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For many immigrants, buying a house is a rite of passage to fully making Canada home. However, not everyone is cut out for home ownership. How do you know if home ownership is for you? And most importantly, how do you know if you’re ready to buy a house? If you don’t feel ready, how can you get yourself ready? This article will help you answer these questions.
To determine your readiness to buy a house, you need to examine some key factors that could affect your home ownership process. This self-assessment will not only help you determine your readiness but also help you know areas you can improve to get better rates and give you an overall positive mortgage experience.
Factors that determine your readiness for home ownership
Your employment status
This is one of the key factors that mortgage lenders consider when deciding to give you a mortgage because they need to see that you have a stable job with reliable income. A stable job means you’re not a new employee or a struggling business owner. If you recently changed jobs and still under probation or your business does not have steady inflow, it might be best to wait until after your probation period or when you hit a steady profit milestone before you begin your mortgage process. While some lenders require that you have a permanent job, others do not mind a temporary job. If you’re on a temporary job, ask the mortgage advisor of the lender about their policy on acceptable types of employment before you begin filling the application. You wouldn’t want them to pull your credit history only to discover that your employment status is a deal breaker. This also applies to your partner if you’re applying as a couple. If one partner’s circumstance is as described above, you should consider waiting until their circumstance changes or applying with a single income.
Your credit score and history
Your credit history is the second most important factor considered by potential mortgage lenders in their decision to approve or deny your mortgage application. Most mortgage lenders require a minimum of one year credit history to approve your mortgage application. If you have been in Canada for less than one year, this might be a challenge. Is your credit in order? To find out, request for a copy of your credit report from Equifax and TransUnion to review your rating and check for errors on your credit report. Your credit report gives you an overview of your borrowing history and lets you know if there are errors in your information and financial records. If you notice any errors in your information, you’ll need to correct them before applying for a mortgage. Also, ensure that you don’t have any overdue credit. If you determine that your credit needed improvement, take at least six months to intentionally work on your credit. According to Equifax, here are three ways to improve your credit:
- Your debt-to-income ratio: “This is the proportion of debt that you have in relation to the money that you make. The higher this number is, the more debt you have”, Equifax explains on their website. Lenders typically prefer applicants with a lower ratio, as this means that you’re likely to have the funds to make your monthly mortgage repayments. Determine how much of your income goes into debt repayment monthly.
- Cut out any unnecessary borrowing: Avoid applying for new credit lines in the six months preceding your mortgage application and minimize your spending. Create a budget that leaves room for mortgage payment and stick to it for at least six months to show a consistent spending pattern.
- Keep older credit accounts open: These can demonstrate to lenders that you’ve been able to make repayments over a sustained period of time. You may want to close inactive accounts, though, as they would show lenders that you have too much access to credit that you don’t need.
BONUS TIP
Keep your debt-to-credit rate at 30 per cent or less. For instance, if the total amount on all your credit cards and line of credit is $10,000, avoid having a debt above $3,000.
Your budget
What type of how can you afford based on your budget? Check the property listing in the neighborhood or city you want to potentially buy a house to see the types of houses within your budget. Is this the type of house you’ll like to buy? If not, would you need to increase your budget to get the type of house you want? Can you afford the new budget? The answers to these questions will reveal whether you’re ready for a mortgage or you need to wait for a couple more years to increase your budget, review your housing requirement or consider a more affordable location. Keep in mind that real estate is largely unpredictable and waiting a couple more years might further push your dream home away from your reach. Use the mortgage qualifier calculator to determine how much you can truly afford based on your income, expense and housing price. An important aspect of your budget consideration is your down payment. Can you afford the down payment for the type of house you want?
Down payment and associated cost
To buy a home, you need a down payment. This is the money you put down upfront towards your home before your mortgage loan pays the rest. The calculation of the minimum down payment depends on the purchase price of the home. According to canada.ca, the formular used to calculate your minimum acceptable down payment is shown below:
- $500,000 or less, 5% of the purchase price
- $500,000 to $999,999, 5% of the first $500,000 of the purchase price10% for the portion of the purchase price above $500,000
- $1 million or more, 20% of the purchase price
Example: Suppose the purchase price of your home is $400,000. You need a minimum down payment of 5% of the purchase price. The purchase price multiplied by 5% is equal to $20,000.
If the purchase price of your home is more than $500,000
Suppose the purchase price of your home is $600,000. You can calculate your minimum down payment by adding 2 amounts. The first amount is 5% of the first $500,000, which is equal to $25,000. The second amount is 10% of the remaining balance of $100,000, which is equal to $10,000. Add both amounts together which gives you total of $35,000.
In addition to your down payment, there are other costs associated with finalizing your mortgage. Expect to spend between 1.5% and 4% of the purchase price. This cost includes your mortgage loan insurance if you’re paying less than 20%, home insurance, property tax, and legal fees among others.
If you do not have sufficient funds for down payment and associated costs, you might consider finding a cheaper house. Otherwise, doing a simple financial analysis will show how long it will take to raise the required funds. Use the financial goal calculator to analyze your finances . You may also be eligible for the Home Buyers’ Plan (HBP) if you’re a first-time homebuyer. However, as a new immigrant, you likely won’t have substantial savings in your RRSP to benefit from HBP.
Ongoing housing cost
According to Canada Mortgage and Housing Corporation (CMHC), your monthly housing costs should not be more than about 35% of your gross monthly income. This includes your mortgage payments and utilities. Your entire monthly debt load should not be more than 42% of your gross monthly income. This includes your mortgage payments and all your other debts. Although this is the best practice, statistics show that majority of households in Canada, immigrant inclusive spend more on than this percentage on housing and debt, yet manage to survive. Be sure to calculate your monthly expenses including housing cost with your mortgage payment to avoid living beyond your income and taking more debt than you can afford.
Responsibilities of home ownership
While home ownership can be rewarding, especially with the joy of knowing that you’re building equity instead of helping your landlord pay for his own mortgage; it comes with a lot of responsibilities that might make some decide not to own a home. In addition to the bigger financial responsibility that comes with home ownership, regular maintenance is important to keep the house in shape and valuable in the market. There’s also the possibility of unexpected and costly repairs. It is important to learn basic DIY repairs to keep the cost of repairs low. Otherwise, the cost of repairs can eat so deep into your pocket, you’ll almost regret owning a home. Depending on the type of home you buy, you might have to worry about clearing the snow in winter and caring for the lawn in spring, summer and fall.
After considering all the above factors, if you’re ready to buy a home, then you need to begin your mortgage process.
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