So, you’ve decided to take
the big leap and purchase your first home. Most of us have
a “dream home ” tucked
away at the back of our minds — comp lete with six bedrooms,
two fireplaces and a panoramic view. Before setting off to
view properties you likely can’t afford, step back and
take a reality check.
Your “dream home” can easily become a nightmare
when most of your money goes to pay the mortgage and there’s
little left over for anything else. Overextending yourself
financially is the quickest way to destroy the excitement of
home ownership and add stress to your life.
Smart home-buying means knowing what you can afford and being
practical about it. Most first-time buyers, in particular,
lack the funds needed to buy a home without assistance from
a bank or financial institution. Buying a home means combining
savings with money borrowed through a special arrangement called
a mortgage.
To keep mortgage payments within their means, most first-time
buyers purchase what is commonly known as a “starter
home.” A starter home is just that — a way of getting
started in long-term real estate investment.
To match the home you buy to your pocketbook you have to realistically
assess your needs, determine what you can afford and, usually,
lower your expectations. Begin by enlisting the services of
a real estate representative. This individual will help you
target your home ownership dreams and provide valuable information
on mortgage options, interest rates and incentives, such as
government programs, for first-time buyers.
In the meantime, here are some ways to determine how much
you can afford.
Set a maximum price range
To determine your “affordability” price range,
you must calculate two amounts: the amount of cash you can
afford to put towards the purchase (down payment) and the maximum
amount of loan (mortgage) you can comfortably carry. Typically,
household expenses should not exceed 35 per cent of your gross
income.
Put down as much as you can
The key to getting started for most first-time buyers is the
initial down payment. This is the part of the purchase price
you have to put down as cash. You may be able to buy a home
for as little as five per cent down. But remember that the
larger the down payment, the easier it will be to manage the
other expenses (mortgage, utilities and property taxes).
An ideal down payment is 25 per cent of the purchase price.
Keep some cash in reserve though for unexpected expenses related
to a home purchase and typical expenses such as land transfer
tax, legal fees and moving expenses.
Know how much to borrow
To establish your maximum mortgage limit,
a financial institution will determine the monthly payment
you can afford by calculating your debt-service ratio. List
all your loans (car, personal loans, monthly credit card balances).