ARE YOU READY?
Finances key to buying home
Buying a home is, for most of us, the largest single purchase of our lives. How do you know if you’re ready to take this step?
The first question should be, are my finances in order? Most people underestimate what their debt load is, and overestimate what they can afford. A good place to start is a conversation with your banker or mortgage broker. They will be able to determine whether you qualify for a mortgage and how much money the bank is willing to lend you. They will check your credit score to ensure it is high enough to qualify for a mortgage, and confirm your income and expenses. Your length of employment and credit history will impact your ability to qualify.
So, how much have you saved as a down payment? Most first-time homebuyers will end up putting up a down payment of 5 per cent of the home’s purchase price. For those that are able to put 20 per cent down, they may avoid loan insurance. Loan insurance is required when your down payment is less than 20 per cent, and the premiums for this are 4 per cent of the home price if you are putting a down payment of only 5 per cent. The premiums are included in your mortgage, so you don’t have to save up for them.
For those who lack a full 5 per cent down payment but have outstanding credit, a borrowed down payment may be an option. Going this route will help you get into a home faster, but it comes with a cost. Mortgage insurance rates are even higher, resulting in your total borrowed amount being higher than the total purchase price of the home. If you don’t stay in the home for at least five years, it may not be the right option for you.
Once you’ve determined how much you qualify for, the next step is to decide how much you want to spend on a home. Even if you qualify for a large mortgage, it doesn’t necessarily mean you should purchase up to that amount. Depending on your lifestyle, you may decide to spend considerably less than the bank is willing to lend. If you have expensive hobbies, like to travel, eat dinners out, or wish to save more aggressively for retirement, maybe spending less is the right answer. Being house poor is no fun.
Another consideration for potential homebuyers is the strength of your contingency fund. If you rent you don’t have to worry about repairs — that’s your landlord’s concern — but when you own a house the repairs are up to you. What if the furnace quits? (They usually quit in the dead of winter.) Will you have access to funds to shell out $5,000 for a new furnace or $2,000 for a hot water tank? A home inspection can help weed out homes that need a lot of work, but life has no guarantees, and even a furnace that is a few years old could be a dud.
Beyond the emergency fund, building a repair/replace fund will assist in maintaining your home and preserving your investment. When will the roof need replacement? Will you have enough funds at that time? Appliances are also something that can need repair or replacement. Knowing the costs of home ownership can help you determine if you’re ready. Closing costs are another consideration, and generally fall between $2,000 and $3,000. These costs include lawyer fees, the home inspection, utility hookups, movers, and sometimes tax adjustments.
Tax adjustments are closing costs that are often unanticipated. Let’s take a look at an example where your property taxes are $4,000 and you bought your home in July, with a closing date of August 1. In this example, let’s say the property taxes of $4,000 were paid in full by the seller in June. Your lawyer will be required to pay to the seller your share of the annual taxes. You see, taxes are paid in June for the calendar year, so you will owe the taxes for August 1 to December 31, which in this case is about $1,670. However, if the homeowners pay their taxes monthly (and many do) this will not add to closing costs.
It’s a good idea (or shall I say absolutely necessary) to know your total monthly expenditures. This will include your mortgage, property taxes, home insurance, utilities, and possibly home ownership association (HOA) fees. And, of course, condo fees if you’re purchasing a condo. Your budget for home maintenance and repairs will direct every dollar you make to its assigned location. By going through this process, you will get a better understanding of what you can afford versus what you qualify for.
Buying a home is a great decision that can add significantly to your net worth come retirement age. Lets face it, you have to pay to live, so you may as well pay your own mortgage down rather than your landlord’s.