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Steps to Being Financially Ready for Homebuying

Posted by admin on April 25, 2024
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 The Puffin Team Real Estate - Lynn Vardy - Unlock Your Financial Potential for Homeownership

Buying a house is an exciting journey that marks a significant milestone in your life. However, before you start browsing through real estate listings or visiting open houses, it’s crucial to determine whether you are financially ready.

By setting a realistic budget, you can ensure that you find a home that not only meets your needs but also fits comfortably within your financial means.

Assess Your Financial Readiness for buying a house

The first step in setting your home buying budget for buying a house is to take a close look at your financial situation. Evaluate your monthly income, including any additional sources such as bonuses or side hustles. Deduct your regular expenses like bills, groceries, transportation, and other obligations. This will give you a clearer picture of your disposable income, which will help you determine the amount you can comfortably allocate toward homeownership.

Calculate Your Gross Debt Service Ratio

Your Gross Debt Service (GDS) ratio is a critical factor that lenders consider when assessing your mortgage eligibility for buying a house. It measures the percentage of your monthly income that goes toward debt payments.

To calculate your GDS, add up all your monthly debt payments (including credit cards, student loans, car loans, etc.) and divide it by your gross monthly income. Lenders usually prefer a GDS ratio of 32% or lower, so aim for a lower ratio to increase your chances of loan approval. They may also evaluate your Total Debt Service (TDS) ratio. If you have less than a 20% downpayment you will need CMHC insurance.

To help determine your GDS and TDS Ratio, check out this calculator.

Furthermore, the assistance of a mortgage broker or bank will help you with all of these calculations for buying a house.

Down Payment and Closing Costs

One of the significant upfront costs in home buying is the down payment for buying a house. Typically, lenders recommend a down payment of 5-20% of the home’s purchase price. However, depending on your financial situation, you may be eligible for lower down payment options.

Research various loan programs and consult with mortgage professionals to explore the best options for your circumstances. Additionally, keep in mind that you’ll also need to account for closing costs, which typically range between 2% and 5% of the home’s purchase price, as well as a land transfer cost.

Consider Your Monthly Expenses

Owning a home involves more than just a mortgage payment. To know whether you are financially ready, you also have to keep in mind of your ongoing expenses such as property taxes, homeowners insurance, utilities, maintenance, and potential homeowner association fees. While these costs can vary depending on the location and size of your home, it’s essential to factor them into your budget. A good rule of thumb is to set aside around 1% to 3% of the home’s value per year for maintenance and repairs.

Get Pre-approved for a buying a house – Mortgage

To get a clearer understanding of your home buying budget, it’s wise to get pre-approved for a mortgage. This process involves providing necessary financial information to a lender who will then evaluate your creditworthiness and provide you with a pre-approval letter.

Pre-approval will not only give you a clear idea of the loan amount you qualify for but will also make you a more attractive buyer in the eyes of sellers. It also sets you up if you are not able to purchase yet. They can give you tips on improving your credit, recommend home buying programs and more.

Determining whether or not you are financially ready is an important step in the home buying process. By assessing your finances, calculating your GDS & TDS ratio, considering down payment and closing costs, factoring in ongoing expenses, and getting pre-approved for a mortgage, you can set a realistic budget that aligns with your financial goals and aspirations.

Remember, buying a house is a significant investment, so take the time to carefully evaluate your financial situation and make informed decisions.

Happy house hunting!

Lynn Vardy Realtor at The Puffin Team Real Estate

 

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