Today’s new home buyers are just not sure whether to buy a home now, or wait until they are in a better financial position. Whatever the reason, it helps to know where you stand with respect to the following priorities before buying a home…
Although the Real Estate market is known for its ups and downs, the current property trend is considered a good ”Buyer’s Market”. Both the For Sale by Owner market and Broker-listed properties are feeling the crunch. Prices are still considered on the low side, but it may not be price alone that dictates the final decision. There are still many potential first-time buyers shying away from taking that last leap of faith and plunging into home ownership. Many of these buyers have been pre-approved, but reconsidered their way of thinking after looking at all the facts involved. These young buyers are trying to avoid the mistakes made by those before them who have overextended their budgets in purchasing homes, and are now considered “house poor.”
So, what is “house poor”? It’s a phrase used to describe home buyers who have spent the maximum amount possible on a home and now find themselves with no funds for recreation, travel, education and in some cases, regular monthly expenses. In effect, the price of owning a home has completely altered the lifestyle and freedom to which they are accustomed.
The price of purchasing a home is a monumental commitment for anyone at any age, but careful planning, saving and commitment must also be considered. There are many unspoken barriers that can directly influence a person’s financial abilities beyond the pre-approval stage when purchasing a home, so let’s start there:
Pre-approval is simply a base to work with. Your financial lender uses your monthly income versus debt ratio. This calculation is the maximum amount of cash your financial institution will lend. Being able to make a monthly payment sounds easy enough, but that’s not the end of the funds required…
Current Home Prices
Current market prices are a direct influence on today’s potential home buyers. Although the mortgage rates themselves are excellent right now, location is a major factor. Having a limited spending allowance may cause prospective buyers to shy away from some of the neighborhoods in which they currently live and work, in search of more affordable properties elsewhere. Unfortunately, for many people buying a home “further out” creates the need for a higher car and gas allowance due to a longer commute. Moreover, changing jobs at this point will almost certainly jeopardize the pre-approved mortgage.
Many banks and financial institutions have historically used “Zero Down” as a mortgage option to entice buyers. For years, homes could be bought with no down payment and 100% financing. However, in today’s market, this possibility has long been erased from the list of financing options. That means every buyer needs to put up a minimum of 5% of the purchase price in order to qualify for an insured mortgage. Those wishing to escape the additional fees of mortgage insurance require a minimum of 20% or more! Combine this with the fact that the length of mortgages has also been reduced from 40 years to 25, causing the amount of monthly payments to increase immensely. Few buyers actually qualify for this amount without funding from RRSP accounts or parental assistance. It is often difficult for potential homeowners to amass such a sum of money on their own, thereby ultimately preventing them from purchasing a home.
Those who have achieved success in saving the funds required or are receiving parental assistance to qualify for a mortgage, now find out that there are even more fees attached to the price of purchasing a home, beyond coming up with the down payment. For many, it is virtually impossible to accumulate extra money for unanticipated closing costs. These first-time buyers may not have taken into account legal fees, property taxes, land transfer tax and other charges that will also be required upon the purchase date. Not to mention the cost of transferring furniture, cleaning, and minor repairs or appliances that will be needed. Those on a tight budget simply cannot afford another financial hit. Those who did not plan ahead for this may have to walk away from the home they wanted, and wait for additional savings to accumulate.
Job security and the amount of money a person earns are directly related to the size of the mortgage a person will qualify for. Being a sole provider for the household is a pretty rare occurrence in today’s economy. Most of the homes sold to first-time buyers have two or more names on a mortgage in order to reach the qualifying level. This brings another issue to the table. Many of these first-time buyers are common law relationships or even college buddies. Unfortunately, signing your name to a massive debt that extents over 25 years may exceed the length of time that a relationship can remain on friendly terms. Young couples are taking a long, realistic look at the divorce rate, changes in the economy, and even family planning before signing on the dotted line. A real estate venture has become an investment option as opposed to the traditional family home unit. Contract investments should always have a complete “exit strategy”, which is legally drawn up prior to purchasing such a large investment. Buyers are also increasingly looking at the possibility of purchasing homes with more than one unit of living space, in the hopes of using the rental income as a sort of “mortgage helper.” In some cases, unless the home has a basement suite, the home will be eliminated from the list of possibilities.
Times have changed and so has the view of first-time buyers. They are calculating far beyond the pre-approval stage. Cash flow, job security, closing fees, and commitment have put many buyers on hold. Lifestyle, feasibility and affordability are just a few of the issues faced. Statistics show that parents are reaching out (more often than not) to assist on the financial front. While other buyers (without financial assistance) are holding off until they are able to bank more money for down payments and additional fees, before taking the final plunge into the world of home ownership and massive mortgages.
For more on buying, check out the Canadian Home Find Buyer’s Guide … and save yourself thousands in costly mistakes!