You have decided that it is the time in your life to settle down and buy a house. It might be your first house or an additional property; however, before begin your search for that dream estate, the first thing you must do is figure out if you are ready financially.
This article will provide you with a few quick and easy tools that will help you to determine if you are financially prepared to purchase a property. These tools will also help you determine how much you can afford. They can also inform you if it is a good time to purchase a property, or if it is better for you to wait to find that dream home.
Once you understand all the details of your finances, then you will be ready to make an informed decision on the purchase of your property.
Introductory Calculations
Household Budget
There are many different calculations that you must consider, but the first consideration you must make is your own personal budget. When budgeting you must make sure that you have enough to cover all your expenses at the end of the month. You will also want to confirm that you have enough to cover your mortgage payment and be able to invest as well. When thinking about your housing costs, you must make that your housing payments (mortgage payments, property tax, heating, condo fees) do not account for more than 42% of your household income. The lower this amount is, the better, because if you run into a period of financial hardship, then you won’t have to worry about missing your mortgage payments.
Calculate your Household Budget (Courtesy of CMHC)
Net Worth
Another primary calculation that you should be aware of is calculating your net worth. Banks generally will feel more comfortable lending to someone who has a positive net worth, and the bigger your net worth is the better. It is always something important that you should be aware of. You should check on your net worth from time to time to make sure that it is increasing.
Calculate your Net Worth (Courtesy of CMHC)
How Much Can you Afford?
The next major consideration when trying to find out what you can buy is to figure out what you can afford. If you feel you are at this point, then it is a good idea to speak with either a mortgage broker or a mortgage professional to have them help you start the process; however, if you are not that interested in looking for a house yet and you would just like to know, then there are a lot of good calculators that can help you figure out how much you can afford. These numbers are not exact, and it is better to speak to a mortgage professional to help you see what you can get exactly, but they are good for a starting point.
Calculate how much you can afford. (Courtesy of CMHC)
Make sure that you are aware that different lenders offer different products. If the lender you speak with does not have the product you require, then make sure to speak with different lenders to find the product that you seek. The other option is to speak with a mortgage broker and have them find the product you require.
With house prices, just because you can get approved for a certain amount does not mean that you should take that amount. Instead, make sure that you analyze the payments and ask yourself ‘If interest rates changed, then would I still be able to make my payments?’
Should I Buy a House?
The final thing that you should ask yourself, ‘is it the right time for you to buy a house?’ If you plan on moving in a few years, then it is probably not the right time to buy a house because the moving costs are approximately 7-10% of the property value. Another thing that you will want to consider is if it is a good investment to purchase a property. Recently, market valuations on property have changed dramatically. Over the last several years, house prices increased by approximately 10% in a lot of areas across the continent; however, this has recently changed to a negative return on investment.
The most important question you have to think about is that, is the property a good investment for your family over your current living conditions.
Calculate if you should Rent or Buy (Courtesy of Industry Canada)
Once you have determined that it is financially appropriate for you to purchase a property, then you should begin looking into a property. For good advice on the situation, you should contact a mortgage professional to help you understand your finances. They will provide you free advice and even offer suggestions on how you can prepare for home owndership if now is not the right time.
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