Buying Your First Home: Are You Ready Financially?

If you’re thinking about buying a home, you’ve probably asked yourself, “How much can I afford?” But that’s just the tip of the iceberg. The real question of affordability isn’t just about the listing price; it’s a mix of your financial picture, from down payments and mortgage rates to property taxes and insurance. You’d also need to consider your current debts and lifestyle. So, before diving in, take a step back and really assess your budget. A little homework now could save you from much stress down the line. 

Understanding Gross Debt Service (GDS) and Total Debt Service (TDS)

GDS and TDS ratios offer a snapshot of your financial health, giving lenders an idea of your ability to manage mortgage payments and other debts. GDS calculates your housing-related costs as a percentage of your gross monthly income, including principal, interest, taxes, and heat (PITH). At the same time, TDS adds in other debts like car loans and credit card payments to provide a more comprehensive view of your financial commitments. Keeping your GDS under 35 per cent and your TDS under 42 per cent of your gross income is generally recommended. These ratios are crucial for mortgage pre-approval and can help you house-hunt within a realistic budget. 

The Canada Mortgage and Housing Corporation (CMHC) offers web-based tools for calculating GDS and TDS and a Mortgage Calculator for various down payments, house prices, and interest rates. Meeting with a potential lender to discuss these ratios before you start looking for a home is always advisable.  

Assessing Homeownership Readiness 

While GDS and TDS ratios are conventional yardsticks for assessing your mortgage affordability, they don’t provide a complete picture of your financial readiness. Here are additional factors and insights to consider, giving you a more comprehensive understanding of your finances before taking on such a significant investment. 

Credit Score and Credit History 

Your credit score is a key factor that lenders consider when you’re looking to buy a house. A credit score of 700 or above is generally regarded as good and can significantly boost your mortgage approval chances while potentially securing more favourable interest rates.  

If your score is lacking, you can take steps to improve it. Consistently pay your bills on time. You can also lower your credit utilization ratio—the amount of credit you’re using compared to your credit limit—by either paying down existing debt or increasing your credit limits. Don’t forget to regularly review your credit reports for errors or discrepancies, as correcting these can have an immediate positive effect. Proactively addressing such issues can improve your credit score and help you gain savings over the life of your mortgage. 

Liquid Assets and Reserves

Lenders take a holistic approach to your financial situation, going beyond the basic metrics of income and debt. They also examine your liquid assets, such as savings accounts and investment vehicles like stocks and bonds, to gauge your financial resilience and flexibility. 

Keep an emergency fund at hand. Financial experts commonly suggest that this fund should cover a minimum of 3-6 months’ living expenses. 

Employment Stability 

Lenders are more comfortable with borrowers who’ve stayed in the same job for a while because it suggests you’ll have a reliable income for mortgage payments. If you’re thinking about switching jobs, you might want to get your mortgage sorted first to avoid any potential hiccups. Give your employer a heads-up that they might be contacted to confirm your job, and stress how important a quick response could be. If you have multiple sources of income, such as freelance work or a side business, provide documentation to prove their stability. The more stable income you can show, the better. 

Down Payment Size 

The size of your down payment speaks volumes about your financial discipline and readiness. The larger the down payment, the less you’ll need to borrow, which could make your mortgage more affordable in the long run. It also means you’ll need a smaller mortgage and could get a better interest rate. The First-Time Home Buyers’ (FTHB) Incentive is a federal program that can assist you by offering 5 per cent or 10 per cent of the home’s purchase price toward a down payment, essentially acting as a shared equity mortgage. Note that the amount you borrow must be repaid when you sell the home or after 25 years, whichever comes first. 

Lifestyle and Future Plans 

Your financial readiness doesn’t exist in a vacuum; it’s closely tied to your life plans. Are you planning on having children, going back to school, or making a career change? All of these life events impact your financial situation. Try to forecast your future expenses as accurately as possible and factor them into your budget before making a home-buying decision. 

 Enhance your home search with RE/MAX. From understanding local by-laws to optimizing your investment with tailored market insights, our agents are committed to meeting your needs. Contact us today and schedule a consultation.