June 12, 2014
Home Budgeting Tips for First Time Home Buyers
Visions of friends gathering for a BBQ, immaculate gardens, enough space to really relax. Ah, your first home! Exciting, isn’t it?
Well, you’re right, it really is. You deserve to be excited. However, there is a rather overwhelming list of things to consider before you get the keys and start selecting paint colours and window dressings. Don’t stress though, as long as you prepare yourself, home buying can be a painless experience.
So what do you need to consider?
The first things that you’ll need to prepare are your budget along with your wish list. Home budgeting will help you capture an idea of what is realistic. Keep in mind that you may not be able to get everything on your wish list for what you can afford. That’s perfectly normal; remember this is your first home.
The average budget for first-time home buyers is a staggering $316,000. That’s not exactly small change, so you’re going to need to know the basics before you dive headfirst into a major purchase.
Are you ready for this?
Determining your budget can be difficult. It’s important to understand where all your money is going on a monthly basis and how you can potentially curb your spending to save towards a bigger down payment to secure a larger mortgage loan. You want a realistic picture of what you’ll be able to afford so it’s important to take every last dollar into consideration. Yes, that does include your daily stop at the coffee shop.
Lucky for you, CMHC has a few handy calculators that help with budget planning.
Purchasing a home is likely the single largest purchase you will make in your life. You’re going to want to be prepared for all of the tough decisions and home budgeting that comes along with it. You can never be over-prepared for such a big decision.
How much money do you need to put down?
A down payment is the amount you’re able to put towards a house up front. The larger it is, the smaller loan you’ll need, and the lower interest rate you’ll receive. Ideally, you should be prepared to put 20% of the purchase price of the home down. If you can’t save that much, don’t worry, you can still get a mortgage.
The minimum amount for a down payment you’ll need is 5% of the purchase price of the home. The kicker is that with any down payment under 20%, you’ll only be able to qualify for a high-ratio mortgage. What this means is because your loan value is more than 80% of the purchase price of your home, mortgage lenders will require you to get mortgage loan insurance.
Mortgage insurance helps the lender protect themselves in the event that you default on your mortgage payments. If you do default on a payment, your insurance will cover the cost of your mortgage. Insurance varies depending on the size of your down payment and typically ranges from 0.5% to 3%.
What can you afford?
As a rule, your monthly housing costs should run you no more than 32% of your gross household monthly income. This includes mortgage payments, mortgage insurance (if applicable), property taxes, and utility expenses. When coupling this with your total monthly debt load, which includes credit card payments, personal loans, car loans, or other debts, you should not be spending more than 40% of your gross household monthly income.
Once you have determined your budget, you should meet with a lender for pre-qualification. During this process, they will review your overall financial picture and provide you with a realistic mortgage amount you can expect to receive. At this point, you can start your search. Keep in mind, however, that a pre-qualification should not be considered guaranteed funds.
You should aim to secure a pre-approval with your lender, as it’s based on a more intense exploration of your credit score, debts, and future earning power. With this amount, you’re able to confidently explore your options. Acquiring pre-approval also instills confidence in the seller that you’re serious about making an offer and there will be no hiccups with funding should they select you as the buyer.
What are the closing costs and other costs associated with buying a home?
Appraisal fees will often come into play when a mortgage lender wants to see an appraisal before approving your loan. An appraisal is an evaluation of the value of the home based on market conditions, sales comparisons, and the characteristics of the home itself. These fees will cost between $200 and $600.
Land transfer taxes are the fees you pay when you buy land. In most provinces, the tax is calculated as a percentage of the property value. In Ontario, Prince Edward Island, and British Columbia, first-time homebuyers are offered rebates on land transfer taxes. You can expect to pay 0% to 4% of the purchase price in land transfer taxes.
Legal fees will cover the cost of a lawyer who will handle counsel through difficult decisions, the transfer of funds, and you may also require their assistance when drafting your offer. These fees will run you anywhere between $500 and $2,500.
Home inspection fees cover the cost of a home inspection that may end up saving you big bucks. Home inspections are not mandatory but are very important. Inspectors will check for water damage, warn you about future expensive repairs, and check the foundation of the home. This inspection will give you peace of mind and will cost between $300 and $500.
Title insurance is what protects you against errors in public surveys, encroachment issues with neighbours, and title fraud. It costs between $500 and $1,200.
Prepaid utility bills or property taxes will need to be reimbursed to the seller. You should bank on spending $400-$2,000 for these expenses.
Moving costs involve any costs incurred to move you and your belongings from point A to point B. You may require movers, you may be able to rent a truck, or you may need to stay in a hotel if you’re moving across the country. You should budget anywhere from $250-$5,000 depending on your situation.
For more tips on purchasing your first home, check out our complete Home Buyers Guide, which features step-by-step guidance on the home buying process.