As we enter into spring home buying might be on your mind. There are many reasons for wanting to buy a home such as financial security, flexibility and the stability that having a place of your own brings. Before you start house hunting, you’ll need to determine if you are ready for the financial responsibilities of owning a home.
It’s important to determine exactly what you can afford and how much you can put as a down payment on a home to avoid any surprises. This will require a thorough assessment of your finances to figure out your current financial situation and the maximum home price that you should consider.
The first thing you need to figure out is how much you are spending now by calculating
your current monthly expenses and your monthly debt payments as well as your assets including property, vehicles you own, savings, RRSPs and other assets. This information will provide a snapshot of your current financial situation and indicate how much you can afford for a down payment. Canada Mortgage and Housing Corporation (CMHC) has online tools available at www.cmhc.ca to help you with your calculations including the Current Household Budget worksheet.
It’s also important to know if you can also manage the various expenses related to homeownership. These include heating, property taxes, home maintenance and renovation as required.
Two simple rules can help you figure out how much you can realistically pay for a home. The first affordability rule is that your monthly housing costs shouldn’t be more than 32 per cent of your gross household monthly income. Housing costs include monthly mortgage principle and interest payments, taxes and heating expenses – known as PITH for short.
The second affordability rule is that your entire monthly debt load shouldn’t be more than 40 per cent of your gross household monthly income. This includes housing costs and other debts such as car loans and credit card payments.
If, after making the necessary calculations, you feel fairly confident you are ready to begin the home-buying process, then you’re ready to proceed with homeownership.
On the other hand, if your calculations show that you might have trouble meeting monthly debt payments, you may find it difficult to get approved for a mortgage. However, there are things you can do to improve your situation such as paying off some loans first or saving for a larger down payment. Also, take another look at your current household budget to see where you can spend less and perhaps lower your price range. Remember that your first home is not necessarily your dream home.
Some other helpful strategies may include meeting with a credit counsellor to help you figure out how to minimize your debts; buying your home through a rent-to-own program which are sometimes provided by the builder or a non-profit sponsor; or asking the housing department of your municipality if any there are special programs to help homebuyers.
Buying a home comes with many associated costs but it can be an exciting and rewarding experience. Fortunately, there is information available to help ensure you are financially ready for home ownership. To help you learn more about all aspects of buying a home, Canada Mortgage and Housing Corporation (CMHC) has a publication called Homebuying Step by Step.
About the Author: Christina Haddad is the Regional Vice-President, Ontario at Canada Mortgage and Housing Corporation.