While spring is often the time that most people look for houses with the intent to buy, fall and winter are the best time to plan a purchase and determine if you are financially fit to be a homeowner.
With interest rates remaining low, home prices in Canada have been rising consistently since 2009. As a result, buying property is becoming more difficult for first timers, and so they must make good purchasing decisions and be confident that they can handle the financial obligations and risks that come with home ownership.
Homeowners are Real Estate Investors
People looking to buy their first home need to realize that the act of purchasing property makes them a real estate investor.
As real estate investors, they need to develop skills that will allow them to make good investment decisions. For example, investors need to understand what drives real estate prices so they can buy property in an area where the demand for property will increase over time, causing their home's value to appreciate in the long run.
It's important to remember that land appreciates in value, while the physical structure of a house depreciates. This alone should caution buyers against purchasing the largest and most expensive house in an area. It's also critical to learn which maintenance and remodeling projects have the greatest chance of preserving real estate values as the building wears out or becomes functionally obsolete.
It is also important to understand the supply side of real estate investing. Be careful that potential real estate development in your area will not negatively affect property values!
The Financial Obligations of Home Ownership
New homeowners also need to be sure that they are financially fit enough to handle the myriad of financial issues and expenses that often come with home ownership. For most people, the equity in their homes will represent the largest single asset in their investment portfolio. Not understanding one's financial ability to maintain payments on their home can result in a significant financial and investment risk.
Before undertaking any financial obligations, you should create a specific and detailed budget that spells out your periodic financial obligations and the amount that you are willing to spend on other items such as food, clothing, entertainment, and so on.
A budget will help you determine the amount of money you will have to allocate each month for both the financial obligations of your home and long term savings. By estimating the costs of major expenses such as your mortgage, property taxes, insurance and maintenance costs, you can roughly determine the purchase price you can afford.
You must be disciplined about determining the difference between the house you need from the house you want so that you don't become house poor and impair your ability to save for the future.
Review your Credit Status
Determining your financial ability to purchase and maintain your new home is about more than just ensuring you have enough money to cover the equity contribution and your household expenses.
Since your mortgage will likely represent your largest household expense, sustaining a high credit rating will allow you to take advantage of the best financing options available and ultimately save you money. Good credit also means you're equipped to face any short term financial emergencies. It's important to take steps to understand and strengthen your credit well in advance of purchasing property or seeking financing.
Conduct a Financial Trial Run
Another way to determine your financial ability to be a homeowner and to avoid becoming house poor is to do a trial run with your new budget for 2-3 months.
Make sure that you determine the exact amount of disposable income you will have after you've accounted for all home-related expenses, including things like the cost of continued maintenance, landscaping, utilities, and commuting costs.
If you find yourself struggling financially and realize that you don't have enough money left over to put away as savings each month, you will need to find a way to reduce your expenses, possibly by purchasing a smaller and less expensive home.
It may also be wise to defer home ownership until you feel confident about your ability to live comfortably within your required budget. You want to avoid discovering that you can't live within your means after spending the equity, upfront fees and transaction expenses required to buy your new home!
Insure Against the Unexpected
One way that many people find themselves in financial trouble and unable to cover their mortgage payments (and other obligations), is by neglecting to insure against unexpected expenses that can derail their financial plan. There are many situations that can cause significant financial hardship, whether it is the loss of a job, health issues, investment or business losses, or natural disasters.
Sometimes it can take months or years to recuperate from financial hardship, and this can ruin even the best credit rating. The most effective way to ensure you're able to continue making mortgage payments during troubling times is to create an emergency fund. By doing so, you will ensure that all household expenses listed in the budget you have created are covered for 6-12 months. This means that while you are trying to put your financial life back together, you can get some comfort in knowing that you still have a roof over your head.