Buying your first home is exciting and enticing. But getting your finances in order is an important first step.
For a full list of what to prepare:
Track Your Household Budget
Tracking your income and what you’re spending each month will help you determine if you can afford to buy a home, and how much home you can afford. Your budget should include categories for total monthly income minus your household expenses (like rent, energy usage, groceries, phone and internet) and monthly debts (including leases, loans and credit cards), not to mention an estimation of additional daily and miscellaneous expenses (like meals out and entertainment).
If you don’t already have a budget tracking tool, there are lots of free ones available like the CMHC Household Budget Calculator. An excel worksheet will also do the trick. Whatever tool you use, the important thing is that you have a realistic picture of your total monthly expenses.
Know the Rules of Affordability
How much can you spend on a home? Here are two affordability rules to help you answer that question.
Rule 1 | Gross Debt Service Ratio (GDS)
The GDS ratio is the percentage of your gross monthly income that’s allocated to your total housing costs including mortgage payments, property taxes and heating. Your monthly housing costs shouldn’t be more than 32% of your gross monthly income.
Rule 2 | Total Debt Service Ratio (TDS)
TDS ratio looks at your entire monthly debt load, including your housing costs and all your other debt payments, such as loans or leases, credit card payments and lines of credit payments. Your entire monthly debt load shouldn’t be more than 40% of your gross monthly income.
CMHC has a calculator on their website that make determining your GDS and TDS ratios a snap.
Determine Your Maximum Home Price
The next step is calculating the maximum house price that you can afford. You can easily calculate this number by using our Mortgage Affordability Calculator.
Though you’ll want to confirm the numbers with your lender, it’ll give you a good idea of what you may be looking at in terms of a maximum house price and the monthly mortgage payment. The calculator also allows you to compare up to three different scenarios so that you can determine which mortgage product is right for you. After you’ve completed your calculations, you can print, save and share your results.
Account for Insurance Premiums & Down Payments
You’ll notice in our affordability calculator that mortgage insurance is referenced. Mortgage loan insurance helps protect lenders against mortgage default, and provides an opportunity for consumers to purchase homes with a minimum down payment starting at 5% on the first $500,000.
You’ll find a chart on the CMHC website here that outlines what you can expect in terms of the CMHC Mortgage Loan Insurance premium. You’ll notice that the higher the percentage of the total house price/value that you borrow (over $500,000), the higher percentage you will pay in insurance premiums.
Now that you’ve examined your finances, is home ownership looking like a reality in the near future? If so, you’re ready to meet with a lender and get pre-approved for a mortgage.
Take a look at our full checklist to see what other next steps you can expect when buying your first home.