Are you Financially Ready to Buy a Home?
Are you financially ready to buy a home? Get a sense of your current monthly expenses and think about the following:
Consider your down payment: A down payment is the part of the purchase price the buyer pays in cash rather than financing with a mortgage. Buyers typically need a minimum 5% of the purchase price as a down payment, though some lenders now have mortgage options that allow you to borrow your down payment, and/or a relative can provide you with a gift of a down payment. Other than any such gift funds, you must prove to the financial institution or lender that your down payment is from your own funds. Other than any gift funds, you must prove to the financial institution or lender that your down payment is from your own funds.
If your down payment is less than 20% of the purchase price, you need a high ratio mortgage and it has to be your primary residence (i.e. you can’t rent it out). Lenders require borrowers to obtain mortgage insurance for high ratio mortgage, since they can be riskier for financial institutions. Your mortgage insurance premium will vary depending on the size of your down payment relative to the price of the property, but ranges from under 1% of the purchase price to more than 3%. If your down payment is 20% of the purchase price or more, you do not require mortgage insurance.
Ensure you have deposit funds: You need to provide a deposit with your offer to purchase. Your deposit funds are typically part of your down payment.
Budget for closing costs: Closing costs are separate from your deposit and down payment, and are typically due on possession date, which is the date when the real estate transaction is complete and the property is yours. Closing costs include lawyer fees, property tax adjustments, title insurance (if any), etc. It is a good idea to budget a couple thousand dollars on top of the purchase price as closing costs.
Remember that being approved for a mortgage of a certain amount doesn’t mean you have to spend that much. In fact, many experts believe you shouldn’t max out on the value of your home. You want to leave enough room in your budget in case you have unplanned expenses come up, interest rates rise in the future, or if there’s going to be a period of time when you’re off of work (sickness, parental leave, etc.).
Get a sense of market conditions: News articles often refer to real estate market conditions.
- buyer’s market – where property supply is strong and buyer demand is weak. In a buyer’s market, you’re more likely to hear that buyers think they received a good deal.
- seller’s market – where buyer demand is strong and property supply is weak. A buyer in a seller’s market may worry they’re paying too much for a property because they’re competing with other buyers for a limited supply of properties.
- balanced market – where demand from buyers is keeping pace with the supply of properties for sale.
Market conditions affect home prices. Sellers want to get as much for their property as they can and buyers want to pay as little as they can; the market conditions will dictate who has a stronger negotiating position.