Do you have what it takes to own your own home? If you’re a renter you’re probably already pretty good at doing the dishes, taking out the trash, keeping the grass cut, and paying your rent on time. But what else does it take to become a fully fledged home owner? What else does it cost?
The obvious answer is “a mortgage”. But there are several other expenses that go into homeownership. Putting your home owner skills to the test means finding out, to the nearest dollar, how much it would cost you to own a home and then testing your ability to live within that budget before you actually go out and buy a home. Lets say your current circumstances cost $3,000 each month but homeownership would cost you $4,000. In order to simulate the financial homeowner experience you’ll put aside an additional $1,000 every month to see what kind of impact it might have on you.
The first step in putting your skills to the test is calculating your income. Whether you have one income or several, work as t4 employee, by contract for for commission, or if you’re planning on buying a house alone or with a partner (or two), make sure you account for every dollar coming in. Once you have your total put it into the “income” side of a balance sheet.
The key to this step is to be honest with yourself. Don’t overestimate what you make or what you THINK you’ll be making when you buy a house. Use real numbers. The worst thing you can do here is assume you have more money than you do, start looking for a house, and then fail to qualify for a mortgage.
The next step in putting your homeowner skills to the test is a little more time consuming. Calculating your expenses. Here’s a list to get you started.
-utilities (power, water, heat, sewer, garbage pick up, etc.)
-other housing costs (repairs, renovations, furniture, maintenance, etc.)
-consumer debt (credit card, line of credit, student loan, vehicle loan, etc.)
-consumer spending (gas, groceries, internet, cell phone, insurance, savings, and all other spending)
This list isn’t the be all end all. There are all sorts of other expenses you might have to think about in your personal circumstances. Whatever they are, make sure you account for them.
Don’t just guess how much your mortgage will be based on what your friends and family are paying. Get a mortgage pre-approval. This application will tell you just how much lenders may qualify you for and how much your payments are likely to be. It’ll also tell you how much how you’re qualified to buy. Keep in mind, however, that you don’t have to use the maximum amount offered to you. Consider your income and the rest of your expenses, pick a payment that fits within your budget and add it to the “expenses” side of your balance sheet..
Home insurance, HOA fees, property taxes, and utilities
What expenses related to your home do you pay for? Home insurance, electricity, and heat utilities commonly paid for by renters. However, property owners have additional expenses they have to take care of like HOA fees and property taxes. Larger homes also have larger utility bills.
In order to put your skills to the test you’ll have to find out how much these kinds of expenses will cost. You can do this by talking to people you know who live in homes similar to what you’d like to buy. Additionally, you can go to open houses and ask what the current tenants have been paying for expenses related to the property in the last year.
With these numbers in hand you can add them to your balance sheet.
Other housing costs
The number one regret up to 71% of millennial homeowners have is that they didn’t know how much owning a house was really going to cost them. Unexpected costs like repairs, renovation, emergencies, and maintenance caught them off guard. Experts suggest that homeonwers plan to spend 1% of the cost of their home every year on upkeep. If your house cost you $400,000 you should budget $4,000 every year for maintenance on your home. If you don’t spend it one year, hold on to it for the future. Some repairs cost more than other.
If you’ve already done a mortgage pre-approval you’ll know how approximately how much the purchase price will be on your home. Take 1% and add it to your balance sheet.
If you’re like most Canadians you’ll start homeownership with pre-existing debt. Whether it’s a credit car, student loan, vehicle loan or line of credit, tally up how much you spend on this debt and add it to your balance sheet.
A word on consumer debt. Before you buy a home it’s a really good idea to get rid of as much debt as possible. Not only will it make your financial life easier, but it will also increase your chances of getting the mortgage you want. The less debt you have the better your debt-to-income ratio.
This category of expenses covers everything else you spend your money on. Gas, groceries, new clothes, a trip to the dentist, health insurance and vehicle insurance, your cell phone, internet, and so on. Some of these expenses are probably the same every month (like your Netflix subscription), but others fluctuate. Spend three or four months tracking every dollar that goes out of your pocket and get an accurate idea how much consumer spending you do every month. Add this number to your balance sheet.
The Balance Sheet
Once you have all your income and expenses laid out on paper you’ll be able to see right away whether or not you’ll be living within your means as a homeowner, and by how much. If your expenses will be more than you’re comfortable with (or even more than your income) now is the time to move some things around.
The first obvious solution is to increase your income. After that you’ll need to find ways to decrease your expenses. You can do this by lowering your mortgage payment by buying a smaller home. Going out to eat less often. Making smaller contributions to savings or retirement. Choosing a cheaper cell phone plan. Cancelling your Netflix account (gasp!) Trading in your vehicle for one with a smaller payment, or no payment at all.
If homeownership is the goal, find a way to make the numbers work in your favour.
Put your skills to the test
Once your balance sheet is in order it’s time to put it to the test. The sheet is hypothetical, so if in reality you’ll be spending $3,000 every month and homeownership will cost you $4,000 you’ll have to put aside the extra $1,000 each month to simulate the experience of being a home owner. Put your skills to the test for six months to a year. You’ll find out within a few months if you’re ready for the real thing.
If it turns out you need to to fine tune a few things or wait and try again later, you’ll be no worse off. In fact, you’ll be grateful you tried it out first before buying a house for real. Buyers remorse is NOT what you want to feel after becoming a home owner.
If after a few months of putting your skills to the test you discover that you can live within this new budget quite comfortably then you’re ready to go house hunting! Give us a call today to get started!