involve transforming a non-residential property into a home. Information about Canadian credits for new home buyers can be obtained from the government websites, including the Canadian government’s HBP FAQ.
Mortgage options for first time home buyers
New home buyers are often confused by the number of mortgage options available to them, with different mortgage loan types available for different borrowers and real estate markets. Whether you live in the United States or Canada, there are a number of decisions to make surrounding down payment ratios, interest rate structures, payment schedules, mortgage rates, and other mortgage conditions. It's easy to avoid some of these mortgage problems if you do your research well.
If you live in the United States, Homeownership provides information on government mortgage relief programs, with the Federal Housing Finance Agency (FHFA) also committed to providing resources to America’s homeowners who have been affected by the housing crisis. If you live across the border, the Canada Mortgage and Housing Corporation (CMHC) are also there to help.
Conventional mortgages vs high ratio mortgages
In the U.S, a conventional or conforming mortgage describes any fixed or adjustable rate loan that is not insured or guaranteed by the federal government using guidelines set by Fannie Mae and Freddie Mac. Conforming loans require a down payment as little as 3 percent for a fixed rate term or 10 percent for an adjustable rate.
In Canada, where lending requirements are typically stricter, a conventional mortgage describes a down payment of 20 percent or more of the property value. All mortgages with a down payment lower than this are considered high ratio and may require insurance against payment default. In Canada, high ratio mortgages need to be insured by the Canada Mortgage and Housing Corporation (CMHC) or an alternate organization.
Fixed interest rates vs variable and adjustable interest rates
The decision between a fixed-rate mortgage and an adjustable-rate mortgage or variable rate mortgage is critical. While fixed-rate loans are locked down for the entire term of the loan, other options are more flexible depending on wider economic and market conditions. Variable rate loans alter interest rates according to market conditions, with adjustable-rate loans changing both interest rates and repayment schedules according to conditions. All of these options are readily available in the U.S and Canada.
Open mortgages vs closed mortgages
New homeowners often require more flexibility when it comes to making repayments. An open mortgage describes a flexible payment solution that can include both early and lump sum repayments. While this kind of flexibility is important to many new homeowners, it's important to realize that these types of mortgage loans often carry a higher interest rate. In contrast, a closed mortgage comes with a fixed payment schedule that can not be altered when conditions change. This monthly mortgage payment schedule is important, and you have to abide by it.
Mortgage terms and amortization
Along with your down payment, interest rate structure, and payment schedule, it's also important to look at the terms of your mortgage. The amortization period is the amount of time it will take you to pay off both the underlying principal and interest on your entire mortgage. It's important to note that accelerated payments are only allowed under certain mortgage contracts, so it's important to get a flexible mortgage if you plan on paying off your loan early.
In the United States, it's possible to get 40-year, 50-year, and even 60-year mortgages. This is not typically recommended, however, with ultra-long-term loans often seen as a replacement for troublesome interest-only loans because they have homeowners paying interest payments for years. In Canada, the maximum time frame is 25 years for insured mortgages, with this period reduced in 2012 from 35 years, which is still applicable for uninsured loans.
Comparing lenders in the U.S.
First time home buyers have a number of options available to them when choosing a lender or a loan program. These vary from conventional bank and credit union loans through to mortgage brokers and government insured loans. Firstly, it's important to understand the difference between direct lenders such as banks and mortgage brokers. While mortgage brokers don't actually lend money themselves, they act as agents for multiple mortgage lenders and have access to a wider range of mortgage products.
Other than the conventional loans available through banks and mortgage brokers, there are also other options available in the United States. Federal Housing Administration (FHA) loans are ideal for new borrowers with low credit and down payment amounts, with the FHA’s maximum financing being a 3.5 percent down payment for borrowers with a credit score of 580 or more.
United States citizens also have access to specialized loans such as VA loans backed by the U.S. Department of Veterans Affairs, and USDA loans backed by the U.S. Department of Agriculture. Borrowers typically need a minimum credit score of 620-640 to qualify for these loans. A number of direct lenders and mortgage brokers also offer Jumbo loans, which require a high credit score because loan amounts exceed conforming loan limits.
