If you’ve been renting an apartment for a few years, you may be ready to buy a condo. There are many benefits to owning one as we’ve explored earlier. But the process of buying a condo can be overwhelming for first-time buyers. The team at SimpleCondoAdvice.com compiled a list of popular tips for first-time condo buyers.
Tip #1: Write a detailed budget
If you’re interested in getting into the real estate market, write a detailed budget. The budget must reflect your current living conditions. A well-prepared budget will help determine if a household can afford to buy a condo.
There is a common mistake we see when coaching visitors. Some first-time buyers replace “Monthly Rent” for estimated monthly mortgage payments. Like that, owning a condo becomes viable. Unfortunately, it’s not that straightforward.
Let’s begin with the obvious: condo owners must pay monthly condo fees as well as municipal or city taxes.
The less obvious expenses are area-dependent. Here are some examples of extra expenses condo owners may have that renters do not:
- Heating and/or cooling;
- Hot water tank rental;
- Furnace and/or air conditioner maintenance;
- Saving for renovations (if buying resale).
In general, buying a condo is a better financial option than renting. These extra expenses don’t change that. Writing a detailed budget helps first-time condo buyers estimate affordable mortgages sizes. This helps navigate the market and adjust expectations.
Tip #2: Decrease your debt load
This is another obvious but often overlooked mistake made by first-time condo buyers. Decreasing or eliminating debt will have two significant impacts. First, it will make it easier and quicker to secure a mortgage. Second, it will increase a household’s monthly cash flow. This will make it possible to get a better mortgage.
What if I have large debts?
For those with large student debts, it’s easy to get discouraged. The amount looks insurmountable and unlikely paid off anytime soon. The good news is that banks may still lend to such people if repayments are on time. Contacting a mortgage broker is the best way to get definitive answers.
In more extreme debt cases, consolidate the debt to increase the monthly cash flow. Consult with a debt specialist and explain what your objectives are. Adjust your expectations. Buying real estate may not be possible within the next year. That said, a specialist can help you achieve your goal in the long run. They’ll put you on an action plan for you to follow and may be able to reduce your debt burden.
Tip #3: Check Your Credit Score
Your credit score is like a first impression when interacting with banks and lenders. Even if you don’t have debt, your score may still be terrible. Like that pesky lettuce stuck in your teeth.
There are many reasons why your credit score could be low, even if you have good financial discipline. A common mistake we see are households with bad utilization ratios. Utilization ratio is the amount of credit used relative to available credit.
Having small lines of credit or credit card limits may help you stay disciplined. It could also be affecting your credit. Lenders will see that you’re almost always “credit choked” even if you never miss a payment. This matters to them. They want to be sure that you have the capacity to borrow on a rainy day and not miss a mortgage payment.
Each jurisdiction has different free credit score checking tools. Be careful not to give away personal information to possible fraudulent sites. We recommend contacting a financial planner. They can do this for you. You’ll then have an expert to go over the information with.
Tip #4: Accumulate money for a down payment
Nothing can shoot down your goals of buying a condo than not having a suitable down payment. Down payment requirements vary by jurisdiction. For example, in Canada, most mortgages need a 5% down payment. Yet, some US Citizens can qualify for 0% down payments.
As we’ll see in Tip #7, contact a mortgage broker to find what programs you may qualify for.
Tip #5: Set money aside for closing costs
Buying a condo is more than closing a deal, signing a mortgage and moving in. There are always closing costs associated to a real estate sale. These costs must get paid cash. In most jurisdictions, it’s not possible to add those closing costs to your mortgage. In other words, you need to have that cash ready to pay the various specialists and service providers.
Here is a list of possible costs due on closing:
- Land transfer tax (if buying resale condo)
- Sales tax (if buying new construction condo, sometimes rolled into the sale price)
- Lawyer or notary fees
- Prepaid condo fee to cover balance of first month
- Prepaid municipal tax for period
- Bank or lender appraisal fee (when buying resale)
- Mortgage broker fee (usually paid by the lender to your broker but confirm first)
- High ratio mortgage insurance fee (will depend on your lender)
- Prepaid occupancy fee payments (if buying from a developer in some areas)
The three largest unavoidable closing costs are usually the land transfer tax or sales tax, legal fees and balance of the municipal tax. To get an idea of how much these will add up to, contact your real estate agent or builder.
Then there’s the post closing costs:
- Services and utilities (ie hydro, gas, internet, phone) connection fees
- Moving expenses
- Redecorating or Renovating costs
- Heating and cooling systems maintenance checks
First-time condo buyers feel like everyone is out to get their money. Most of these closing costs aren’t insurmountable amounts, but it feels like you’re bled by 1,000 small cuts. Make sure you have enough set aside for closing costs.
Tip #6: Get your paperwork organized
Most lenders will need a series of documents before pre-approving your mortgage. Although it depends in which jurisdiction you’re in, most lenders will want to see:
- Proof of income (if you’re salaried, at least two paychecks);
- Official letter of employment (with your title, employment status and gross income);
In some areas, lenders may also need you to provide:
- Your last two years’ tax papers;
- Your last two months’ bank statements.
These documents are generally easy to get but can take time. All it takes is for your HR rep to be on vacation to add unwanted delays in getting approved for a mortgage. This could make or break a fast-moving condo deal. If you can’t secure financing, another buyer may swoop in and steal your deal.
Lenders don’t just take your word or “know you’re good for it”. They need proof you’re reliable. If you’re missing only one document, they won’t approve your mortgage.
Tip #7: Mortgage brokers are invaluable
One of the first questions we ask clients is whether they contacted a mortgage broker. If you’ve read any of our other articles, you’ll have noticed we encourage having a mortgage broker on your side.
The reason we push approaching mortgage brokers is simple. Mortgage brokers are experts at finding the right mortgage for your specific situation. They have access to lending companies who don’t interact with the public. These small lenders offer better rates than the major banks.
If you try shopping around for mortgages at banks yourself, you’ll face two challenges. First, you won’t find the better rates out there. Second, you’ll waste a lot time setting up appointments. Banks don’t only want to sell you a mortgage, they also want your banking business. Be ready to be up sold on the latest and greatest bank account.
A broker fixes all those problems in one swoop. Getting pre-approved usually takes 2-5 business days and you don’t even have to lift a finger! A mortgage broker can also help you determine if you can afford a mortgage.
Tip #8: Get professional help by building a team
As you saw in the previous tip, we encourage approaching a mortgage broker. But, don’t underestimate the help of other real estate professionals. A successful real estate sale is the culmination of many moving parts. For the first-time home buyer, it can be overwhelming to stay on top of each part of the process.
Approach a real estate agent specialized in your local condo market. Which neighborhoods are booming? Which developments are over-hyped? Does this building have mechanical issues? Realtors know these things.
If you are buying new construction condos, a real estate agent can also help you. Be up front with them that you want to buy new as it will affect their commission.
When buying a resale condo, consider hiring a reputable home inspector. Have your real estate add a home inspection clause to any offers put on a property. Home inspectors can point out possible problems with the property. Depending on the nature of these problems, you may want to back out of a deal. If the problems need basic renovations, ask the seller to adjust the cost.
Although not a real estate professional, a financial planner is also a good move. Especially if you’re not sure about your personal finances. This specialist will help you draft your budget and determine what size of a mortgage you can afford. A financial planner gets no commission from closing a mortgage. It’s a good unbiased second opinion.
A real estate lawyer is invaluable. You will need one to go over the legal documents of any real estate transaction. Have your real estate add a legal review of the condo corporation’s documents to any offers. Real estate lawyers may identify problems with the condo corporation’s finances.