Figuring out the financials

Tips on how to see if you’re bank account is ready for your first home

So you’re ready to be a homeowner. But is your bank account?

Canada Mortgage and Housing Corp. (CMHC) offers the following tips to help first-time homebuyers determine if their financially ready to take that first step:

1. How much are you spending now?

Start figuring out your financial readiness by evaluating your present household budget. How much are you spending each month? Also, calculate your monthly debt payments. Do you know how much debt you are carrying? That could include car loans and leases, personal loans or lines of credit, credit cards and student loans. If you decide to buy a home, mortgage lenders will ask for this information. Your total monthly expenses are your household expenses plus your debt payments.

2. How much can you afford?

Before you begin shopping for a home, it’s important to know how much you can afford to spend on homeownership. In addition to purchasing the home, other significant expenses include heating, property taxes, home maintenance and renovation as required.

Two simple rules can help you figure out how much you can realistically pay for a home:

• Affordability Rule 1: Your monthly housing costs shouldn’t be more than 32 per cent of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating. Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS should be 32 per cent or less of your gross household monthly income.

• Affordability Rule 2: The second rule is your entire monthly debt load should not be more than 40 per cent of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments. This figure is called your Total Debt Service (TDS) ratio.

3. Your maximum house price

The maximum home price that you can realistically afford depends on a number of factors. The most important factors are your household gross monthly income, down payment and the mortgage interest rate. CMHC offers a mortgage affordability calculator at www.cmhc.ca.

Homebuyers should also be aware of mortgage loan insurance, which helps protect lenders against mortgage default. The minimum down payment requirement for insurance depends on the purchase price of the home. For a purchase price of $500,000 or less, the minimum down payment is five per cent. When the purchase price is above $500,000, it’s five per cent for the first $500,000 and 10 per cent for the remaining portion.

4. Credit history

Before approving a mortgage, lenders will want to see how well you have paid your debts and bills in the past. To do this, they consider your credit history (credit report) from a credit bureau. If you have no credit history, it is important to start building one by – for example, applying for a standard credit card with good interest rates and terms, making small purchases and paying them as soon as the bill comes in.

If you have poor credit, lenders might not be able to give you a mortgage loan. You will need to re-establish a good credit history by making debt payments regularly and on time. Most unfavourable credit information (including bankruptcy) drops off your credit file after seven years.

5. Mortgage  pre-approval

A lender will look at your finances and figure the amount of mortgage you can afford. Then the lender will give you a written confirmation, or certificate, for a fixed interest rate. This confirmation will be good for a specific period of time. A pre-approved mortgage is not a guarantee of being approved for the mortgage loan.

The lender or broker will offer you several choices to help find you the mortgage that best matches your needs. Some of the most common include amortization period, payment schedule, interest rate type and mortgage term.

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