Comparing lenders in Canada
New home buyers in Canada have many of the same options as U.S residents, including direct lenders such as banks and credit unions and mortgage brokers. Monoline lenders are also an important factor in the Canadian mortgage market, with these mortgage lenders providing only mortgages and not involved in other financial products. Monolines typically don’t deal directly with consumers, so you have to go through a mortgage broker.
Benefits of dealing with a monoline lender include more competitive interest rates, more flexible loan terms and conditions, lower penalties, and improved mortgage servicing. Monoline lenders also make it easier and cheaper for borrowers to transfer their mortgage to another lender down the track. There is no equivalent to FHA government loans in Canada, with tighter lending restrictions and mandatory CMHC insurance required for down payments between 5 percent and 20 percent.
Finding a real estate agent
When you're ready to start house hunting, choosing a good realtor can make all the difference. Real estate agents are not all equal, with each realtor and agency needing to be compared based on your needs and expectations. It's important to select someone who specializes in certain locations and property types, with individual neighborhoods and markets having their own distinctive flavor.
Real estate agents can be found in many ways, with popular methods including word of mouth, online reviews, and location proximity. Once you have a short list, it's always a good idea to interview agents and ask them specific questions relating to your property search. Not only do you need someone who's familiar with the type of property you're looking for, you also need someone who you're comfortable communicating with.
Numbers never lie when it comes to the property market, with good realtors always happy to promote their recent sales, commission rates, and other relevant market data. You can even ask them questions about broader market conditions in your neighborhood of choice, including recent and historical sales prices, sales volumes, and time on the market. Last but certainly not least, you need to have an agent with a solid marketing plan and well connected local profile.
In the United States, real estate agents are distinguished from realtors, with the later belonging to the National Association of Realtors and taking a pledge to follow its Code of Ethics. Licensing requirements for realtors vary across Canada, with licensed professionals often becoming members of a local real estate board along with the Canadian Real Estate Association (CREA).
Finding a property lawyer
Much like a real estate agent, having a good lawyer by your side is a crucial part of home ownership. From reviewing paperwork and conducting a title search through to registering the deeds and helping you avoid litigation, the trustworthy legal advice is worth its weight in gold. While a property lawyer is often associated with the final part of title transfer, it often makes sense to develop a working relationship with someone by getting them on board from the very beginning.
Buying property is one of the biggest and most important financial transactions that you'll ever make, so it's important to get solid legal advice from the outset. The buying process can be absolutely overwhelming for everyone, especially first-time homebuyers. Among other things, lawyers can ensure that your legal rights and obligations are being met and that your mortgage and transfer documents are correct. Specialist property lawyers can be found through word of mouth, recommendations from real estate agents or mortgage brokers, and online reviews and testimonials.
Finding the perfect neighborhood
Finding the ideal neighborhood for your new home takes a lot of thought and consideration. While you may know exactly where you want to live based on your work, school, or family connections, it's important to take a step back and analyze each potential location based on criteria that are important to you. What type of home do you want? How close do you need to be to transportation hubs? Do you want to live somewhere peaceful or somewhere full of energy?
Different things are important to different people, with each person needing to create a list of priorities and work out where compromises can be made. For example, while close proximity to entertainment and cultural districts will be essential to some people, others will be more concerned with proximity to nature trails and daycare centers. At the end of the day, you need to find somewhere that will make you happy both now and in the future.
It's important to look into location carefully, including environmental and lifestyle factors such as traffic and noise pollution, light pollution, and air quality. Along with location, you should also make a property checklist to avoid comparing homes on price alone. Remember, the purchase price is just one of the factors, as the buying process is complex. Properties should also be compared by the type (are you looking at single-family homes, condos, apartments, etc), lot size, the age of the home, parking and access, bedroom and bathroom amenities, property taxes, and interior and exterior condition just to name a few.
