With the advantages of buying a home, many Canadian residents wonder how much home they can reasonably afford. After all, the price of a listed home is not the only factor to consider before making a purchase.
A home buying budget is important, although not the most exciting part of the home buying process. Rather than struggle with mortgage payments and maintenance costs, Canadian residents can feel confident with the knowledge that they have the extra funds they may need for unexpected expenses. Make timely mortgage payments and build equity when starting off with a home-buying budget.
Examine Current Expenses
Begin the process by a review of checking and credit card statements from the previous three months. Look at current expenses in areas like:
- Current rent or mortgage;
- Insurance; and
It may be useful to track spending for a couple of months to see which areas remain consistent and necessary and where it may be possible to reduce expenditures, such as with clothes, gifts and eating out. This can help potential buyers build up a nest egg for the costs of a down payment and closing costs. Anyone can benefit from this exercise as it can reveal a pattern of splurging that can decrease funds that could otherwise go to savings or an investment fund.
Consider New Expenses
Those looking to buy a home may need to familiarize themselves with potential costs that may arise with moving into their new home. A few questions for potential buyers include:
- Will commuting costs increase?
- Is it necessary to decorate and furnish the home?
- How much will maintenance costs, utilities and any HOA fees be?
In addition, those taking out a mortgage need to think about paying property taxes and homeowners insurance. Look at current spending habits, which expenses may disappear with a home purchase, and any potential new bills that may arise. Compare this to current income and debt levels to get a better picture of how much it will cost to buy and maintain a home. Planning ahead can help a West Calgary new home buyer easily cover such costs.
Work on Other Areas of Savings
There will be other ways in which a home buyer may need to allocate their funds. Individuals may need to create an emergency fund, set aside money for education savings and retirement, or pay high deductibles for auto or medical insurance. Create a financial cushion that can help maintain the current standard of living when various challenges occur.
Do the Math
Taking a look at these areas will provide an amount of money that can be spent toward the principal and interest of a mortgage payment. Some choose to use an online mortgage calculator to get a rough idea of the mortgage size they may qualify for. This can help those getting started in the house hunting process.
A good or excellent credit score is a critical factor for lenders. Those who take steps to improve their credit score and reduce outstanding debt can improve their chances of getting approved for a mortgage loan with relatively low interest rates. Requesting a free credit report from Equifax, Trans Union or Experian can help potential borrowers learn more about their credit score, credit history and any potential red flags for lenders. A mortgage loan rate difference of 3 per cent, such as for those that are deemed low risk, can translate to being able to pay off a mortgage loan faster.