How do I know if I'm ready to buy a house?
Have you gathered all of the information needed to make an informed decision?
You’ve probably purchased something, and then found out all the little things you didn’t think of are now adding up. Nowhere is this more of an issue than when you buy your own home. But there are ways to protect yourself and make sure you understand that your total costs are apparent. The secret? Information; lots of it. So let’s break it down and consider the information that can help you make good decisions.
Five character traits of a successful home owner
- Financially secure: A house isn't something you should consider buying unless you are gainfully employed in a stable job and generally know how much income you're going to regularly make. You need to be able to manage your expenses responsibly and make sure you've learned to manage any ongoing 'money problems' which prevent you from paying your bills on time.
- Stable: A home can be a great way to build net worth, and since you always need a place to live, it's money you were going to have to spend anyway. However, for most people home ownership is a long term commitment and requires long term thinking. If you're considering going back to school, expecting a child, or considering a job transfer, these are all things you're going to have to take into consideration before committing to a mortgage.
- Able to deal with financial stress: Home ownership is very empowering for most. It's also one of, if not the single biggest financial obligation you're ever going to make. From getting together your down payment and handling closing costs to the ongoing expenses of taxes, maintenance, renovations and general upkeep, home ownership can be stressful and you need to be prepared.
- Willing to do maintenance: Once you have your own place, there aren’t too many times where you can say “I have nothing to do today”. Just keeping up with lawns, sidewalks, siding, fences and landscaping is time-consuming. Like a toothache, avoiding home maintenance usually results in a more painful, expensive result over the long-term
- Flexible: Throughout the life of your mortgage and your journey as a home owner, life is going to happen. You need to be able to roll with the punches. That means preparing for a rainy day, anticipating challenges before they become problems, and communicating with the other stakeholders in the arrangement, from your family and neighbors, to your lending institutions and insurance providers. When it comes to their home, nobody likes surprises, but being flexible will help you successfully manage challenges as they emerge.
Calculate your net worth
Deciding to buy a house is one of life’s most important choices, but it’s not just about whether you want to own a house — it needs to be more about whether you can afford a house. In this step, you will find a number of simple calculations that you can do to evaluate your current financial situation and the maximum home price that you can afford.
You want to feel comfortable about your home buying decision, and you certainly don’t want anything popping up that you weren’t aware of. But there are a few simple financial calculations you can make to get the green light you are looking for. They include calculating your net worth, determining your current monthly expenses and what your current monthly debt payments are.
Knowing your net worth is important because you will need this information when you discuss a mortgage with your mortgage specialist. Your net worth is the amount left over once you’ve subtracted your total liabilities from your total assets. It will also give you a snapshot of your current financial situation and show you how much you can afford to put as a down payment.
Next, it’s time to determine your current expenses and debt payments. This will help you see what your actual monthly obligations are and what kind of mortgage payment you can comfortably fit into your budget.
Calculating your monthly expenses
This step will show you how much money you’re spending every month. Be sure to include all your costs so you get an accurate picture.
Completing these two exercises gives you valuable insight into your financial situation. You’re one step closer to knowing whether you really can afford your own home. These completed sheets will also help your mortgage specialist move your application along quicker.
Once you have figured out the home price range you can afford and the type of mortgage you qualify for, you will need to calculate all of the associated costs to make sure you have accounted for all the costs.
- Upfront costs: You will need to plan ahead to cover the many up-front costs of buying a home. Timing is important to help make sure things go smoothly.
- Mortgage insurance premiums: If yours is a high-ratio mortgage (less than 20% down payment), you will need mortgage loan insurance. You can choose to add the mortgage insurance premium to your mortgage or pay it in full upon closing.
- Appraisal fee: We may require that the property be appraised at your expense. An appraisal is an estimate of the value of the home. The cost will need to be paid when the appraiser delivers your report.
- Deposit: This is part of your down payment and must be paid when you make an Offer to Purchase. The cost varies depending on the area, but it may be up to 5% of the purchase price. If you wish to make a down payment of 5% and you give a deposit of 5%, then your down payment is considered to be made.
- Down payment: With mortgage loan insurance from CMHC you can own your first home with a minimum down payment of 5%. At least 20% of the purchase price is usually required for a conventional mortgage.
- Estoppel certificate fee: This applies if you are buying a condominium or strata unit.
- Home inspection fee: We recommend that you make a home inspection a condition of your Offer to Purchase. A home inspection is a report on the condition of the home. It may be more costly to inspect a large home or one where issues such as moisture problems, pyrite, radon gas or urea-formaldehyde are suspected.
- Property transfer tax: This tax is charged on the purchase price at 1% for the first $200,000 and 2% on the balance. In B.C., first time homebuyers may be eligible for the First Time Home Buyer’s Program, which will provide an exemption on this tax.
- Pre-paid property taxes and/or utilities: To reimburse the vendor for prepaid costs such as property taxes.
- Property insurance: This insurance covers the cost of replacing your home and its contents. You’ll want it to protect your belongings and we require it because the home is security for the mortgage. Property insurance must be in place on closing day.
- Survey or certificate of location cost: We may ask for an up-to-date survey or certificate of location prior to finalizing the mortgage loan. If the seller does not have one or does not agree to get one, you will have to pay for it yourself. It can cost in the range of $1,000 to $2,000.
- Water tests: If the home has a well, you will want to have the quality of the water tested to ensure that the water supply is adequate, and the water is potable. You can negotiate these costs with the vendor and list them in your Offer to Purchase. Septic tank. If the house has a septic tank, it should be checked to make sure it is in good working order. You can negotiate the cost with the vendor and list it in your Offer to Purchase.
- Legal fees and disbursements: Must be paid upon closing and your lawyer/notary will also bill you direct costs to check on the legal status of your property.
- Title insurance: Most mortgage lenders and financial service providers require this on all residential mortgages.
The point of this article isn't to scare you off of home ownership, it's to help prepare you for one of the most significant financial decisions you'll ever make in your life.
If you think you're ready to take the plunge, you can start by getting pre-approved for a mortgage. Just click the link below.