Once you have decided that homeownership is right for you. You have to now determine if you are financially ready to buy a house.
You start off by discussing with a mortgage professional about you mortgage. In this discussion, you net worth will come up.
You net worth is the amount left over once you have subtracted you total liabilities from your total assets. It will give you a general idea of your current financial situation and how much you can afford to put as a down payment.
From there, you calculate your monthly debt payments; this includes credit cards, student loans, car loans/ leases, etc.
Now that you know this information, you will have a good idea of your current financial situation. You can now determine how much you can afford in monthly housing costs.
There are two simple affordability rules lenders follow to determine how much you can pay.
1. Your monthly housing cost should not be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal, and interest, taxes and heating expenses, otherwise known as P.I.T.H. For condominiums, P.I.T.H. includes half of the monthly condominium fees. For leasehold tenure, P.I.T.H. includes the entire annual site lease.
Lenders add these housing costs to determine what percentage they are of your gross monthly income. The figure is known as your Gross Debt Service ratio, and it must be 32% or less than your gross household monthly income.
2. Your entire monthly debt load should not be more than 40% of your gross monthly income. This includes housing costs and other debts. Lenders add up these debts to determine what percentage they are of your gross household monthly income.
Once you have made the necessary calculations, it is time to obtain a pre-approved mortgage, which verifies how much you can afford. The lender will look at your finances and establish that mount of mortgage you can afford.
Now if your calculations show that you will have trouble meeting monthly debt payments and it will be hard to get a pre-approved mortgage, you can improve your chances by paying off some loans, saving for a larger down payment, or revise your target house price.
Once you have established yourself in this step, you can move on to step 3 which is the costs attached to owning a home.
Jeff Markewich
Broker of Record with InfoMarket Group GMAC Real Estate
www.imgrealestate.ca
