Can You Afford Your House?
Before you start looking at Calgary homes for sale, practicality asks you to conduct preliminary number crunching to see how much you can afford on a new house.
Of course, you don’t head straight for a real estate agent or mortgage broker headfirst. Even if you do not have any formal training in real estate or in finance, it falls on you to conduct at least a bit of rudimentary research on the outlook of the housing industry as well as on the entire process of buying Calgary real estate.
Fortunately, tons of websites provide home affordability calculators, so coming up with a fairly reliable ballpark figure shouldn’t be too difficult. That said, you should still do your homework and figure out how these calculators work, as there may be times when you may have to tweak the formulae to fit your needs.
To start, home-buying calculators compute your potential gross debt service or front-end ratio. Don’t be intimidated by this jargon. All it means is the percentage of your gross monthly income (that is, before taxes) that goes straight into your monthly mortgage payments. This figure should be 32% or less. From another perspective, you can spend X dollars on your monthly mortgage payments, where X is 32% of your gross annual salary divided by twelve months.
The other ratio commonly used in the industry is your total debt service or back-end ratio. Your total debt service, which is the percentage of your gross income that goes into paying all your debt (including mortgage, student loans, car loans, and others), should be 40% or less. Conversely, this means that on a monthly basis, you should be spending only 40% of your annual salary divided by twelve months for all your debt obligations.
Sounds simple? Maybe. But don’t rely too much on these percentages. Remember that they function merely as ballpark figures. You still need to consider various factors, including a down payment and other initial expenses. It goes without saying that buying Calgary homes for sale costs more than just the house’s listed price. Consider appraisal fees, legal fees, moving expenses, and a whole range of other costs.
And then, there’s this scary prospect we call the future. Much of the risk involved with buying a house draws from the uncertainty of the future. Will the economy crash? Will housing prices plummet? Will you lose your job? You can’t hold yourself accountable for some of these factors, but you should at least give them some thought when buying Calgary real estate. For starters, make sure the assumptions you used in your preliminary calculations will hold true—particularly, how confident are you that you can maintain your income over the mortgage period? Next, will you be incurring any major expenses in the foreseeable future? If a big wedding or a child comes into the picture, the entire equation shifts. Make sure your finances will survive this shock.
If you’ve decided that you are ready to look at Calgary homes for sale, your next steps are to check your credit report and get pre-approved for a loan. Otherwise, see a credit counsellor, pay off some more loans, or save some more for your down payment. You may find some homeownership programs in your area, and mortgage loan insurance may serve as a safety net, but in general, you will want to be honest and realistic when making your decision. Conservative assumptions may put a damper on your breadth of choices, but it’s always better to be safe than sorry.