If you are considering buying your first home, an exciting step no matter where you are in life. From a university graduate, to a newly married couple, to someone who is later on in life and ready to root down somewhere, buying your first home is exciting, but at the same time nerve-wracking experience. How do you know if you can afford it? How do you know if you’re picking the right home for your current and future needs? How do you make sure you’re not overpaying or that you’re getting fair interest rates? This week our blog will address these questions in detail with daily posts of questions to consider before taking the home buying plunge.
How Much Can I Afford?
Taking on a mortgage is often the biggest debt you will incur over your entire lifetime, so how do you know what amount is manageable for you? It is important to decide on an upper limit before you contact a Realtor and start home searching – don’t put yourself in a position where you fall in love with a home you can”t afford. First, take a look at your monthly debt ratios. What is your gross (pre-tax) monthly income? Subtract from that payments you know you will have to make every month; insurance, heating, electricity, minimum credit card or line of credit monthly payments etc. Divide the total number of money going out by the gross income you have coming in – this is your debt ratio. Ideally, to comfortably afford a mortgage you want this number be around or below 40%. If this number comes out over 44% you will need to consider a smaller mortgage or find a way to reduce your other debts. You must lower your debt or monthly payments or increase your income until the ratios are in the proper range.
In most cases, you can purchase a home with as little ass 5% down payment. If your down payment is between 5% and 19% the mortgage must be insured by The Canadian Mortgage and Housing Corporation (CMHC) or one of its’ competitors. This insurance fee is rolled into your mortgage principal amount for you to pay off along with the mortgage. If you are able to put 20% down CMHC Mortgage Insurance is not required. If you don’t already have a savings fund set up to put towards down payment start as soon as you can.
Pre-Approval & Mortgage Budgeting
If you have a down payment saved up and your debt ratios are acceptable the next step would be to apply with a mortgage broker to see how much you qualify for. This will help focus your search for the right home within an acceptable price. Once you get a pre-approval, see how much the estimated monthly payments would be for that amount and then see if these fit into your existing budget. One strategy that people will use to prepare themselves for paying a mortgage is to make “pretend payments” – If you are currently paying $800 per month in rent (not including utilities) and your estimated monthly mortgage payment is $1300.00 then put $500 per month into a savings or tax free savings account and see if your budget can still work with that total amount going out. If this works for a few months you know you can manage your mortgage payments and you have some extra funds set aside for down payment.
Planning for Additional Costs
Last, but not least, beware of additional costs that come with buying a home and mortgage. Right off the bat, you will have inspection fees and closing (legal costs) to pay to close your real estate transaction and the mortgage. It is also a good idea to start an emergency fund in case you need to do repairs or replacements on the property. A good savings target is up to 1% of your home’s value per year.
Please don’t hesitate to give our office a call if you would like to discuss a pre-approval, need a referral to a Realtor, or have further questions about applying and qualifying for a mortgage.