At this point you have established the will to become homeowners, now it is time to determine if you have the capacity. No, not mental capacity, something much more important: financial capacity. Determining financial capacity for homeownership involves both short term financial holdings and long-term capital projections; you don’t want to simply get into a house, you want to be able to sustain homeownership for a long time. It’s a marathon not a sprint. And like any runner knows, it’s what you do to prepare for the race that determines how well you will perform during it. Here are a few things to consider when evaluating both whether you are financially ready to purchase a home at all and what will maximally be able to afford:
- Net Worth: take your total assets (cash savings or items convertible into cash), subtract your liabilities (debts or other existing financial obligations) and the difference is your net worth. Net worth is a fair determination of your financial position in relation to buying a home. It will typically give an accurate indication of how much you will be able to spend on a home and how much of a down payment you will be able to afford.
- Income, Savings and Expenses: while keeping your net worth in mind, you can also test your financial aptitude for sustaining homeownership by calculating your current monthly income and expenses and projecting what they will be in the foreseeable future. It is imperative that you determine your gross monthly income because your housing costs should not exceed 32% of that income. In fact your total monthly debt load (housing costs and all existing debts owing) should not exceed 40% of your monthly income. All of these factors will be weighed by your lender to determine the maximum home price you can afford.
Actual Costs
There is not much to say by way of introduction here; what follows are the terms of engagement associated with your home purchase (figures will vary depending on a host of variables such as location and specifications of the property):
Necessary Fees:
- Deposit
- Down payment
- Property Insurance
- Legal Fees
Possible Fees:
- Mortgage Loan Insurance
- Appraisal Fee
- Home Inspection Fee
- Land Registration Fee
- Title Insurance
- Prepaid Property Taxes and/or Utility Bills
- Certificate of Location Cost
