The leap into home ownership is a huge step. For many people, especially those who grew up with a family that owned property, it can feel like the last barrier between childhood and adulthood.
Although home ownership is extolled as a great investment and a step towards true financial freedom, it isn’t for everyone. Some people appreciate the flexibility and independence of renting because they can move whenever they like and aren’t responsible for repairs and maintenance. Others who strive towards home ownership can’t imagine anything worse than renting forever. If you’re trying to make this decision, be patient with yourself. Examine the pros and cons of both options in order to make an informed decision.
If you decide to pursue home ownership, start by answering these questions. After you’ve gone through the following five questions, you’ll have a much better understanding of your financial obligations, and your priorities moving forward.
Am I Ready to Stay Put?
Before we even start talking about money, the most important question to ask yourself is whether you’re truly ready to settle down. If you don’t enjoy living in the same place for more than a few years at a time, home ownership might be more of a burden than a joy.
Experts recommend staying in your starter home (first purchased home) for at least five years. Homes appreciate roughly 2-3% per year, so if you put your house up for sale within a year or two, the small amount of equity you do build up likely won’t even cover your closing costs.
If you have to move, you can always rent out your home. However, this places a huge amount of responsibility on you to maintain the property, find appropriate tenants, and pay all related fees from annual property taxes to fixing broken faucets, windows, and anything else that could get damaged while you’re not living in the home. Being a landlord is a responsibility that no one should take lightly.
Before moving on to the monetary aspects of home ownership, think hard about whether the home you’ll pick now is somewhere you can stay for the next few years. If you value the freedom and flexibility of being able to leave at a moment’s notice, consider remaining a renter until you’re ready to settle down.
Can I Make Basic Repairs Myself?
As a new homeowner, it can be a huge adjustment to suddenly be responsible for everything that goes on in and around your home. It can really help to have a few basic skills mastered before closing day. This could be anything from basic plumbing to painting, home repair, and woodworking.
It’s going to be much less expensive long-term if you can deal with small repairs and maintenance yourself, instead of having to hire a contractor to diagnose and fix every little thing. You can find a great list of books to get you started here.
How Much Debt Do I Have?
Once you’ve established that you’re ready for the responsibility of home ownership, examine your finances to see whether this is something you can afford. Start by looking at your debt to income ratio. This is your total debts, divided by your gross monthly income.
The Canada Mortgage and Housing Corporation (CMHC) recommends having a post-purchase debt to income ratio of no more than 42%. This means that your debt-to-income ratio pre-purchase should be much, much lower. This is an important factor in getting a mortgage.
Most creditors like to see housing debt represent no more than 28% of your gross monthly income. The ideal mortgage applicants have 14% debt-to-income ratio (or lower). Being at a debt-to-income ratio of 14% pre-purchase ensures that there’s plenty of room to take on additional expenses like a mortgage, and other payments associated with home ownership.
This is also a great time to examine your credit, and see whether there’s anything in your history that could limit your chances of getting a mortgage.
How Much Money Do I Have Saved?
So, you’ve determined that you’re eligible for a mortgage by examining both your debt and credit score. The next step is taking a look at whether you can afford an appropriate down payment. The minimum down payment in Canada ranges from 5-20%. If you’re self-employed or have poor credit, you may be asked to put down more money upfront.
If you are not able to put down more than a 20% down payment, you may be required to obtain mortgage insurance, which insures you against default. Before you start your search for a new home, you’ll need to go into a bank and talk to them to obtain mortgage pre-approval. This means that the bank has committed to offering you a mortgage at a certain rate, which is typically locked in for 120 days. The final mortgage amount depends on a few other factors including property valuation, but you’ll need this minimum commitment from a bank in order to move forward.
Once you’ve determined that the financial aspects of home ownership are in order, you can start the search for your new home.
What’s Out There for Me?
A real estate agency is a great place to go to ask questions about your local market, as well as what housing is available in your area. However, before you jump into the process of finding a real estate agent, your wants and needs should be clear.
For a real estate agent to be truly helpful, you should know your budget, what area you’d like to settle in, and what type of home you’re looking for.
Before you connect with a real estate agent, spend some time getting to know the area that you’d like to settle in. Learn about what housing stock is available, typical price ranges, and what amenities are standard for the region. The more information you’re able to give your real estate agent, the faster they’ll be able to narrow down some options and schedule tours.
Feeling Ready? Get in touch with our Windsor Real Estate Team
If you’re feeling ready to make the leap into home ownership, get in touch with our expert team of Windsor real estate agents. We’re eager to work with new homeowners and guide them through the process of finding their perfect home. Contact us today to get started!