The decision to purchase a house is not one that can be taken lightly. Though homeownership is a rewarding opportunity and a lifelong aspiration for many, it is not suited for everyone. Unless you win the lottery, the average person does not have the funds available to purchase a house outright without the aid of a mortgage. Generally, qualifying for a mortgage is part of the battle. Before you begin meeting with a mortgage advisor, take some time to assess your personal financial situation and see if you are financially prepared to become a homeowner.
Evaluate Your Current Expenses
Start with your current expenses. Make a chart detailing every expense and the associated monthly cost. Remember you are being honest with yourself, so do not be tempted to exclude any bills to make yourself look better on paper. The more accurate you are with the expenses chart, the better understanding you will have of your suitability for homeownership.
Include all household bills such as rent, hydro, gas, water, internet, car/tenant/health insurance, child care, car/public transit costs, cell phone, groceries, clothing, entertainment, and any savings contributions you regularly make. If you have inconsistent spending habits, remember it is better to overestimate rather than underestimate your expenses.
It’s difficult to include all money you spend, but try to generalize with categories that are a bit more infrequent and difficult to track. For instance make a category in the expenses chart for gifts. Although you do not purchase gifts every day or even every week, there still needs to be a general allocation of money towards gifts because it is inevitable at some point. Putting an amount of $25 per month is a safe bet and will cover off possible overspending at Christmas time.
Evaluate Your Debt Load
Once you have a complete picture of what your expenses are, make another chart for your debt repayments. This is an important part of assessing if you are financially prepared to undertake a mortgage and will certainly be heavily scrutinized by financial lenders. In the debt repayment chart be sure to include any existing property loans, car loans, lines of credit, credit cards, student loans, and any personal loans you may have. Figure out what your monthly owings are in debt repayment. This number may startle you when you see everything combined into one amount, so be prepared!
If, in your estimation, your debt load is too large to consider buying a home right now, there is still hope. You may look into debt consolidation to simplify and possibly reduce your repayment requirements. You should also tackle debt in order of interest rate. Debts with high interest rates, such as credit card balances, should be paid off first.
Evaluate Your Aspirations
Whether or not you can afford to buy a home will, of course, depend on what type of property you are interested in buying. Regardless of your income, expenses, and debt obligation, there is a difference between buying a $200,000 apartment in Britannia, a $300,000 townhome in Bridlewood, and a $3 million estate in Manotick. In addition to the sale price, property taxes, homeowner’s insurance, and maintenance expenses will vary wildly based on the type and size of property. Calculate how much you can currently afford versus where you need to be to afford the home you desire. From there, you can come up with a budget that will help you reach your objective in due time.
Having your financial situation laid out for you in chart form is an easy way to assess if you are financially prepared to purchase a home. Knowing the amount of your total debts and expenses may feel like an overwhelming task, however the knowledge you gain from this exercise will be invaluable when it comes to obtaining a mortgage. When you are ready to consider applying for a mortgage, book an appointment and discuss your eligibility with a mortgage advisor.