What You Need to Know About Getting Your First Mortgage
So you’re going to buy your first house. Congratulations! Now you need to figure out how you’re going to pay for it.
You’ve probably already started looking at real estate listings, trying to figure out how much the kind of house you want is going to cost you. This is all good, but you do need to slow down. Before you think too hard about your first house, you have to take the time to learn the ins and outs of a thing most people will, at some point, want, but definitely don’t want to understand: a mortgage.
Here’s a crash course for getting your first mortgage:
Gather your paperwork
No matter what lender you choose, your financial history is going to be a major issue before you receive money. Realize that the lender is fronting the money, and is on the hook if you default. Here are some of the documents you will need when applying for your first mortgage (or any mortage):
- Recent pay stub
- Notice of Assessment to prove you’re keeping up with your taxes
- Copies of your T4s to show earnings over time
- Bank statements for at least the last three months to show that you would have the ability to make the down payment
- Your SIN for a credit check
Having your paperwork ready to go streamlines the process when you actually begin shopping around.
How much do you qualify for?
Don’t start visualizing life in your perfect dream home just because you’ve saved up a down payment. Come back down to Earth and figure out how much house you can actually buy by getting pre-approved.
Most lenders will pre-approve a prospective home buyer. Getting the pre-approval is important because it will put into better perspective just what your budget will be when house hunting. It can even make you look that much more serious and attractive to sellers and real estate agents. In competitive bidding situations they’re practically mandatory. Keep in mind that you’re not locked into using a particular lender if they pre-approve you. Realize, too, that with your first mortgage you might not be approved for the amount you would like.
What can you actually afford?
When you take out a mortgage you’re committing to forking out a certain amount of cash every month for (typically) the next couple of decades. A lot can happen in that time frame. You may get approved for a large mortgage and be able to buy yourself an amazing house, but then you’ve got more than just that mortgage payment to think about. Utilities, maintenance costs, and property taxes and of course, home insurance premiums can take a huge bite out of your paycheque. If you aren’t careful, you may find yourself spending most of your money on the house and not being able to adequately cover other costs in life. This is what people mean when they talk about being house poor.
Avoid becoming house poor by exercising patience. Don’t rush into your first home purchase. Many people want a lifestyle that they aren’t ready for. Don’t fall into that trap. A common rule of thumb is that you should spend no more than a third of your annual income on housing. In some markets that may sound unrealistic, but it’s still important to realize that owning property is a privilege and not a right. If you can’t properly afford it, you’re not doing yourself any favours buying it with a large first mortgage.
Create a bigger plan
It’s not uncommon for homeowners to think about the long term plan for what they’ll do with their home even before it’s theirs. Because a home is such a large asset, it is often a cornerstone of the life plan. Whether the home will be sold for retirement money or for a down payment on an even better home in the future is something you should consider when looking at the house’s features and location.
One last tip before you get your first mortgage
There are sure to be a whole host of unfamiliar terms when you start dealing with mortgage lenders. Brush up on some common mortgage terms so you understand what to expect. Knowledge is power when it comes to your finances.