Are You Ready to Buy?
Make Sure You’re Informed First
Buying a home is most likely the biggest financial decision you’ll ever make, so prepare yourself by making a knowledgeable decision.
Buying a home almost always seems like a great idea, but it is important to understand what home ownership involves.
Being a homeowner is something to be proud of, but it also means having to invest money, time and energy while taking on added responsibilities. Here are some things to consider: Financial Security If housing prices rise, your home can provide you with some financial security due to capital appreciation.
Stability
Having a place of your own lets you “put down roots”.
Financial Stress
Coming up with the down payment, meeting regular mortgage payments and other ongoing costs will tie up a lot of your cash, and can put considerable stress on your finances.
Maintenance
Keeping your home in good shape requires time and money.
Responsibility
You alone are responsible for payments, repairs and maintenance.
Flexibility
You can decorate or renovate your home to meet your own family’s personal tastes and needs. Now that you have an idea of what to expect, You’re ready to take a detailed look at everything home ownership entails.
Are you Financially Ready? Calculate Your Net Worth
So, you’ve decided that homeownership is right for you. Now you need to determine if you are financially ready to buy a house. In this Step, you will find a number of simple calculations that you can do to evaluate your current financial situation, how much house you can afford and the maximum home price that you should be considering
To avoid any future surprises, you can do some financial exercises to see where you stand. They include calculating your net worth, determining your current monthly expenses and what your current monthly debt payments are.
Knowing your net worth is important because you will need this information when you discuss a mortgage with your mortgage specialist. Your net worth is the amount left over once you’ve subtracted your total liabilities from your total assets. It will also give you a snapshot of your current financial situation and show you how much you can afford to put as a down payment.
Next, it’s time to determine your current expenses and debt payments. This will help you see what your actual monthly obligations are and what kind of mortgage payment you can comfortably fit into your budget.
Calculating Your Monthly Expenses
This step will show you how much money you’re spending every month. Be sure to include all your costs so you get an accurate picture.
Completing these two worksheets give you valuable insight into your financial situation. You’re one step closer to knowing whether you really can afford your own home. But first, let’s look at how much closing the deal will cost.
What Does It Cost to Close?
Once you have figured out the home price range you can afford and the type of mortgage you qualify for, you will need to calculate all of the associated costs of the transaction to make sure you are financially ready.
Upfront Costs
You will need to plan ahead to cover the many up-front costs of buying a home. Timing is important to help make sure things go smoothly.
Mortgage Loan Insurance Premium. If yours is a high-ratio mortgage (less than 25% down payment), you will need mortgage loan insurance. You can choose to add the mortgage insurance premium to your mortgage or pay it in full upon closing.
Appraisal Fee. We may require that the property be appraised at your expense. An appraisal is an estimate of the value of the home. The cost is usually around $350 (plus HST) and must be paid upon presentation of the appraisal report.
Deposit. This is part of your down payment and must be paid when you make an Offer to Purchase. The cost varies depending on the area, but it may be up to 5% of the purchase price. If you wish to make a down payment of 5% and you give a deposit of 5%, then your down payment is considered to be made.
Down Payment. With mortgage loan insurance from CMHC you can own your first home with a minimum down payment of 5%. At least 25% of the purchase price is usually required for a conventional mortgage.
Estoppel Certificate Fee. This applies if you are buying a condominium or strata unit and could cost up to $100.
Home Inspection Fee. We recommend that you make a home inspection a condition of your Offer to Purchase. A home inspection is a report on the condition of the home and generally costs around $500, depending on the complexities of the inspection. For example, it may be more costly to inspect a large home or one where issues such as moisture problems, pyrite, radon gas or urea-formaldehyde are suspected.
Property Transfer Tax. This tax is charged on the purchase price at 1% for the first $200,000 and 2% on the balance. In B.C., first time home-buyers may be eligible for the First Time Home Buyer’s Program which will provide an exemption on this tax.
Prepaid Property Taxes and/or Utility Bills. To reimburse the vendor for prepaid costs such as property taxes.
Property Insurance. This insurance covers the cost of replacing your home andits contents. You’ll want it to protect your belongings and we require it because the home is security for the mortgage. Property insurance must be in place on closing day.
Survey or Certificate of Location Cost. We may ask for an up-to-date survey or certificate of location prior to finalizing the mortgage loan. If the seller does not have one or does not agree to get one, you will have to pay for it yourself. It can cost in the range of $1,000 to $2,000.
Water Tests. If the home has a well, you will want to have the quality of the water tested to ensure that the water supply is adequate and the water is potable. You can negotiate these costs with the vendor and list them in your Offer to Purchase. Septic tank. If the house has a septic tank, it should be checked to make sure it is in good working order. You can negotiate the cost with the vendor and list it in your Offer to Purchase.
Legal Fees and Disbursements. Must be paid upon closing and cost a minimum of $500 (plus /HST). Your lawyer/notary will also bill you direct costs to check on the legal status of your property.
Title Insurance. LVCU requires this on all residential mortgages, and the cost normally runs $200 to $250.
If you feel you cannot cover all of the up-front costs, you can talk to us about a loan. Remember that payment for this loan amount, based on a 12-month repayment period, will have to be included in your Total Debt Service ratio calculation.
Other Costs
Besides up-front costs, there are other expenses to consider:
- Appliances. Check to see what comes with the house, if anything.
- Gardening and snow-clearing equipment.
- Window treatments. Check to see what comes with the house.
- Decorating materials. Paint, wallpaper, flooring and tools for redecorating.
- Hand tools. You will need some basic hand tools for your new home.
- Dehumidifier. May be required, especially in older homes.
- Moving Expenses, Renovations or Repairs
- Condo Fees.
- Service connection fees and deposits for some utilities.
How Much Can You Afford?
Now that you have a clear picture of your current financial situation, it’s time to find out what you can afford in monthly housing costs. Lenders follow two simple affordability rules to determine how much you can pay.
The first affordability rule is that your monthly housing costs shouldn’t be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses – known as P.I.T.H. for short. For a condominium, P.I.T.H. also includes half of the monthly condominium fees. For leasehold tenure, P.I.T.H. includes the entire annual site lease.
We will add up these housing costs to determine what percentage they are of your gross monthly income. This figure is known as your Gross Debt Service (GDS) ratio. Remember, it must be 32% or less of your gross household monthly income. The second affordability rule is that your entire monthly debt load can’t be more.
than 40% of your gross monthly income. This includes housing costs and other debts, such as car loans and credit card payments. We will add up these debts to determine what percentage they are of your gross household monthly income. This figure is your Total Debt Service (TDS) ratio.
