Home ownership does have its own financial advantages for building long term wealth, but depending upon your personal situation it may not be for you at this moment.
There can be several factors that affects your home buying decision - lets understand a few of them:
AFFORDABILITY
There are many factors that affects the amount of mortgage you can afford and its always better to have a basic understanding of this.
Factors that affects your mortgage affordability:
- Household Income - Your total household income before taxes plus any other income (any part time job / business income / child support)
- GDS & TDS ratio - Your monthly housing costs means mortgage principal and interest, taxes and heat expenses should not exceed 35% of your gross household monthly income (in case of a condominiums - also includes 50% of monthly condo fees).
Your Gross Debt Service(GDS) ratio = Sum of monthly housing cost / Gross monthly household income
TDS ratio is the percentage of your income required for all of your debt servicing which includes auto loan, credit card balances, child alimony, and any other debt and should not exceed 42%.
Your Total Debt Service(TDS) ratio = Sum of your monthly debt / Gross monthly household income
Preparing well in advance (at least 12 months) can increase your chances of landing the lowest interest rate possible, which can lead to thousands of dollars in savings over the life of the loan. It takes time to get you finances & credit in line to qualify for the most suitable product.
How to Increase Your Mortgage Affordability:
There are a few things that you can do to increase your mortgage affordability to buy that dream home:
- Pay off your debts
- Increase your income
- Increase your down payment
- Get a co-signer or guarantor
Know How much house your can afford & get Pre-Qualified in minutes for free: http://bit.ly/mortgageprequalification
REQUIRED DOWN PAYMENT
The amount of down payment will have a significant effect on your mortgage – the more you pay as down payment, the less would be the loan amount and the less would be the amount you pay in interest.
It will also help the lender to calculate your loan to value, it is calculated as
Loan to value (LTV) = Mortgage loan amount / Appraised property value
Generally, 20% down payment is required to buy a home but Qualified home buyers can buy a home with as low as 5% down payment (required to purchase Mortgage Default Insurance) but they need to factor in the other costs associated with the home ownership.
The amount of down payment for your home will depend upon a lot of factors:
- Financial stability
- Marital status
- Your household income
- Credit
- Amount of debt
It’s always better to pay as much as you can as down payment but always keep a safety cushion & a separate emergency fund.
EMERGENCY FUND
The thumb rule would be to have at least 3-6 months of living expenses to avoid financial crisis in any situation like - layoff, medical situation or any emergency situation which leaves you unable to work.
It better to keep it in a separate account to avoid an easy access to this money.
CLOSING COST
Closing costs associated with a real estate deal depend on a few different factors, but a good rule of thumb is to budget about 2-2.5% of your property purchase price. The costs may include:
· Property Appraisal
· Title insurance
· Home Inspection
· Title insurance
· Legal fee
There may also be other costs like property taxes, moving expense and homeowners insurance. A local experienced Realtor will be able to give you a more accurate overview of closing costs based on the home you choose and your particular situation.
BEING A LANDLORD
When you are the landlord or become a home owner - you are responsible for the maintenance of the property which can be the biggest difference from being a renter.
So as a landlord, you need to factor in the maintenance cost which as a thumb rule can be 1% of the property price annually and should not come as a surprise to you.
Buying your home is a big financial decision so need to be prepared, do your homework, and factor in all the associated cost of home ownership.
CREDIT
Your credit score shows your financial health (level of risk) and one of the important factor in your mortgage approval. An excellent credit score proves that you manage your finances well and considered low risk, whereas a low credit score shows a poor & mismanaged history
There are two credit bureaus in Canada: Equifax and Transunion. It’s always better to check your credit report every year.
Factors that affects your credit:
Your credit score is calculated based on the following factors:
- Late or missed payments / bankruptcy / Consumer Proposal
- How much you owe debt
- How old is the credit accounts
- How frequently you apply for new credit
- Types of Credit
To improve your credit scores:
There are a things you can do to build / improve your overall credit:
- Pay all your bills on time and pay in full
- Don't use more than 30% of the available credit limit.
- Don't apply for new credit too frequently.
- Maintain ta least 2-3 different credit accounts and establish a long credit history.
Your first home is a big purchase—maybe even the biggest one you’ll have ever made up to this point in your life.
Let a qualified Mortgage Professional take care of you needs & by guide you throughout the process of home Ownership.
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