Reconsidering your budget
Once you've tracked down the perfect home, it's important to do some more math and reconsider your budget. The calculations you made at the start of the process are probably not accurate, and with new information by your side, it's time to make changes. Have you factored your new housing costs into your budget? Is your current budget realistic given the size of your mortgage? Do you need to make compromises to live the lifestyle that you want?
It's also important to be wary of common closing and after-closing costs, including home inspection fees, land transfer taxes, legal fees, and property repair and renovation costs. Along with responsible budgeting, you may need external help with your new property. Various tax deductions are available to you as a homeowner, with state taxes and charitable donations now earning you deductions that can reduce your tax bill substantially.
For example, in the United States, you can deduct interest on up to $750,000 of debt used to acquire or improve your home. You can also deduct the "points" paid to your lender as interest when the cash you paid at closing equals the same value. U.S homeowners can also deduct local property taxes each year, deduct home improvement costs when they sell a property, and access energy tax credits worth up to $500. If your new home increases the size of your mortgage interest deduction, you don't even have to wait until you file your tax return to see the savings.
While Canada doesn't have a home mortgage interest deduction, any interest you pay on a real estate investment is tax-deductible if you use the property to generate income. In addition, the Canadian Revenue Agency offers various tax credits and allows property investors to deduct some of their fees and expenses related to property ownership.
Research utility bills and connections
The cost of setting up utilities and amenities should always be considered as part of any move. From setting up gas, electricity and water through to telephone, internet, and cable TV, there are often significant setup costs involved when you move into a new home. It's important to take care of your utilities as early as possible, after all, you don't want to move into your new home without hot water.
Electricity is probably the biggest utility expense, with gas also significant in colder climates. Other ongoing costs include water, sewerage, garbage, internet, and cable TV among others. When setting a budget, it's important to recognize initial setup costs and ongoing purchase price fluctuations based on the time of year and day. Utilities cost calculators are available from many service providers and third-party websites.
Home inspection tips
A comprehensive and professional home inspection is always recommended when you're moving into a new property. In fact, you should probably think long and hard about a home inspection before you sign any contract. While some problems are easy to see with an untrained eye, others require professional inspection. From structural work and building foundations through to plumbing and electrical, a home inspection can help to identify significant problems sooner rather than later.
Even if you've already purchased a property, a home inspection can help you to manage ongoing repair and renovation costs. While most people budget accordingly for things like mortgage payments and homeowner's insurance, home repair costs can be a big surprise if you're not prepared. When hiring a home inspector, you should always do your own research instead of relying on a recommendation from a real estate agent. While most realtors are honest, it's normally better to isolate the home inspection from the real estate transaction in order to avoid pressure from both sides.
In the United States, licensing requirements for home inspectors differ from state to state. While operators in many states have to pass the National Home Inspector Examination (NHIE) and ASHI Standards of Practice and Code of Ethics Examination, this is certainly not the case everywhere. Regardless of where you live, your inspector should have liability insurance and certification through a reputable home inspection training association.
The situation in Canada is just as confusing, with home inspectors unregulated in Ontario but regulated in Alberta and British Columbia. Provincial regulations for home inspectors can be found through the Canadian Association of Home and Property Inspectors website. Along with licensing standards, it's important to find someone with experience, someone with good communication skills, and someone who is aware of potential problems that may be relevant due to local building standards and weather conditions.
Moving into your new home
Once you've done all the hard work and paid the bills, it's time to move in and enjoy your new home. A successful and stress-free move is all about preparation, from the early stages of list making and organization through to the final stages of packing and cleaning. Making a comprehensive moving house checklist is the only way to ensure that everything is in place.
Are the utilities connected? Have you thought about vehicle access for the removalists? Have you organized moving insurance? Have you packed an essentials box and overnight bag for the first night? Along with moving your belongings and conducting a final inspection, closing day is the final hurdle to overcome before you move into your new home.
Once you've received your statement of adjustments, you can ensure the correct payment of all closing costs, including appraisal fees and mortgage insurance for your new home. Once you've paid your final closing costs, received the final go-ahead from your lawyer, and arranged for your utilities to be connected, it's time to collect the keys to your new home and start enjoying your new life.