How to give financial advice on buying a home
As a financial professional, you are more objective and knowledgeable about financial matters than most people. However, there is a line to walk. You do not want to give the impression that you know everything because you don’t. You also do not want to be the one who knows a lot but never helps anyone.
When someone is purchasing a home, here is how to give solid advice without overstepping.
First, suggest they begin saving early. They will need a downpayment. Do not be specific about what downpayment they will need. This will vary. The smallest downpayment possible is 5%, but this does not apply to everyone or every property. The average Toronto home price in September 2020 is 1 million dollars, but you know how averages work. Suggest they speak to a mortgage professional who can help with specifics.
Be sure to tell them to put their whole downpayment in a single accessible Canadian bank account. Regular automatic deposits to this bank account are a good way to go.
Along with the downpayment, they will need closing costs and moving costs. Closing costs are the fees and expenses required to close the purchase of their home. It is a good idea to budget 3-4% of the purchase price. They will also need money to move into the house and do a few things to the house when they get there.
Given the high prices of the Toronto market, they will probably use all they have to get into the house. As a good friend, you will want them to keep a little aside as an emergency fund. If not possible, get them started on the emergency fund right after the home purchase.
How much home can they afford? Be careful about making pronouncements here, but as a rough rule of thumb, you need an annual income of $150,000.00 to purchase a million-dollar Toronto home. If you think your friends are well below this level, do not burst their bubble. There are a bunch of things that can be done to help, but they will need the help of an experienced mortgage broker to make something work.
The next step is in the realm of personal finance. Advise them to check their own credit at equifax.ca or creditkarma.ca. Their own reports do not affect their credit scores. They should pay their bills on time, keep credit accounts open, and have low credit balances.
Suggest they get a pre-approval letter from their mortgage broker before starting the home search. Once they have the letter, they should be aware that big moves such as major purchases, changing jobs, and new information may impact their pre-approval.
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