4 Things You Need to do Before Going to Real Estate Viewings
This is part 1 of my home-buying series where I detail my experience about purchasing my first home (in this case a condo). I started this series with Part 0 which went through some of the pros and cons of renting vs. buying and ultimately why I decided to buy.
Part 1 goes into what you need to have before you start going to viewings. Below is a list (of semi-particular order) of 4 Things You Need to do Before Going to Real Estate Viewings.
1. Know Your Budget
Side note
Does writing it out not work for you? A general guideline banks use when giving a pre-approval is you can’t spend more than 44% of your total monthly budget on a mortgage.
Once you’ve decided that you want to purchase your first home, you need to figure out how much you can afford. This also complicates things if you are purchasing your first home with a partner.
If you are purchasing with a partner/roommate then your first step is to sit down with them and discuss finances. Are you going to be splitting everything 50/50? Is one person going to pay for groceries and the other is going to pay for the internet? Are you combining your monthly incomes into a joint chequing account?
Even if you aren’t purchasing your first home with a partner the core principles are still the same. You need to sit down, write out all your current and future monthly expenses, including your savings (consider it an expense), debt repayment, etc. and whatever is leftover is what you can afford per month on a mortgage/condo fees/land tax.
Side Tangent (Percentage Method)
I have always been a fan of splitting finances through percentages. In this scenario, your partner makes significantly more money than you or vice versa. If you split everything 50/50 then the person who makes less money struggles to save every month. At times, this is unfair and can lead to issues of resentment towards the person that makes more money.
The percentage method dictates that both of you pay the same percentage of your paycheck per month towards shared expenses. For example, if person A makes $3,000 a month and person B makes $2,000 a month and each must contribute 30% of their paycheck towards the mortgage, person A would contribute $900 a month and person B would contribute $600. Even though one person is paying more than the other, it is proportional to what they make so person B is now able to save a more reasonable amount per month compared to the 50/50 method.
What I Learned
Laying out your monthly expenses is a good way to track where your money is going and also whether or not you can cut back on eating out, morning coffee shop visits etc. Just don’t get too carried away with cutting costs, you still need to eat food other than instant ramen and KD!
Having these financial conversations early is also a good way to get to know your partner and will help set up your relationship for success later down the road for large purchases like a home. One of the top reasons for divorce/separation is finances!
2. Getting a Pre-Approval
Side Note
1. When the bank checks your credit score your score will decrease a few points
2. General rule-of-thumb, a bank will give you 4x what you make (gross) annually, that amount will increase based on bonus factors like an excellent credit score.
The next step on your home-buying journey is getting a pre-approval on a mortgage (the scariest part in my opinion). A brief overview of how a pre-approval works is a bank (or mortgage company, but for the sake of this example I will use a bank) will: ask what your total combined yearly income is (before taxes); check your credit score; ask how much you have saved for a down payment; and ask how much you can pay towards a mortgage per month (this is where 1. Know Your Budget comes in handy). You will also need to supply additional documentation like proof of employment.
Once the bank has all your information, they run it through an algorithm which dictates how much you’re approved for (so the maximum loan amount you can have) and also the mortgage interest rate. This pre-approval is good for 120 days and your interest rate is also locked in unless there is a decrease. Once this offer expires then you will have to apply for another pre-approval.
Ultimately this pre-approval will give you a guideline of the total amount of money you can use to purchase a home. It is also essential for your real estate agent to know this information so they can show you listings that better fit that your price criteria.
What I Learned
Shopping is a good thing! It’s better to shop around to different banks or mortgages companies to see the best rates. In some cases, you can leverage a better rate with one bank by mentioning the lower rate of another bank.
Another great option is to use a mortgage broker. A mortgage broker has access to multiple different mortgage products and they do all the negotiating for you. I was offered a mortgage broker through my real estate agent (more on that in the next point) and I’m glad I decided to use his services. It made the whole process less stressful and it gave me peace of mind that I was getting a good rate.
3. A Good Real Estate Agent
Your real estate agent is your guide through the housing market. It is extremely important to choose an agent that works well with you but also someone you can trust to have your best interest in mind. Personally, I chose to go with Condos.ca and was matched with Gary MacRae. Gary was patient, as I tend to ask a lot of questions, but also very honest about what types of properties my budget would allow (spoiler alert, I had a tight budget that could afford rougher neighbourhoods and fixer-upper condos). He also connected me with a mortgage broker and real estate lawyer. Based on my experience with Condos.ca and Gary, I highly recommend the site. It really is a great one-stop shop for all your condo real estate needs.
It’s also important to find an agent that either specializes in the area that you are looking to live in, or first-time homebuyers. Real estate agents that are specialized to your area of choice will have more information about the area itself (crime, age demographic etc.) and usually offer better advice.
I will be releasing a full review on my Condos.ca experience at the end of my home-buying series.
What I Learned
It’s also good to shop around for a real estate agent that you mesh with. A lot of agencies will get you to sign an exclusivity agreement so it’s important that you establish a relationship with your agent before you sign. Usually these agreements will lock you in to using that agent for a predetermined amount of time, however, there are penalties if you buy a house with another agent right after the agreement expires.
I did end up signing an exclusivity agreement and I will expand more on that in my Condos.ca review.
4. Access to Your Down Payment
Real estate moves very quickly. From the time that I went to the first viewing of my condo, to the date that the final offer was accepted, it took about a week. Now what they don’t tell you about buying a home is that you are required to put down a deposit. In my case, the deposit was $25k and it had to be received by the seller’s real estate company within 24hours of signing the purchase agreement. Having tight time windows like these are common in the condo real estate market (some of my offer windows were 4 hours!) so it is extremely important that you read these over very carefully before you sign.
You may need to consider things like whether or not there is a holiday weekend close to your sign date as this may affect your banks operational hours and your ability to access your funds. In most cases, your real estate agent can negotiate a longer time window if need be before you sign the purchase agreement.
What I Learned
Your deposit is NOT your down payment! Once the deal is accepted the deposit will be counted towards your down payment and you will be required to pay the difference (if any) at the time of closing.
Side Tangent Bonus Story (an Ode to Facepalm)
My money for the deposit was in a Tax Free Savings Account (TFSA). I found out after I signed the purchase agreement that you can’t wire transfer or get a bank draft from a TFSA; it has to be moved to a traditional savings/chequing account. The other caveat was if I fail to send the deposit within 24 hours, the seller has the ability to sue.
With the clock ticking, I was extremely lucky that: the 24 hours was considered a business day; the deal was signed on a Friday; and my bank was open on Saturdays. By divine intervention, my money was moved from the TFSA to my chequing account within 24 hours (Friday-Saturday). The following Monday, I was able to go into the bank and wire transfer the money in time for the 6pm deadline…
The moral of the story is even though it worked out in the end, don’t be like me. Have your down payment easily accessible, to avoid unnecessary stress and getting sued!
**If you are interested in a more in-depth post about creating a working budget or any other topics I touched on in this post let me know in the comments!
