May 7, 2012

Be a Financially Savvy Homeowner

by Scotia Bank

Before you start thinking about the kind of home you want and where you want to live, it’s a good idea to take a financial inventory.

This stage of the process – saving, budgeting, planning – is not as exciting as choosing a neighbourhood and looking at homes. But it will put you in the best position when it comes time to talk mortgages. Your home can provide a lifetime of memories and financial security, with the right mortgage and financing options that give you the upper hand.

Preparing to buy a home

For most of us, the first step in the home-buying process is to ramp up savings – the more you can put towards a down payment, the less interest you’ll pay and the more you may save on mortgage insurance.

Paying down debt and building a good credit history are also part of this process. The better your credit history, the more leverage you’ll have when negotiating a mortgage.

Now, how much home can I afford?

This convenient mortgage calculator will give you a good idea of how large a mortgage you can qualify for. The calculations are based on some traditional debt-to-income principles:

The first lending principle states that your monthly housing costs – including mortgage payments, insurance, property taxes, applicable condo fees – should not exceed 32% of your family’s gross monthly income. This is also known as the Gross Debt Service Ratio (GDSR) calculation.

The second lending principle states that monthly housing costs plus all other debt (loans, credit cards, lease payments) should not exceed 40% of your family’s gross monthly income. This is also known as the Total Debt Service Ratio (TDSR) calculation.

Pre-approved mortgages

Once you’ve set your savings plan, and determined how much home you can afford, getting pre-approval is the next step. Having a pre-approved mortgage tells potential sellers that you are serious about entering the housing market.

A pre-approved mortgage qualifies you for mortgage financing at an interest rate that is typically guaranteed for 60 days from the time that financing is arranged.

Fast fact: You can purchase a home with as little as 5% down. However, if your down payment is less than 20% of the home’s appraised value or its purchase price, you are required by law to purchase mortgage insurance.

—
This article was provided by Scotia Bank. Let us help you get the upper hand on your home financing. Visit scotiabank.com/upperhand for great tips, calculators and more. Want to get more information on your home-related financing goals by email? Sign up here.