Buying a home is costly, but ultimately worth it! Here are the 10 major costs associated with home ownership:
Purchase costs
The following 5 are the major costs to buying a home. The largest cost, the downpayment, can be as little as 5%, but conventional mortgages have a downpayment of 20% or more. For an example, lets look at the cost to buy a $600,000 home with a 20% downpayment. (We are going to assume they took out a 25-year mortgage at a rate of 2.88%.)
- The down-payment: $120,000
- Legal fees: $1,600
- Small fees like Appraisals / Home Inspections / Status Certificates etc: $400 total
- And, Land Transfer Taxes: $8,475
- Total cost = $130,475
Monthly Costs
- Mortgage: $2,242
- Utilities: $300
- Maintenance: $300
- Insurance: $100
- And, Property Taxes: $416.67
- Total monthly cost= $3,158
How much can you afford monthly?
The general consensus with lenders and mortgage professionals, is that your monthly housing costs should not exceed 36% of your gross monthly income. If your annual household income is $100,000 (or $8,333 monthly), then your maximum monthly housing costs should not exceed ($8,333 x .36% = $3,000). In reality, with excellent credit you could qualify for more, but then risk being mortgage poor. A mortgage broker or bank professional can help you decide on a monthly housing budget.
If you want to know more about how lenders qualify clients, read on…
There are two ways lenders qualify clients. They take into consideration your Gross Debt Service (GDS) ratio and your Total Debt Service(TDS) ratio. Your GDS ratio is based on your monthly housing expenses; your monthly housing expenses should not exceed 30-35% of your gross family income. The second calculation lenders use, TDS, looks at your monthly housing expenses plus other monthly debts. TDS takes into consideration car payments, personal loans, and credit card debt. Your total monthly housing and loan payments, TDS, should not exceed 40% of your gross family income.
For example (TDS), John and Sarah have a combined family income of $120,000 (or $10,000 monthly). TDS states no more than 40% of their monthly costs can go to housing and other fixed debts. (10,000 X 40% = $4,000). They have a car loan of $200 and student loans of $300 monthly. Therefore, their maximum monthly housing costs are $3,500.
For example (GDS), John and Sarah’s GDS is (10,000 x .32% = $3,200). Therefore, their maximum monthly housing cost should not exceed $3,200 based on this calculation.
A lender will use a combination of the two of these ratios and take into consideration your credit to approve you for a mortgage.
Owning a home isn’t cheap, but leveraging your money to make an investment in a home makes financial sense in the long-term. For more info on buying download our buyer’s guide.
