Buying a home is one of the most life-altering decisions an individual or a family can make. In today’s market, it often takes people years or even decades to save up enough for a down payment.
Too many people make the mistake of putting all their money into their new home when they first move in. It might feel great to get into a home after years of renting, but if you’re unprepared financially, you put yourself at risk of being ‘house poor’. This term refers to individuals who spend a large, potentially unmanageable percentage of their income on their home, putting their financial security at risk.
To avoid starting the search for a house for sale too early and jeopardizing your financial future, start the preparations early, but don’t buy anything until you know you’re ready.
How to Prepare When You Want to Buy a Home in the Future
There are lots of things that you can do now, even if it will be 1, 2, or even 5+ years before you’re ready to buy a home. By proactively preparing now, you can make the experience a whole lot easier. Take it from our Windsor real estate agents: it’s a lot easier to focus on the house hunt if your finances are already in order before you start the search.
Here are our best recommendations on how to prepare yourself to buy a home in the future.
Improve Your Credit Score
Your credit score and credit report are some of the first things that a mortgage lender will look at when they’re evaluating you for a mortgage. In Canada, the two main credit bureaus are Equifax and TransUnion, and they express credit scores in a range of 300-900. The closer you get to 900, the better your credit score.
Many factors go into calculating your credit score, including when you opened each account, how much you owe to creditors, whether you make payments on time, and if you’ve ever gone over your credit limit.
As soon as you start seriously considering homeownership, take the opportunity to get to know your credit score. The more familiar you are with your score and the accompanying credit report, the better you’ll be able to make positive changes that bring your score up. You should also double-check the report to make sure that all your information is correct, and that there’s no erroneous information that could undercut your score.
Work to Minimize Your Debt-to-Income Ratio
Another financial factor that’s important to mortgage lenders is your debt-to-income (DTI) ratio. This number compares how much money you owe versus your total income. Generally, lenders want to see a DTI of no more than 28%.
If your current DTI is higher than that, spend the next several months or years before you make a home purchase decreasing that number. Start looking for a higher-paying job, figure out how to make money on the side, or get serious about paying down your debt. All of these are great ways to decrease your DTI.
Start Saving for a Down Payment
These days, the average down payment is 7%, rather than the 20% that was standard decades ago. Even with diligent saving, it’s hard to save up more than 7% when the average house price in Canada keeps rising every year. To avoid stressing your finances, take a gradual approach to saving up for your down payment. Putting away as little as $100 per paycheck will help you get there.
To make it easier to save, you can automate the process, so money transfers into your savings account on a weekly, monthly, or semi-annual basis without you having to think about it at all.
Set Money Aside for Moving and Closing Costs
Another critical financial aspect of homeownership that many people don’t take into account are your moving and closing costs. You should be budgeting at least 3-4% of the purchase price of your home for these costs, which include things like property evaluation, house inspection, title insurance, legal fees, and moving expenses.
These are costs that aren’t as exciting as the mortgage, but are necessary nonetheless. Having a robust savings account with enough money to cover these fees as well as other unforeseen expenses is important to ensure that you won’t have to borrow at a high interest rate if something happens during your closing.
Set Yourself Up for Success with a Reliable Windsor Real Estate Agent
With a bit of preparation, you can set yourself up for success even if you don’t plan on buying a home for several years.
Have any more questions about the process of becoming a homeowner? Get in touch with our Windsor real estate agents at the Dan Gemus Real Estate Team. We’re dedicated to ensuring the success of every client, no matter where they’re at in their journey towards homeownership.
Contact us today to learn more.