Are You Financially Ready to Buy a Home?
By Terrilyn Moore
For some future Home-Owners, talk about home purchasing has been put temporarily on hold because of the new mortgage rules. But most future home-owners have chased their dream of home-ownership more creatively: searching outside of the hot Toronto market or changing the home type to make it more affordable.
But are you financially ready to buy a home? For some, it feels like all their friends are buying homes, so they feel ready! For others, rent just went up again and they can’t wait another year.
Believe it or not, how much you are currently spending will determine if you’re ready to buy a property. Why? It’s simple. Not knowing your monthly expenses can get you in trouble. The first thing to do is determine how much you are spending on household expenses monthly (groceries, rent, entertainment, etc). The second step is to calculate your debt spend monthly (credit cards, loans, etc).
If you need a worksheet to help you through this process, check out our Rent vs. Buy Calculator.
“I always say to my clients: save each month what it would cost you to run your own household while living at home with your parents.“, Terrilyn Moore, Mortgage Broker at YourMortgageYourWay.ca The Mortgage Centre. “You wouldn’t believe how many people rise up to that challenge and in 6-12 months have been in the market.”
Knowing your current financial situation helps ensure you buy a home you can comfortably afford.
It can be scary for first time home buyers and that’s why it’s important to find a mortgage that you can live with.
For many first time home buyers, the temptation is to focus on location, neighbourhood perks, the perfect house in your choice of location. We encourage you to focus on the numbers first. It’s good business sense. Your starter home isn’t necessarily going to be your dream home.
With the new mortgage stress tests introduced by Ottawa in October, “We’ve had a couple of deals fall apart because the buyers thought they were qualified for a certain amount of money and they found out they didn’t qualify for as much as they thought they had.”, Roy Cocciollo, Broker/Owner, YourMortgageYourWay.ca
If somebody qualified for $1M they’re only qualifying for $850,000 under the new rules. And don’t forget CMHC is hiking mortgage insurance premiums starting March 17.
Even with the help of government measures such as the doubling of the provincial land transfer tax rebate for first-time buyers, it’s a tough entry-level market.
Follow these 3 key steps and become financial ready to buy a home:
1. Debt-Free with a Healthy Emergency Fund
This ensures you can handle any unexpected expenses that come your way once you own a home. Three to six months of expenses should do the trick.
2. Have Your Down Payment plus a little extra
3. Pay Your Own Closing Costs
On average, closing costs can range from 2% to 5% of your home’s purchase price. For a $200,000 home, that’s anywhere between $4,000 and $10,000 to cover items like:
4. Save for Moving Expenses
You’re going to have plenty of moving expenses:
- Boxes, bubble wrap and other moving supplies
- Deposits for utilities
- Cleaning supplies
- Appliances that aren’t included in your home purchase
- Any pre-move-in upgrades like painting, new furniture and closet organization
Don’t let new-home excitement cause you to overspend on items you don’t need right away.
Get Your Mortgage Pre-Approved
Obtaining a mortgage pre-approval can be a valuable first step to take before you begin your house search. To get your mortgage pre-approved, you will need:
- Your personal information, including identification such as your driver’s license
- Details on your current job and proof of your salary
- Information about your bank accounts, financial assets, current loans and other debts
- An indication of how much your down payment will be and where the money will be coming from
- Proof that you have enough money to cover the costs of closing the sale (usually between 1.5 to 4% of the cost of the house).
Trouble Qualifying for a Mortgage?
Sometimes, you just can’t afford the house you want. If that happens, you may want to:
- Pay off some other loans or debts
- Save up for a larger down payment
- Revise your target house price
Your credit history tells mortgage providers about your financial past and how reliably you have paid your debts and bills. If you have no credit history, it is important to start building one — for example, by applying for a credit card. If you have a bad credit history, you will need to re-establish a good credit history by making debt payments regularly and on time. Do you need credit counselling?
Your Mortgage Broker Can Help!
Use our online homeownership calculators to evaluate your financial situation, determine how much house you can comfortably afford, and what your monthly payments will be:
Compare different options and calculate how much your payments will be so you can find the mortgage that is right for you.
For first time home buyers looking for their Dream Home this Spring 2017, it’s important to be aware of a potential increase in interest rates and the more stringent mortgage rules. If you have any other questions, give us a call and we’ll walk you through the mortgage process or visit /pages/contact-mortgage-brokers-consultants-toronto