So many of your hopes and dreams rest on finding the perfect place to live, a setting for all those plans you’ve made. Your dream home could be a luxury condo in Uptown Waterloo or a rustic rural homestead. Either way, you’ll need to be financially ready to buy that dream home.
Determining your financial readiness is a crucial stage in the home buying process. For some homebuyers, that process may only last a few weeks but for others it can last much longer. Every journey to home ownership is different. The first step is always asking yourself, “Am I financially ready to buy a home?”
Some homebuyers will be ready to call a Realtor as soon as they have a few thousand dollars saved up. While calling a Realtor is a great place to begin your journey, having a down payment is not all there is to buying a home. A good Realtor can educate, guide and assist you but you’ll likely need more than a small down payment to be truly “ready.” There are also online tools and calculators that will help you assess what you can reasonable afford to purchase. Canada Mortgage and Housing Corporation’s website has some calculators and tools that will give you a better perspective on your debt-to-income ratio, the estimated upfront costs of a home purchase, as well as mortgage payments and types.
We have put together a few items for you to consider as you determine your financial readiness.
Of course the down payment is no small matter and should be your #1 financial priority. Saving for your down payment takes discipline and effort – you can do it! This is a good starting point towards home ownership. Your down payment is the portion you will pay towards your home that does not come from your mortgage loan. This is the portion you will have to have in a readily available form (like a checking or savings account) when you close on the purchase of your dream home.
The size of this payment will vary depending on the mortgage issuer you choose and the price of the home. Most mortgage companies would like to see you make a down payment of at least 5% of the home’s selling price before they will issue a traditional mortgage. You may be able to make a smaller percentage payment if you purchase mortgage loan insurance (through CMHC, Canada Guaranty or Genworth) which will raise your monthly payments slightly.
When potential buyers make an offer on a home, a deposit is required to assure the buyer that they are indeed quite serious about buying that particular home. The size of the deposit will vary depending on the situation. If the buyer backs out of the deal, he may lose this deposit unless his contract states that the deposit is contingent upon certain factors such as findings from the home inspection or securing financing. Deposits are usually rolled into the down payment at closing.
A home purchase will require you to pay certain fees above and beyond the down payment on the home. Here a few fees to make yourself aware of:
- Appraisal fee. Paid out-of-pocket by the buyer, and appraisal is often required by the lender. This is a valuation of the home (including its features, recent comparable sales and recent market conditions) by an independent party.
- Home Inspection Fee. Your lender most often requires a home inspection and this is an item you should absolutely include in your budget. An inspection tells you the condition of the home including all of its major systems. The inspector can alert you to any problems before you buy.
- Mortgage Broker Fees. If you have chosen to use a broker to help you find the most favorable mortgage, his fees will likely be due at closing.
- Pre-paid taxes. A prorated portion of the year’s property taxes may be due as soon as your close on a new home.
- Estoppel Certificate Fee (for condos only). Also called a Status Certificate, this certificate outlines the financial and legal condition of a condo corporation so you can determine if a unit is a safe financial risk.
- You lender will require your to have property insurance in place as soon as the home is in your possession on closing day.
- Closing costs. There are numerous fees due at closing that are collectively called “closing costs”. Underwriters’ fees, title searches and insurance, survey fees and origination fees all fall under this heading.
- Moving costs. Don’t forget to include the cost of a mover. Even if you plan a DIY project (renting a truck and packing it yourselves), get a quote ahead of time to ensure you have put aside funds for the fun!
This list is by no means exhaustive but you can see that you will need a little more than your down payment in hand by closing day.
Once the Home is Yours
A home will require more than a monthly mortgage payment. There will be other costs involved so be sure your budget can handle these added costs. Taxes are a major consideration and so is basic maintenance.
Don’t let this list of costs discourage you from your dream of home ownership! Talk to a financial counselor or a Realtor on The Mark Maurer Team and learn what it will take for you to be ready to buy a home. You might be surprised that you are in a better position that you imagined!