Are your finances in order to be a home buyer?
One of the best ways to test your financial readiness is to calculate your monthly expenses required to buy a home and live within that budget for six months. Set aside the money in a savings account and see if the remainder of your income is satisfactory to maintain your lifestyle.
How much can you afford?
Before beginning the process of shopping for a home it’s important to know exactly how much the bank thinks you can afford. The bank will take into consideration a number of factors including:
- Credit rating
- Income source and type
- Down payment saved
- Mortgage payments
- Maintenance, condo fees, taxes, etc.
- Other outstanding debt
- Potential rental income from a suite, etc.
- Discount from market value, if any
Affordability Rule #1 – Gross Debt Service (GDS)
The fisr rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include mortgages, taxes, and heating.
Affordability Rule #2 – Total Debt Service (TDR)
The second rule is that your total combined monthly debt payments cannot be more than 40% of your gross monthly income. This includes credit card minimum payments, car payments, etc.
The next steps
Contact a mortgage broker for an assessment of your situation. Brokers are independent business owners who work with all the banks. They get paid by the lender if you qualify for a mortgage and will often make an extra effort if your application is marginal. You may also want to contact a bank you have a relationship with. Banks employ mortgage specialists who are like brokers but work for a single institution. Expect a broker to work on your behalf to find the lowest rate or the best options for self-employed or other complex applications. They usually have a better selection of financial products. A broker’s services are free of charge–they get paid a commission by the lending company or bank.
If your profile doesn’t fit the two affordability rules there are steps you can take to improve your buying ability.
- Consider a smaller home
- Pay off some debt
- Save a larger down payment
- Look at your assets to see if you can sell something
- Look at your expenses and see if you can make improvements