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A First Homebuyer's Guide

Owning a home for many people is definitely a dream, but with that dream comes numerous realities that need to be addressed. Many experts suggest looking at a home purchase as a lifestyle investment, not a financial investment. Making mortgage payments indirectly forces you to save but it can take 15 to 30 years to pay off your home before it finally becomes a substantial asset. However, if you can see yourself mowing the lawn on the weekend and doing home repairs, then being a homeowner may be for you.

It is a wise idea to arrange financing before you begin shopping for your first home. Being prequalified by a lender will help you focus on homes you can afford as well as make you more attractive to potential sellers. In addition to qualifying for a mortgage, you will of course, need a down payment. Down payments generally vary from 5 per cent to 20 percent, but down payments greater than 20 per cent will most likely buy you a better rate. Lowering the down payment definitely increases leverage, which is the opportunity to make a profit using borrowed money, but it also significantly increases your monthly payments.

New homeowners are usually quite surprised to find that the down payment is not the only cash requirement when it comes time to purchase that house or condo. Things like closing costs that could include loan origination fees as well as upfront points or prepaid interest, appraisal fees, application fees, title searches, title insurance, surveys, recording fees, attorney's fees and even your first months homeowners insurance fees can all be expected. And we cannot forget to add the previous homeowner adjustments for things such as prepaid heating or property taxes that usually add up to be between 3 per cent and 8 per cent of your purchase price.

To ensure you can afford the monthly payments on your new home, the housing expense ratio works by comparing basic monthly housing costs to the buyer's gross, before tax, monthly income. Basic costs include things like insurance, property taxes and of course, the mortgage payment itself. Your qualifying income will be assessed on your steady cash flow from your salary, any self-employment income, child support or alimony payments and pensions received. On the expenses side, monthly payments on items such as student loans, instalment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. For a typical conventional loan, your housing cost should not exceed 28 per cent of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Buying your first home can definitely be a challenge but it can also be a very rewarding experience.

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