Buying a home is one of the most exciting things that will happen in your life. It's also one of the most expensive purchases you'll ever make. Before you drop hundreds of thousands of dollars to become a homeowner, make these money moves so you're in a better financial position.
Get your credit score over 680
This rule could potentially affect anyone who has a down payment of less than 20%. The good news is that there are
- Lowering your credit utilization ratio
- Avoid applying for new types of credit
- Use different types of credit
- Pay your bills on time
- Settle any delinquent bills
It's always in your best interest to have a good credit score, so strive for more than 680. Once you get in your credit score into the very good range (735+), you'll likely get better rates when it comes to loans including your mortgage.
Keeping your debt to a minimum is always advised since you want to keep your finances in order, but this is especially important when it comes to buying a home. The amount of debt you have will directly affect how much home you can afford.
Most mortgage lenders don't want you to have a total debt service (TDS) of more than 44%. What that means is all of your housing expenses, plus any outstanding debt, can't exceed 44% of your income before tax. If you're getting CMHC insurance, your TDS needs to be 42% or lower.
Let's say your combined monthly income is $12,000. Your TDS will need to be less than $5,280 a month with most lenders or $5,040 if you need CMHC insurance. If you want to be able to afford more, you need to reduce the amount of debt you have.
At first glance, having a TDS of less than 44% will seem easy, but keep in mind that calculation is based on before tax dollars, whereas you get paid with after tax dollars. If you don’t prepare yourself, you could end up in a cash crunch.
Get pre-approved for a mortgage
Remember, lenders calculate how much you can afford based on how much of a down payment you have and your TDS. What they don't factor in are other expenses and saving goals that you may have such as vacations, retirement savings, your child's
Speaking of mortgages,
Make a new budget
For many people, the additional expenses that come with owning a home can be shocking. There will be things you'll be spending money on that you've never had to pay before, but that's the price you pay when becoming a homeowner.
To ensure that you don't end up house-poor,
- Your mortgage
- Condo maintenance fees
- Property taxes
- Home insurance
- Life insurance
- Home maintenance fees
Those are things that are related to your home. As mentioned, you'll also want to factor in any other expenses or saving goals you may have. There’s also the one-time fees that you’ll need to pay such as closing costs, moving fees and new furniture.
Becoming a homeowner is an important milestone in your life, but preparing yourself begins way before you get your keys. By getting your finances in order early, you can ensure that you'll be prepared for all the additional expenses that may come your way.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog
Money We Haveis one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.