You’ve decided it’s time to buy a home of your own. But the decision to buy a home isn’t just about whether or not you can afford the purchase price. It also means taking on responsibility for all the other costs (both anticipated and unexpected) that come with homeownership.
How can you know if you’re financially ready to become a homeowner? Canada Mortgage and Housing Corporation (CMHC) offers the following tips to help you figure out your current financial situation and the maximum home price that you should consider:
– Before you begin shopping for a home, it’s important to know how much you can afford to spend on homeownership. In addition to the mortgage payments and interest, other significant expenses will include heating costs, property taxes, condo fees, and regular home maintenance and repairs.
– To answer this question, start by calculating how much you’re already spending each month on household expenses. To help you take a realistic look at your current monthly expenses without leaving anything out, use CMHC’s Current Household Budget worksheet (http://www.cmhc-schl.gc.ca/en/co/buho/hostst/wosh_003.cfm)or Household Budget Calculator, (http://www.cmhc-schl.gc.ca/en/co/buho/hostst/hostst_002.cfm) both of which are available free of charge on the CMHC website.
– Next, figure out how much debt you’re carrying. If you decide to buy a home, this information will be one of the first things mortgage lenders will ask to see.
– Once you’ve calculated your household and debt expenses, there are two “Affordability Rules” that can help you figure out how much you can realistically pay for a home. The First Affordability Rule is that your total monthly housing costs shouldn’t be more than 32% of your gross monthly income. Gross monthly income is the amount of income everyone in your household brings home, before taxes and other deductions. Housing costs include mortgage principal and interest payments, as well as property taxes and heating expenses (or PITH for short).
– The Second Affordability Rule is that your entire monthly debt load shouldn’t be more than 40% of your gross monthly income. Your monthly debt load includes your housing costs (PITH) plus all your other debt payments, such as car loans or leases, student loans, credit card payments, lines of credit payments and so on.The maximum home price that you can realistically afford depends on a number of factors, in particular your household gross monthly income, your down payment and the mortgage interest rate. For many people, the hardest part of buying a home – especially their first one – is saving the necessary down payment. Use CMHC’s Mortgage Affordability Calculator (http://www.cmhc.ca/en/co/buho/hostst/hostst_002.cfm) to figure out the maximum home price you can afford, the maximum mortgage amount you can borrow, and your monthly mortgage payments (including principal and interest).
– If these calculations look encouraging, obtain a copy of your credit report to make sure your credit history is accurate and complete. Then, contact your lender or mortgage broker to figure out which type of mortgage best meets your needs and the amount of mortgage you can afford.
– There are many up-front costs when you buy a home, from the down payment and deposit to legal, property and home inspection fees. Early planning will help make sure things go smoothly.
To help you learn more about your financial readiness and all aspects of buying a home, CMHC’s Homebuying Step by Step: A Consumer Guide and Workbook will lead you through the homebuying process in five simple steps, from the moment you decide to buy a home of your own to the day the movers carry the first box through your new front door.