The 4 Steps to Prepare Your Finances for Purchasing a Home

I recently wrote a blog post about the three things to consider when deciding between renting and buying a home (click here to read). The last part of that post dealt with the financial aspect of buying a home. I have received a couple of questions about this topic, so I have decided to follow up with a post that will go a little more in depth about what you need to know about the costs of home ownership.

The actual cost of any of these items will vary depending on the property you select but I think this will provide you will some things to consider when you are looking at buying your first home.

Step 1 – Know you finances

You need to make a plan in the form of a budget.  You can do this on your own or you can talk to your financial advisor, but basically what you need to do is track your current spending, so that you know where your money is going. 

This can be a tedious task to track your spending, but it is a very important part of the process. Once you know where your money is going you can make a plan to maximize your savings for your down payment.

Step 2 – Know what you can afford

Here is where professional help will be the best bet, because when dealing with debt service ratios it’s best to talk to the pros.  Contact a mortgage professional and they can complete the pre-approval process for a mortgage.  This will allow you to know how much money the bank will allow you to borrow to buy a home.

One thing that is important to remember here is that just because the bank will lend you a certain amount of money this does not mean you need to borrow that amount of money, or that you need to search for a home in the price range.  You need to be comfortable with the amount of debt you will be assuming and the payments that will be required to own a home.

Step 3 – Know the cost of buying a home

Now that you have established the price of a home that you would like to buy you can plan for all the costs associated with buying a home. The obvious and largest item here is the down payment, which is at minimum 5% of the purchase price, but there are several other costs associated with buying a home.

It is again a good idea to get some help here and contact your real estate professional to help with estimating theses costs. Some of the costs, over and above the down payment include:

• Land Transfer Tax
• Legal Fees
• Title Insurance
• Home Inspection
• Appraisal
• Insurance
• Property Taxes and Utilities pre-paid by the seller
• Utility Deposits
• Moving Costs
• Cost of Renovations

Many home owners are shocked when they discover how many other costs there are associated with buying a home beyond the down payment. Failure to plan for these costs can add unnecessary stress to the process of buying your first home.

Another consideration in this step is that some of the costs associated with a home purchase will be required before the closing of the transaction. For example, at the time your offer is accepted you will be required to make a deposit, which will be applied to the purchase price at the closing of the transaction. This amount can vary based on the price of the property but most first-time home buyers should budget at minimum to have $5,000 available as a deposit.

Once you have estimated the amount of money you will need to buy a home you can revisit your plan in step 1 and determine where you are and how you will get to where you want to be.

Step 4 – The cost of home ownership

You have the money all saved to make the purchase one last thing to consider is the ongoing cost of home ownership. Since the cost to own is generally higher then what you are paying in rent you should have an idea of what your monthly costs will be to own a home and make sure you plan your finances accordingly. Here is a list of costs associated with home ownership:

• Mortgage payment
• Property taxes
• Utilities
• Insurance
• Maintenance and Repairs
• Saving for capital improvements

For this step you should again go back to Step 1 and use the budget you prepared as a starting point then replace your rent and associated expenses with estimates for the new expenses that you will incur when you own your home. This will give you and idea of what your monthly budget should look like when you own your home.

This is an overview of the financial considerations that should go into the decision when you are thinking of buying a home. This overview is a great starting point but if you would like to discuss any of these items in more detail I would love to be of assistance.  Buying a home is a huge financial commitment and I am here to help you navigate the process.