The Basics Of Housing Affordability
Can you afford to purchase a home that meets your needs?
What is the Debt Service Ratio?
How much monthly debt payments can you safely service with existing income?
What is the Debt Equity Ratio?
What percentage of the purchase price is needed for a down payment?
What are your minimum housing needs and maximum affordability?
These basic questions should be addressed at the start of the process of first time home buying.
Understanding these basic points might save you a lot of time, money and stress.
Ownership versus renting builds equity in a normally rising real estate market. There is a pride and joy of ownership that usually pays off if you invest carefully. Real estate is normally an excellent investment over the long term provided you do not overpay at the time of purchase and are actually aware of all the hidden costs, including renovations required, going in.
You will need to meet with a bank lender or mortgage broker if you have not yet completed a mortgage pre-qualification. They will establish how much of a mortgage you will qualify for. There are normally two ratios you need to consider:
1.Debt Service Ratio – the percentage of your monthly gross income that goes to service your total debt payments – try to keep this ratio under 37%. Banks may let it go as high as 42%. The ratio varies from time to time and your mortgage broker will be able to assess this most accurately based on current bank lending and real estate market conditions. Make sure you totally understand the reasons behind the formula, which are intended to realistically assess your ability to make your total monthly debt payments usually with taxes added in. The general guideline is try to have all your monthly debt payments come in under 37% although this number varies from time to time at different institutions and also depending on your equity, your net worth and your current credit rating Mortgage rates vary considerably and it is important, like anything else, to carefully shop around for the best interest rate, terms and options.
2.Debt Equity Ratio – represents the percentage or ratio of debt to equity in the purchase. For example, if you are putting 20% down payment, the ratio would be 80 – 20, for example 80% debt and 20% equity. Be sure to tell your mortgage broker all the details of your finances. Sometimes it is may be necessary to re-organize your financial affairs in order to better qualify for a mortgage, such as paying off a car loan or getting rid of other monthly payments for consumer debt which directly affect your debt service ratio and your ability to qualify for the mortgage you need to buy the home you want or need.
First time home buyers can sometimes take advantage of the federal government's Home Buyers' Plan. Under this plan normally you may use up to $20,000 of your RRSP towards the purchase of a home. Ask your accountant for the details he is she is best qualified to answer this question.
Are You Ready to Buy a Home?
Do you have the necessary financial resources to complete the purchase of a home that meets your needs? You should have a minimum of ten to twenty percent of the purchase price of a home for the down payment, ideally a larger down payment is better and may be required.CURRENT STRESS TEST RULES HAVE CHANGED EVERYTHING - BE SURE TO INFORM YOURSELF BEFORE YOU INCUR COSTS.
Check the latest rules with your mortgage broker or bank.
Do you expect to stay in your new home for some time? Moving can be expensive and you will want to build some equity before having to relocate. Your job and home life should be stable. Sometimes it is preferable get pre-qualified. And to keep renting and saving until you are quite certain that you have the resources to get the house you want and need. Be vary careful about all the stories you hear about flipping houses. Very few people actually gain financially from such attempts. You hear about the few winners but never hear about the many losers. Be as realistic and unemotional as you can be when purchasing a house – it is the biggest investment you will normally make in your life time. Get pre qualified - start working with a professional Realtor, be realistic, do all your own due diligence at every stage and carefully consider your needs at the start of the process.