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You’ve decided that this is the year you buy a home, but have you ever thought about how to prepare to be a homeowner? This will likely be the largest purchase of your life, so you won’t want to rush things. Owning a home is a serious decision, so you want to get it right.
Okay, so there’s no set formula when it comes to buying a home, but there are a few things you consider before taking the plunge. If you get your finances in order and research your options; you’ll hopefully avoid making costly mistakes when it comes time to close. Here’s how you should get started when you’re ready to buy a home
Pay down your debt
First off, pay down any high-interest debt. If you’re carrying a balance on your credit cards that has a 19.99%+ interest rate, you really shouldn’t even think about buying a home. Those interest payments are insanely high and should always be paid down first.
Now think about your other consumer debt. It’s okay if you still have student loans and say a car loan, but what’s the outstanding balance? If you owe $60,000+, I don’t think it’s a very good idea to think about buying a home (unless you have a high income). You’re much better off reducing your debt first.
Of course, lowering your debt also helps you with the home buying process. Having less debt means you’ll have a lower debt-to-income ratio, which in turn would mean you can afford more home. It might even help you secure a lower interest rate
Start saving!
In Canada, you need a minimum of 5% saved of the purchase price to qualify for a mortgage. If you have 20% saved, you’ll avoid CMHC insurance, but I understand that saving that much can be difficult for many people.
If you want to prepare to be a homeowner, you’ll want to save as much money as possible. The easiest way to start saving more is to cut your expenses. Before I bought my home, I had unnecessary expenses such as cable and excessive eating out. I cut those and diverted that money towards savings.
One trick to make saving easier is to make things automatic. I set up automatic withdrawals for all my savings right when I get paid. Since those transfer happen right away, I never miss the money. I’m paying myself first!
Do your research!
Many people rush into the home buying process without even thinking about it. Again, this is going to the largest purchase of your life, so why rush?
Take the time to figure out how much it costs to be a homeowner. You’ll want to create a budget with all your anticipated expenses. Don’t forget to factor in your retirement savings, vacations, and the cost of having kids. Not sure how much you can afford? Use Rob Carrick’s Real Life Ratio as a reference.
You’ll also want to research how mortgages work. A mortgage broker (more on them below) will be able to walk you through the different options, but you’ll want to have a basic understanding of them first. Choosing the right mortgage could save you thousands of dollars; to learn more, check out my guide on the mortgage basics.
Assemble your real estate team
I talked about assembling your real estate team in an older post, but let’s go over it again. Having the right people work with / for you is paramount when buying a home.
First, you’ll want a mortgage broker. In most cases, they work with multiple lenders, so they’ll be able to get you the best rates. As mentioned, they’ll also be able to explain all the different details of your mortgage and help you choose the right one. Remember, the cheapest rate mortgage doesn’t automatically mean it’s the best option.
Obviously, you’ll want a realtor, but don’t just pick a random person. Don’t use your co-worker who’s a part-time realtor, or that family friend who only does deals in real estate on the other side of the city. You’ll want to work with someone who knows the neighbourhoods you’re interested in.
Finally, there’s your real estate lawyer. You need one to close your deal, but don’t underestimate their value. They’ll look over all the paperwork to make sure everything is good and then deal with all the closing procedures.
Final word
Again there’s no set way or formula when it comes to how to prepare to be a homeowner. The best thing you can do is just prepare yourself and not rush anything.
FAQs
6 ways to save money for a house
- Build your budget. Creating a budget is one of the most important steps when setting a financial goal. ...
- Downsize your expenses. ...
- Pay off debt. ...
- Increase the income from your main job. ...
- Look for other ways to earn. ...
- Plan for the extras.
First, do a quick calculation to get a rough estimate of how much you can afford based on your income alone. Most financial advisors recommend spending no more than 25% to 28% of your monthly income on housing costs. Add up your total household income and multiply it by . 28.
How much money should I have at home? ›
In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses.
What income would you need to afford the house? ›
Most financial advisors agree that people should spend no more than 28 percent of their gross monthly income on housing expenses, and no more than 36 percent on total debt. The 28/36 percent rule is a tried-and-true home affordability rule of thumb that establishes a baseline for what you can afford to pay every month.
What is the 28 36 rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
How much income do you need to buy a $200 000 house? ›
Assuming you have enough in savings to cover the down payment, closing costs and cost of regular upkeep, yes, you probably could afford a $200K home on a $50K annual salary. Using our example above, the monthly mortgage payment on a $200K home, including taxes and insurance, would be about $1,300.
How much house for $3,500 a month? ›
A $3,500 per month mortgage in the United States, based on our calculations, will put you in an above-average price range in many cities, or let you at least get a foot in the door in high cost of living areas. That price point is $550,000.
What is the 50 30 20 rule? ›
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
How much house can I afford if I make $36,000 a year? ›
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
Where is the safest place to keep cash at home? ›
Where to safely keep cash at home. Just like any other piece of paper, cash can get lost, wet or burned. Consider buying a fireproof and waterproof safe for your home. It's also useful for storing other valuables in your home such as jewelry and important personal documents.
“Emergency funds should not be held at your home,” Miura added. “They should be stored in a high-yield savings account of your choice.” McCarty framed it more in terms of a ratio: “In terms of amount, don't let your cash exceed 10% of your overall emergency fund and/or $10,000.”
How much cash can you keep at home legally in the US? ›
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
How much house can I get for $1500 a month? ›
If you bring the national average down payment of 6% to closing and have a 7.69% rate on a 30-year fixed mortgage, that's just shy of $1,700 a month in principal and interest. What does $1,500 buy with those same terms? About $225,000 worth of house, give or take.
Can I afford a house making $70,000 a year? ›
Breaking down the math to apply the 28 percent rule, here's how much you can afford in housing payments on your salary: $70,000 per year is about $5,833 per month. 28 percent of $5,833 equals $1,633, so that's the upper limit on how much you should spend on monthly housing costs.
Can I afford a 250k house on 50K salary? ›
You can generally afford a home for between $180,000 and $250,000 (perhaps nearly $300,000) on a $50K salary. But your specific home buying budget will depend on your credit score, debt-to-income ratio, and down payment size.
Can I buy a house if I make 25K a year? ›
The general rule of thumb is to keep your mortgage payment between 25-33% of your total monthly income. Here's what that looks like if you make 25K a year: 25% of your monthly income: About $521 total monthly mortgage payment. 33% of your monthly income: About $688 total monthly mortgage payment.
How much house can I afford if I make $70,000 a year? ›
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
How much money should I save before buying a house? ›
A good number to shoot for when saving for a house is 25% of the sale price to cover your down payment, closing costs and moving expenses. (This amount is separate from saving up 3–6 months of your typical living expenses in a fully-funded emergency fund—which I recommend you do first, before saving up for a home.)
Will Gen Z be able to afford houses? ›
But because Gen Z-ers earn more, the share of income required (27 percent) is roughly equal for both generations. Who's Had a Harder Time Buying a Home: You or Your Parents? Owning a home would cost Gen Z-ers about $165,000 during the eight-year period studied, while the millennial cost is greater, about $172,000.
