May 10th 2022
Preparing to buy a home? Don't forget these 7 crucial steps
Have you been waiting patiently to enter the real estate market in Canada? With more inventory available, and home prices more or less stabilizing in Toronto and Vancouver, you may be wondering if this is your time to make a move.
Like us, you’re probably aware of the main steps to take when buying a home, which includes having a down payment ready, eyeing shifts in the market, and determining what you can afford.
What you may not know is that there are some day-to-day habits that can make your future home-buying process more of a challenge. Why? Beyond the standard checklist, certain behaviours in your financial history can be concerning to lenders and may reduce your chances of securing a mortgage loan.
The key word here is ‘history’: every financial decision you make in the months before buying a home should be guided by one question: “How will this look to a future lender?”, as they will be reviewing every check and balance in your accounts with increased scrutiny. You can ready yourself by:
- Monitoring big deposits or withdrawals in your account
- Avoiding purchasing big-ticket items before buying a home
- Checking your credit health
- Researching all of your mortgage rate options
- Securing a mortgage pre-approval
- Waiting to close before you change jobs, and
- Choosing the right real estate agent to consult on all of the above!
Let’s walk you through how to avoid some common mistakes before buying a home. Knowing these in advance will better your chances of getting approved for a mortgage, and securing the right financing.
#1. Avoid making big deposits
One of the most time-consuming steps in your home buying journey will be getting approved for a mortgage. This involves a detailed analysis of your financial history by a bank or mortgage broker.
What do mortgage underwriters look for?
If you’ve been saving for a while, you’ve probably been monitoring your account balances closely, and looking at every deposit and withdrawal with extra scrutiny. Your underwriter will be doing the same thing!
Underwriters hone in on specific items and behaviours in your financial history, including your credit background, recent bank statements, and employment information. Mostly, they’re looking at your overall financial health, consistency of income, any anomalies (major purchases or uncharacteristically large sums), as well as your debt-to-income ratio.
The bank or credit union that underwrites your mortgage wants to know exactly where the funds you’re using for your down payment are coming from, too.
How do you account for financial gifts from family or friends?
If you’ve recently had a little financial assistance from generous friends or family members, you’ll need to document where the funds are coming from, and why you received them. This rule usually applies to any deposit over $1,000 from an unknown source (i.e. not your payroll or an internal transfer).
Typically, you will need to provide a signed gift letter, and your lender should be able to provide a template for you to easily complete.
#2. Spend on big-ticket items after buying a home
While investing in a new car may help you commute faster to your next neighbourhood, it’s best practice to delay making large purchases while getting approved for your mortgage. This is mostly because your spending habits have a significant impact on your loan approval success.
This doesn’t only apply to cars: any high-priced purchases like appliances, home furnishings, or electronics will either impact your savings (if you pay cash) or drive up your debts (if you use credit to purchase them). Both ultimately decrease your ability to service additional debts, and negatively impact what you get approved for.
Instead, celebrate your new house with a big purchase after you close.
#3. Check your credit and keep your credit in check
On a related note, make sure you’re monitoring and managing your credit score. Avoid maxing out credit cards, or running up a line of credit in the months leading up to your loan application.
Experts recommend keeping your credit utilization under 30% in order to maintain a good credit score. You’ll also want to avoid late payments on credit cards and other bills, like utilities and cable, since these can have a negative impact on your score, making you a less viable candidate for your loan.
If you’re not sure what your credit score is, or you simply want to keep an eye on it, use a credit scoring tool like Equifax to assess your credit health without impacting it.
#4. Fixed vs. variable? Commit to a mortgage rate that works (for you)
The Bank of Canada increased its overnight rate to 1% in April, and since all mortgages use the overnight rate as a starting point, that means qualifying for both fixed-rate and variable-rate mortgages just became more of a challenge.
The overnight rate is expected to continue rising, with two additional hikes on the horizon (in June and July). Now would be a great time to do a personal financial audit to see what you can afford in the long term, and calculate your minimum, median, and maximum monthly payment threshold.
Once you’ve figured out what kind of mortgage works best, be sure to shop around at a few different lenders, as rates can vary significantly among them. A difference of even 0.5% can have a huge impact on your monthly payment amounts over the course of paying off a long-term mortgage.
Need more information on mortgage types? Check out our tips on whether to opt for a fixed or variable one.
#5. Don’t forget your mortgage pre-approval letter
Once you decide on a lender, and they’ve run an eye over your financial history and pre-approved you, you’ll need to request a pre-approval letter from them before even making an offer on a property (note: this is different from pre-qualification). This document shows a seller that the lender has done their homework, and ensures you have the means and motivation to commit to the purchase of a home.
Pre-approval letters list your loan amount, your interest rate and loan program, and your estimated down payment amount. In some cases (especially for higher-cost homes or in competitive markets), lenders might ask you to provide proof of funds for a down payment, usually in the form of your most recent bank account statement.
These letters usually include an expiration date of 90 days, so you’ll need to keep it up to date if you’re looking for homes over an extended period of time. Don’t lose out on a potential home by coming to the bargaining table without one.
#6. Take pause before changing jobs
You want to make the loan approval process as straightforward as possible—this means avoiding anything that might over-complicate your mortgage application process, like changing jobs. Lenders want to see consistent payments going into your account for at least a few months—otherwise it could mean revisions to the amount you get approved for.
If you work in a salaried job, be ready with pay stubs for at least the past couple of months, as well as tax forms. If your income is more variable (i.e. bonuses or commission make up a big chunk of your annual income), lenders will want to see any information that proves this type of income can be counted on year after year.
#7. Connect with the right agent (for you)
Buying a home is a monumental, deeply personal process which can be overwhelming for buyers and sellers alike. That’s why you’ll need a trustworthy, expert agent to advise and advocate for you throughout it.
Some brokerages and real estate companies make finding the right real estate agent for you a priority. For instance, Properly you will match you with an agent based specifically on your needs, location, preferences, and your stage in the buying or selling journey. Whoever you work with, make sure they are offering you informed advice, ongoing professional support, and ways to ensure that your move is as stress-free as possible.
With market conditions changing frequently, getting financially and emotionally prepared to make an offer on a home, and keeping the above steps top of mind, will set you up for an easier home buying experience.
*DISCLAIMER: This article is provided for informational purposes only. It is not an exhaustive review of this topic. The content is not financial or investment advice. No professional relationship of any kind is formed between you and Properly Homes Inc. While we have obtained or compiled this information from sources we believe to be reliable, we cannot and do not guarantee its accuracy. We recommend that you consult a trusted professional before taking any action related to this information. Properly is a tech-enabled real estate brokerage that is transforming the home buying and selling experience with AI-powered home valuations, Sale Assurance, and a modern streamlined service. We recommend that you compare and contrast your options, read the fine print, and conduct detailed research into any real estate, loan, or investment provider before using their services.*
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