In part 1 I outlined the ‘guard rails’ we have placed to ensure that we can afford a home while still being able to save for retirement, meet other life expenses and enjoy life. This post will outline the steps we will take in the house hunting process.
- Make a list of our needs and wants
Making a list of our needs and wants will help us to put parameters and quickly qualify or disqualify certain homes on the market. Some examples of needs might be: a minimum of 3 bedroom and 2 bathrooms, good sized dining room area, reasonable distance from schools and work/the city core etc. Some wants might include: turn-key home, good sized back yard, porch etc. These needs and wants may change between now and when we actually buy, but making a list is a way to ensure we are both on the same page before taking any further steps.
- View some open houses
With our list of needs and wants we would visit different open houses which we think might meet our criteria’s. This would help us get a better understanding of what is on the market based on our needs and wants and at what price points. It may help bridge the gap between expectation and reality. Because this stage would be before we approach banks for financing we would not be making any offers or working with a realtor at this point, just simply getting comfortable with the house hunting process and seeing what is out there.
- Determine a maximum price point
Before meeting with a lender it is important that we decide the maximum purchase price we are willing to spend on a home. A hypothetical but fairly realistic price point may be $400,000. Using the Canadian Mortgage Calculator and assuming a 20% down payment of $80,000, this would give us a $320,000 mortgage loan amount. The table below provides some more information.
At a 25 year amortization period and a 5-year fixed interest rate of 2.59% (RateSpy.com) our monthly mortgage payments would be $1,447.87 and factoring in property taxes, homeowner’s insurance and utilities it would creep up to about $2,000. At the time of our mortgage renewal (5 years later), we would have an outstanding mortgage balance of $271,330.96. Since we can’t predict where interest rates are heading in Canada, we are going to assume worst case that they are going up. With different stress tests at various interest levels we feel that we can still be able to carry the mortgage. Ideally, we would continue to keeps our debts low and live below our means. It is also important to mention that these amounts assume we do not make any extra payments towards the mortgage. Depending on our financial goals and responsibilities at the time we may try and pay off the mortgage in 17-20 years instead of 25, but are not focused on doing so.
- Meet with a lender for pre-approval
With a good understanding of what we can afford we would contact a lender to get a pre-approval. After reviewing our estimated future housing costs (for example above) and other budget expenses we would have a better idea of what amount of mortgage we can realistically afford. Our ideal mortgage price point would be between $300,000 -$350,000. Even if we qualify for a larger amount we hope to stay within these limits as they will ensure we continue to live within our means and allow us to adapt to changing variables in our lives after buying the home. For us, trying to avoid being ‘house poor’ is a critical step in enjoying the home buying experience and home ownership in general.
- Meet with a Realtor and find the ‘perfect home’
Using a realtor is a must for us. I know some people opt for private sales, but with such a large investment and with so many moving pieces and contracts to understand and sign, it would be great to have expert advice. With a trusted realtor already in mind we would feel more than comfortable and confident that he has our best interest at heart and he knows what he is doing.
Once we viewed a number of homes, we may need to go back to step #1 and re-evaluate our needs and wants and see if they are realistic given all the information we have to this point. Eventually, and without pressure, I hope that we would finally settle on a home that we both love and we can see ourselves staying in for a minimum of 10-15 years.
What was your house hunting process like?