"I am thinking of buying, but I think I am going to wait till the market cools a bit..."
Your decision of buying and selling is a personal decision. In a perfect world, one would want to buy when it's low, sell when it's high, rent and upgrade while the market corrects itself. We try to keep up with every forecast on the market. However, forecast of future trends can always change...just like the weather. It's not possible to time the market, and will only make a complex decision of buying/selling real estate even more complex. If you bought a home and end up not liking your investment, rent it out. If you want to own for your personal enjoyment, build wealth, and make the most of the tax benefits, then buy. But trying to time all of this will blur your overall decision. Instead focus on what works for you by finding the best product for the best price point that fits your budget and criteria.
To determine when is the right time, assess the following 4 crtieria:
1. Liquid Assets (Cash) after Closing Cost
Allow 4-5% of the purchase price towards closing cost. Many buyers don't realize and are shocked how much they have to pay out as part of the upfront cost until they started bidding for the property. This is just a ballpark, depending on how much your downpayment for your purchase is as well. Here is a list of typical one time closing cost:
- legal cost: $800-$1200
- Land Tranfer Tax; 1-4%
- Appraisal or application fee
- Home inspection fee ($300-$400)
- Mortgage Broker's fee
- Moving cost $600-$700
- Tax on High Ratio Insurance Premium (High ratio is anything under 20% down payment)
- Service hook-up fee
- Survey fee +/-$900 (won't apply to condos)
- Interest Adjustment
- Other misc. cost
Other ongoing cost (some may not apply):
- Property Tax
- Heating
- Hydro
- Condo fee (if applicable)
- Cable
- Telephone
- Home Insurance (less for condo)
- Other misc. cost
Downpayment + Closing Costs, will inform you how much money you have left over at the end of the transaction. Leave yourself plenty of security for at least a few months of liquid assets just in case, and till your spending reflects a pattern after your purchase.
2. Debt to Income Ratio - 30% rule
This number will affect your buying power. The lender examines this number to qualify you for a loan. Calculating the Debt ratio includes loan principal and interest, private mortgage insurance, home insurance, property taxes, condo fees, credit card payments, student loans, car loans, any other recurring debt (that takes more than 6 months to pay off) etc.
For example:
TOTAL MONTHLY PAYMENTS: $3,600
TOTAL MINIMUM DEBT PAYMENTS: $1200
TOTAL GROSS INCOME: $16,000
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Debt/ Income RATIO : $4,800/$16,000 = 30%
Generally, you want to keep the ratio below 30%, or offset this with a bulk of liquid assets after closing. Not all loans are the same. The debt/income ratio is only part of qualifying for a home loan. If your credit history looks good, your lender may allow you to carry more debt. So that it's best you get pre-approved before you start home shopping!
3. Job Security
Make sure your current job will not be affected by job loss or relocation when you decide to purchase.
4. Timeline to Hold/Own the property
Changing properties incurrs transaction cost. Holding onto the property for 2 or more years will allow you to build wealth and take advantage of tax benefits.
Assume that you have now decided to buy, figure out whether you can afford it base on your salary, how much will be left over after the transaction close, and if you intend to hold onto the property for a few years. After all, purchasing a home is for your personal enjoyment. If you think it will cause a large amount of stress and reduce the quality of your living standards, and you don't qualify for all 4 criterias above, then you should think twice about buying.
When working with your realtor, he/she will refer you to the mortgage specialists and independent legal advisor that will be taking care of your transaction to discuss your needs.
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