You decide to purchase your own home - wonderful! You have been paying $1400 a month in rent and your sick of it, time to get your own place! You have done your calculations, it is completely feasible based on your current income and you also have support from an uncle for the downpayment - great!
Now you spend multiple hours a week searching the MLS for you perfect dream home. You figure a $300,000 condo would leave you with mortgage payments around $1500/month. 2-3 hours a day are spent searching the internet, for 3 weeks straight - 63 hours of your life addicted to browsing MLS pictures!
Months go by, and you have been going on about 4-5 appointments a week to view the homes that you have narrowed down. Finally you have found the one - the perfect home listed at $315,000!
Now the negotiations begin. Back and forth, back and forth. They will not accept. You loose this option, back to the drawing board.
Another month goes by, more and more viewings of various condos, then once again - the perfect home! Negotiations begin again, and guess what? You get the place for $290,000!
You now spend the next 10 days making efforts to remove all the conditions of your accepted offer. You spend hours reviewing 300+ pages of strata documents, you spend $300 hiring a professional inspector to ensure the building is sound, and you go back and forth with your Bank, digging up all sorts of specific documents they require.
After months of viewings and multiple hours of your life spent searching homes - your bank now tells you that you are approved for a mortgage of $220,000. You only have $5,000 for a deposit - making your mortgage considerably high ratio, so on top of this amount you will have to pay about $5,000 more for CMHC insurance. You also learn that you do not qualify for a 30 year amortization, so your monthly payments are considerably more than you initially expected.
What went wrong? Your calculations had been completely different! The bank informs you that you did not consider the closing costs involved in real estate transactions - extra costs include HST applicable, Property Transfer Tax, Lawyer Fees, any fees for appraisals or surveys that the bank may require etc. They also inform you that you need to be able to afford the annual property taxes, monthly strata fees, and utility payments - all costs on top of your basic mortgage payments.
Well you figured that you could rent out the second bedroom and get $700 a month towards your mortgage, easily making it affordable for you! Unfortunately the bank lets you know that they cannot use this as guaranteed income when approving you for a mortgage and that you alone have to be able to afford the home before they can give you a loan.
Not getting pre-approved for a mortgage first could mean that:
A) You loose the hours and hours that you invested in online MLS searches and viewing properties
B) You loose the home you had set your heart on, because you had no idea that you could not afford it
C) You wasted months browsing homes that were out of your price range, now you have to re-do the whole process and look at homes that, in comparison, look unlivable!
d) Your perfect home, which was completely in your price range, has been snapped up by someone else in the meantime!
The bottom line = GET PRE-APPROVED BY A LENDER FIRST!
I know if it an annpoying process and that it is much more exciting to search the MLS, but do not make this rookie mistake. The bank will assess all areas of your life and inform you of ALL possible costs in the real estate transaction in order to give you a solid and reliable budget to work with. And make sure to fully inform your REALTOR of where you are in the financing process. They are there to help you, and in order to help you they need to know these details.
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