Are you financially ready to buy a house? A Quick Guide to Purchasing Your First Home
Buying a home is an amazing accomplishment but it will also be one of your biggest investments. Purchasing a house is a major financial decision which is why it is important to make sure that you are making the right choice. Fortunately, there are steps you can take to figure out if you are truly ready to buy a home and we've outlined them for you in this quick guide.Step 1. Calculate how much excess income you currently have at the end of the month.The first thing to do is to see how much you are spending on a monthly basis. To do that, combine a list of your usual monthly expenses, which may include:
| Fixed Expenses | Loans & Debts | Variable Expenses | Savings & Donations |
| GroceriesClothingTuitionChildcare Services (babysitters, daycare, etc.)Transportation(car, taxi, bus, etc.)Utility BillsCableInternetPet CareMemberships | Credit Card BillsPersonal LoansStudent LoansLines of Credit | Dining OutMoviesEventsTravelHobbies | Monthly Saving DepositsCharitable GiftsRRSPTFSA |
Once you've added all your expenses, subtract that amount from your total monthly income. The resulting answer is your excess monthly income.Therefore, the equation used in step 1 is: [Revenues – Expenses] Step 2. Calculate how much "house" you can afford. There are two affordability rules to take into consideration:
- Your Gross-Debt-to-Income (GDS) Ratio:
Definition: It is the percentage of your income that is needed to pay all required monthly housing costs which include your monthly mortgage payment (principal and interest), property taxes, heating expenses, and 50% of your condo fees.Your monthly housing costs should be no more than 32% of your average gross monthly income.
- Your Total-Debt-to-Income (TDS) Ratio:Definition: It is the percentage of the your income that is needed to cover housing costs (GDS) plus any other monthly obligations that you may have, such as credit card payments and car payments.
Your monthly debt load should be no more than 40% of your average gross monthly income.Calculate your GDS and TDS ratios on our online calculator. If your ratios abide by the limits then, congratulations! You will be eligible to get your instant pre-approval letter. However, if your GDS and TDS ratios do not abide by the limits of 32% and 40% respectively, then you may not be financially ready to purchase a home.Step 3. Calculate all the upfront costs of purchasing a home.Calculate all the upfront costs that come along when buying a home. Once you see the full amount that you need, you will be able to figure out if you are capable of saving-up enough money for these expenses.Down payment — the part of the home price that is paid when you make an offer to purchase Home inspection and appraisal feesInsurance costs — including property insurance, mortgage loan insurance, etc.Land registration fee — based on a percentage of the purchase price of the propertyPrepaid property taxes and utility bills — you may have to reimburse the seller for bills paid in advanceLegal or notary feesPotential repairs or renovationsMoving costsGST/HST/QST on the purchase price (for newly built homes) or on the mortgage loan insurance (if applicable)Are you ready to save-up enough money to cover all these expenses? If your answer is yes, then you are financially ready to purchase a home!Step 4. Consult the advice of a professional mortgage broker. If you need help with any calculations or if you would like this process to be explained in more detail, contact our professional mortgage brokers. We will evaluate your financial situation and provide you with the right advice to help prepare you for this important investment.Our mortgage brokers are always happy to assist you and answer any of your mortgage related questions!