Becoming a homeowner is one of the most significant goals for many people. However, home ownership comes with a significant financial burden.
For the majority of homeowners, the mortgage payments are their biggest outgoings each month. A large portion of a disposable income may go toward paying off the mortgage.
If you want to make the most significant investment most people ever make count, you need to plan how you’re going to buy the property – not paying too much or buying more than you can afford.
Home ownership is one of the most fundamental goals for most people. It can make you feel safe and secure, and it’s one of the ways the average person can build wealth for retirement. But so many people don’t plan in advance and end up under water.
If you don’t want to find yourself in this situation, you need to:
Figure How Much You Can Pay Monthly
Before you contact a mortgage broker, your bank or a realtor, you need to sit down and do some basic calculations.
Ideally, you shouldn’t be spending more than 30% of your net income on your housing costs. I know, lenders use your gross income to qualify you for a mortgage, however your gross income isn’t what is deposited in your bank account.
First, you need to know how much you’re netting each month. Take your paystubs, your government benefits, your net side hustles , your net self-employment income and add it all up. If you have irregular income, look at what you earned in the past year and use the monthly average amount.
Then, take 30% of that. Boom! This is the amount for your monthly housing costs.
Your housing costs include more than just your mortgage. They also include your monthly property taxes, your monthly insurance, and, if you buy a condo, your monthly HOA/strata fees.
Renovations and maintenance should be a separate line on your budget, as you won’t have them monthly. However, you can save a monthly amount for them.
Buying a home shouldn’t impact your other budget categories such as food, transportation, daycare, vacation, retirement savings etc…It also shouldn’t impact your debt repayment, if you have such thing.
Save for a Down Payment & Closing Costs
The minimum down payment in Canada is 5% on properties under $500K, and an extra 10% on the portion over $500K up to $1 million. For properties over $ 1 million, 20% is required.
If you put less than 20% down, you’ll need to pay for mortgage insurance.
There are other costs involved in the transaction. I’ve discussed them here.
You need to be able to pay for both the down payment and the closing costs with your own money. It means that you can afford to become a homeowner.
A good vehicle to save your down payment is the First Home Savings Account.
Check Your Credit Score and Report
Your lender will do the same. Avoid shock and unpleasant surprises when shopping for a mortgage. Instead, check your credit report for free on Equifax and TransUnion.
Keep a Good Work History
Your work history is essential for getting approved for a home loan. A lender will want to ensure and actually see that you can afford the mortgage payments.
If you’re self-employed, the qualification process in Canada is different.
There are also a few other mistakes you need to avoid when shopping for a mortgage.
Understand the Lingo
Closing date, possession date, appraisal, escrow, form B, form J…etc. These are all important terms to understand. If you understand what goes into home ownership, the whole process will be less overwhelming. Learning the terminology is part of getting that understanding.
While home ownership is an integral part of adulthood, it’s not for everyone. If you cannot afford to keep-up with taxes, mortgage, and aren’t planning to stay in the home for a minimum of seven years, renting may be best for you.
Don’t feel bad or ashamed because you’re renting. Sometimes, renting is the better choice financially.