Are you ready to invest in your first house? It’s an exciting milestone in anyone’s life, but before touring homes for sale in person or even looking online, we recommend you complete these essential steps to strengthen your buying position and improve your knowledge of the process. 

There’s a lot of information out there, so we’ve tried to condense it into the most important crucial steps you really ought to follow. Read on to find out what you need to know before buying your first home. 

Monitor Your Credit

Financing a new home involves several steps before you can answer the all-important question, “How much can I borrow?” Step number one is to check your credit score. You should request a free report at least 3 months before applying to lenders. Starting this early gives you time to work with your financial advisor and credit counsellor to rectify any inaccuracies with the reporting bureau.

To qualify for favourable interest rates, you should ask your advisor how to improve your credit score to at least 780. Common ways to achieve this rating include paying bills on time since a history of late payments holds back your score. Similarly, strive to pay down outstanding credit card balances and avoid opening new accounts in your name for at least 60 to 90 days before making loan applications.

Summarise Your Financial Position

Begin accounting for your monthly income and expenses. Gather statements and pull up the summary screens for your accounts online to paint an accurate picture of your monthly cash flow. Lenders will use a metric known as the debt-to-income ratio (DTI) to evaluate your ability to take on a mortgage.

Measuring the proportion of your debt commitments to your gross income is a simple formula. Divide your total monthly debt by gross income, then multiply by 100. Lenders prefer this to be 43% or lower. A higher DTI impacts your creditworthiness and purchasing power.

Another primary metric to familiarise yourself with is the debt utilisation ratio. It is one of the main factors affecting credit scores and is particularly tied to revolving accounts.

The calculation is as follows: Divide your total credit card outstanding balances by the total of all your account limits, then multiply by 100. For example, if you have 2 cards with balances totalling $1,000 together and a combined limit of $5,000, your utilisation ratio is 20%.

The lower your ratio is, the more favourable lenders view your credit usage. Higher ratios are a red flag alerting lenders to an increased risk of default on your part, thus negatively impacting your overall credit rating. Typically, it’s recommended to stay below a 30% ratio.

Start Saving Early

The next preparation step is immediately implementing an ironclad savings habit. Mortgages require a deposit lump sum of 3% to 20% of your home’s value, depending on your loan classification. Where possible, slash excess expenses and spending.

Many employers offer a pre-tax payroll deduction, letting you move a percentage of your paycheck to an investment or interest-bearing savings account. Take full advantage of these benefits. You’re less likely to spend the money on frivolous things if the money is already transferred.

Other savings methods include notifying close family members of your intention to invest in a home and inquiring if they’d like to help contribute to your down payment. If you have an employer-sponsored 401k account, see if you can take out a low-interest loan against your balance toward your mortgage deposit.

Consider Related Expenses

The choice between buying a house or condo may impact the additional expenses you’ll be responsible for. If you prefer a house, be aware of home inspection fees, appraisals, and insurance requirements. The process works slightly differently again if you’re after a house and land package. 

Many of these expenses are incurred in the weeks leading up to the closing process. Suppose the inspection uncovers significant problems with the house. In that case, you may need to negotiate with the seller for them to cover a percentage of the cost to repair these issues. While it’s less likely you’ll encounter required repairs with a condo, you’ll still need to factor in insurance, utilities, and building restrictions.

Gather Documentation

Before speaking with lenders, collect as much relevant financial history paperwork as you can muster. You want to portray as much history of responsibility and on-time commitments as possible. A reasonable starting point is at least two years of tax return forms, a minimum of 12 months of rent payment and lease contracts, and paperwork for any outstanding loans (vehicles, student, etc).

If you have everything accounted for, the lender will likely prepare and transfer a pre-approval letter for you to begin working with sellers and real estate agents. The letter indicates the loan type you qualified for, the interest rate, and the maximum loan amount. Be aware the amount may be more than your budget allows. If you’re uncomfortable, asking the lender to reduce it is perfectly fine.

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With all these tips at your disposal, hopefully you now feel more confident on what you need to do next. Finally, reach out to someone you trust for guidance. Someone with a real estate investment background, possibly a close family member, colleague, or professional financial advisor. Having someone nearby to lean on when you’re confused or unsure about your options will help you get your facts straight, and relieve some of the stress of this often tedious and time-consuming process. Good luck on your quest to buy that first home.