First Time Home Buyer Mortgage Mississauga, ON
Buying a House - 5 Things No One Tells You, Including How Much of a Mortgage You Can Afford
Ever wonder what no one tells you about buying a house? Or maybe you’re house-hunting and wondering how much of a mortgage you can afford? The size of your mortgage, in addition to your down payment, will determine what price range you want to be looking in. And there’s no shame in starting small because there are a lot of overlooked expenses. Here are 6 things no one tells you about buying a home but which can help you decide how much of a mortgage you can afford:
- Set Your Own Mortgage Limit
- Don’t Start House Hunting Until You’ve Been Pre-Approved or Pre-Qualified
- You Need Down Payment Money Saved, Not Borrowed
- Closing and Moving Costs
- House Purchase is not an Event. It is a process.
1. Set Your Own Mortgage Limit - Lenders Think You Are Richer Than You Really Are
Of all the house buying tips out there, the best one is that if you’re wondering when it’s a good time to buy a house, it’s when you can truly afford it. If you spend all of what they’re willing to lend you, you could have a very, very tight budget and lifestyle for the foreseeable future. Most people can’t adjust to such a drastic change.
You know your budget better than anyone else. Before you talk to your friends, family members, mortgage brokers or Realtors. You should sit down to review your budget. Start by having a list of your existing expenses. Put it on paper, there are more expenses than you think. Household expenses are more than just car payments and loans. We often forget that basic items add up to be a lot of expenses. Toothpaste and toilet papers, gas and car insurance, daycare, clothes and running shoes, lunch money, the list can go on and on. Don’t forget a lot of things that you spent on cash money. If you go to Starbucks twice a day every day, this could add up to a lot of money. Now take a look at your pay. I am not talking about your gross income. It is the take-home pay that counts.
The affordability math is very simple. Money-In must be more than Money-Out.
Keep it Simple When Figuring Out How Much of a Mortgage You Can Afford - Skip the Temptation to Super-Size
In a culture where bigger often means better, when it comes to buying a house and the affordability of your mortgage, bigger can spell trouble, especially when interest rates go up. Resist the temptation to super-size your mortgage and keep payments reasonable. You’ll thank yourself later when something unexpected happens and you’ve got breathing room in your budget to either mitigate a financial crisis or seize an opportunity.
2. Don’t Start House Hunting Until You’ve Been Pre-Approved or Pre-Qualified
Get a written Pre-Approval from a mortgage lender, not just a verbal or a simple email, it should be a written commitment listing how much mortgage, interest rate and terms and conditions.
The approved mortgage amount & the down payment requirement often is a combination of income, credit and the quality of the property.
Mortgage approval is based on:
Most lenders follow the basic CMHC (Canada Mortgage Housing and Corporation) guidelines. Generally speaking the mortgage payment, property taxes and 50% of the condo fees plus a factor for heating costs should not be more than 32% of your gross income. And no more than 42% if you add the other monthly obligations, as, credit card payments, car loans, lines of credit, etc.
Credit rating is another major approval factor. In fact, there may be room for higher debt ratio as listed above is your credit rating is very good.
Credit rating is also used for pricing. Great credit will get you the best possible interest rate, while poor credit may have a premium added to the interest rate.
The mortgage amount, the down payment requirement often is a combination of income and credit.
Any realtor you work with will ask you what price range you can afford. The pre-approval process is intended to let you know how much the banker is willing to lend you. Depending on the lender or mortgage broker, they might let you know what credit score you need to buy a house or if your bad credit will get in the way of qualifying for a mortgage at a reasonable interest rate. Once you know how much you can borrow and how much the payments will be, you can go back to your budget to see if you really want to spend that much.
Knowing how much you can afford to spend will also help you to tailor your house hunting efforts.
You are pre-approved up to a certain amount, not for a certain amount.
Keep in mind that just because you’re pre-approved or pre-qualified for a certain amount, it doesn’t mean that you have to spend that much. You can buy a less expensive home and borrow less money, which will protect you financially when mortgage interest rates go up.
3. You Need Down Payment Money Saved, Not Borrowed
With the help of mortgage insurance, 5% is the lowest amount of down payment. If you are buying a $400,000 house, 5% would be $20,000. This money can be from your own resource, cash in the bank, investments, RRSP or TSFA. It can also be gifted funds from close family members or borrowed money. If it is borrowed money, the monthly payment will be added to the affordability calculation.
If your down payment is less than 20% of your purchase price, you are required to pay for insurance on your mortgage. Your lender will explain what the premiums are based on how much of a down payment you do have. You are able to include the insurance costs in your mortgage, but that does make them more expensive.
4. Closing and Moving Costs - Legal Fees, Property Tax and Strata Fee Adjustments
It is very wise to budget another 2% of your purchase price for closing costs. In addition to buying the home, you will have legal fees, property tax and/or strata fee adjustments, house insurance (a condition of your mortgage is that you must have house insurance) and actual costs to move into your new home.
It is up to you to have the money available for when it’s needed, but a lender will also try to offer you a small line of credit for “just in case.” If you think you might need it, it might be wise to accept their offer because a credit line doesn’t cost anything if you don’t use it. In the months after buying a home, it can be hard to qualify for additional credit, especially if you’ve maxed out your mortgage amount.
5. House Purchase is not an Event. It is a process.
Most successful businesses have systems and processes in place. The reason is this, “Property Process leads to Predictable Results.
It is no different than buying your house. Whether it be your first home or upgrading to another home.
- Know what your price range.
- Know where you can buy.
- Location - which city
- Location - which part of the city
- Location - which neighbourhood
- Build a team of trusted advisors.
- Mortgage Brokers
- Real Estate Lawyers
- Home Inspectors
- Learn - from Trusted Advisors:
- Mortgage Market
- Real Estate Market
- House search process
- Negotiation Process
- Celebrate your success.
There are lots of horror stories about the home buying process. And a lot of them are true. Sometimes it is beyond our control. However, most of the time is due to the lack of following a proper process. “Buy a home should be your fondest dream, do not let it be your worst nightmare.”
Let me repeat what was said earlier. “Proper Process leads to Predictable Results.”
Home buying should be a positive and joyful experience. By following the proper process, it should lead to a celebration of your new home.