Buying a house is a big decision, and it's not to be taken lightly. Navigating the real estate market can be both exciting and daunting, especially if you're new to the process.
From understanding your budget to getting pre-approved for a mortgage, there are things you can do to reduce the stress. We’ve got you covered with these tips that will pave the way to your dream home in Alberta!
1. Understand your budget
First-time homebuyers need a realistic budget based on their financial situation. It's essential to take an honest look at your current income, expenses and long-term financial goals before diving into the home-buying process.
Setting a budget will help ensure that you can comfortably manage your mortgage payments and other related costs.
The 28/36 rule
This guideline is used by lenders to assess a borrower's ability to handle mortgage payments. According to this rule, your total monthly housing expenses (including mortgage, property taxes and insurance) should not exceed 28% of your gross monthly income. Additionally, your total debt obligations (including housing expenses, credit card debt, car loans, etc.) should not be more than 36% of your gross monthly income.
For example, if your gross monthly income is $5,000, your monthly housing expenses should ideally be no more than $1,400 (28% of $5,000) and your total debt obligations should not exceed $1,800 (36% of $5,000).
2. Calculate additional home-buying costs
Aside from the actual purchase price of the home, there are several other costs that first-time homebuyers in Alberta should be aware of:
- Down payment: In Canada, a down payment of at least 5% of the purchase price is required for homes valued up to $500,000. For homes valued between $500,000 and $1 million, the minimum down payment is 5% on the first $500,000 and 10% on the remaining amount. For homes over $1 million, a 20% down payment is mandatory.
- Closing costs: These costs typically range from 1.5% – 4% of the purchase price and include expenses such as legal fees, title insurance, appraisal fees and land transfer taxes.
- Property taxes: Property taxes are an ongoing cost that homeowners must budget for. The amount varies depending on the property's assessed value and the municipality's tax rates.
- Insurance and utilities: Insurance and utilities represent two additional ongoing costs. Home insurance premiums in Alberta average $900 to $1,000 annually. Utilities (gas, electric, water, waste collection) average about $400 per month in winter and half that in warmer months.
Considering these costs as well as your mortgage payments will give you a good idea of the true cost of a new home.
3. Get pre-approved for a mortgage
Obtaining a pre-approval for a mortgage is a crucial step that strengthens your position as a homebuyer. Here’s how to go about it:
- Gather Financial Information: Start by collecting essential financial documents, including pay stubs, T4s, tax returns, bank statements and proof of other assets or investments.
- Credit check: Lenders will review your credit history and credit score as part of the pre-approval process. Ensure your credit report is accurate and take steps to improve your score if needed.
- Choose a lender: Shop around and compare mortgage lenders to find the best rates and terms. You can approach banks, credit unions or mortgage brokers.
- Complete the application: Fill out the mortgage application with your chosen lender. Many lenders offer online applications.
- Provide documentation: Submit the required financial documents to the lender. They will use this information to verify your income, employment and financial stability.
- Pre-approval letter: If you meet the lender's criteria, you'll receive a pre-approval letter indicating the approved mortgage amount and the interest rate.
- Shop for homes: Armed with your pre-approval letter, you can confidently start house hunting within your budget.
Remember that a pre-approval is not a guarantee of a mortgage. The final mortgage approval will be subject to additional checks and a property appraisal.
4. Research your city’s real estate market
Researching your city's real estate market provides valuable insights and helps you make well-informed decisions. Knowledge is power and it gives you the confidence to dive into the home-buying process.
5. Determine your priorities and needs
Carefully assess your priorities and needs in a new home to ensure that it aligns with your budget.
Begin by creating a comprehensive list of essential features and requirements for your future home. Consider factors such as the number of bedrooms, bathrooms, square footage, location, proximity to schools or workplaces and necessary amenities.
Categorise your list into "needs" and "wants." Needs are non-negotiable elements that are crucial for your daily living and long-term plans. Wants are desirable but not essential features that you can compromise on if necessary.
6. Visit a show home
Visiting a new home sales centre like the one in Rockland Park, lets you visualize and experience different home designs, understand the quality of construction, gather ideas, ask questions and make informed comparisons.
7. Learn about first-time homebuyer incentives
As a first-time homebuyer in Alberta, you may qualify for financial assistance from the government.
First-Time Home Buyer Incentive (FTHBI): this program is designed to help first-time homebuyers reduce their monthly mortgage payments by providing them with 5%–10% of their home price as an interest-free loan towards the purchase of their home.
OK, there you have it. These seven tips will help you make smart decisions when buying your first home. We do want to offer one more piece of advice: be patient. You’ll likely live in your home for a long time, so there’s no need to rush the decision.