Tuesday, September 13, 2022 / by Evelyn Lopes- Klarine
If you or someone you know is thinking of buying a home, you may be wondering what you can afford. While affordability is important, the real question is: What’s your buying power? In todays video we will cover what makes up your buying power, how is it calculated, how does it affect your purchasing power and what 4 factors influence your overall buying power. As a bonus at the end of this video I will let you know how you can get our FREE REPORT - " What's Your Home Buying Power?"
Let's dive in.
Your buying power is more than how much of your income you have available to make a mortgage payment; it also comprises how much you’ve saved for a down payment, the proceeds from a home sale and the amount you’re qualified to borrow
Are you in the market for a new home or investment property? One of the first questions you’ll probably ask is, “What kind of house can I get and what can we afford?” Many buyers
become so caught up in how much they can afford that they don’t realize their total buying power—that is, the total amount of purchasing potential they have.
SO, WHAT IS "BUYING POWER"- HOW IS IT DEFINED?
Your buying power is comprised of the total amount of money you have available each month for a mortgage payment. This means the money you have each month after fixed bills and expenses. Plus, any money you’ve saved for a down payment, the proceeds from the sale of your current home, if applicable, and the amount of money you’re qualified to borrow, will all impact your overall buying power. When you take all of this into consideration, you may find you are able to purchase a larger home or a home in a more desirable neighborhood, or you might realize you should be looking for homes in a lower price range.
WHAT 4 THINGS IMPACT BUYING POWER?
There are 4 assets that will impact your overall buying power
#1. YOUR CREDIT SCORE: A strong credit score signifies a good overall credit history and can help you lock into a lower interest rate. Do you know your credit score?
#2. YOUR DEBT-TO-INCOME RATIO: The lower the ratio of your debts to income, the better risk you maybe perceived as, by lenders.
#3. YOUR ASSETS: Proof of where the money is coming from for the purchase of the property will be required- (think in terms of - cash funds on hand; equity realized from the sale of a property) and any investments you have in your portfolio. These funds are your assets
#4. DOWNPAYMENT: The more you’re able to put down, the less you will have to borrow. With a down payment of 20 percent or more, you won’t have to purchase mortgage insurance.
Housing affordability is a metric used by real estate experts to assess whether or not the average family earning an average wage could qualify for a mortgage on the average home.
Although this amount is essential to creating an overview of the real estate market, it’s not a factor you should consider in your home search. What may be considered affordable to you based on your income and other factors may be different than what’s affordable to the average buyer.
WHY BUYING POWER MATTERS
A common misunderstanding is that a home’s list price determines whether or not you can purchase it. Although it’s important to look at the price tag, it’s essential to consider what your monthly payment will be if you own the home. After all, the purchase price doesn’t include the housing-related expenses, such as utilities, annual property taxes, homeowner insurance, associated monthly fees and any maintenance or repairs. Figuring out the payment, will prevent you from overestimating or underestimating your buying power. Remember, you’ll live with your monthly payment, not the sales price. Ensure that you are comfortable with your monthly payments.
Once you have clarity on your buying power, you’ll be able to buy the home you want, instead of settling for a home because you feel it’s the only one you can afford. It will also prevent you from becoming “house poor,” a common term for someone who’s put all their money toward the down payment, leaving them nothing left over for fees outside of their monthly house payment. Both scenarios can negatively impact the lifestyle you want to live. Understanding your buying power can help you get the home you
want without sacrificing the lifestyle you desire.
HOW TO CALCULATE YOUR BUYING POWER?
You might be wondering, “How do I know what my buying power is?” Buying power is calculated by adding the money you’ve saved for a down payment and/or the money you made from selling your home (minus fees and mortgage payoff ) to all of your sources of income and investments that could be used to make your monthly payment. Make sure to include your monthly pay, commissions or tips, dividends from investments, payments from rental properties or other monthly income you receive as well as the loan amount you’re willing to finance and can qualify for.
Most lenders advise buyers to spend no more than 32% GDS- Gross Debt Service Ratio and up to 42%TDS- Total Debt Service Ratio.
their gross pre-tax income on housing, meaning all your income and sources of revenue prior to paying taxes. Make sure you factor in not only your mortgage payment, but also utilities, property tax and home insurance to the cost of housing.
Whether you plan to spend the average, play it conservative or split the difference, it is up to you. Ensure that you feel comfortable with the payments. While it’s tempting to take out a large loan to purchase the home of your dreams, keep in mind the less money you have to borrow, the stronger your buying power may be.
DON’T FORGET TO FACTOR IN PROPERTY TAXES AND INSURANCE
These are often added to your principal and interest of your mortgage payment—the money used to pay down the balance of your loan and the charge for borrowing the money. Since these numbers vary, check the taxes of the properties you are interested in. Property taxes will differ based on the region the property is in, the size of the land and home and upgrades to the property. Here in the province of Ontario, taxes are based on the current value assessment of the property. Moving from one area to another may increase or decrease the property taxes due, on a similar type of home. Also, remember to factor in home insurance for the property as well. You can contact your insurer for a general quote. Once you have these figures, divide each by 12 to estimate how much they’ll add to your overall monthly payment amounts.
How to Save for a Down Payment
If you’re thinking of buying a home one day, one of the first steps to take is to start saving for a down payment. Here are some tips to make saving easier.
1. Set a savings goal. One way to figure out how much to save is to use the average sales price for homes that are similar to what you want and figure out your target down payment percentage. For example, if homes are selling for $800,000 in your area and you want to put 20 percent down, you’ll have to save $160,000. Set a goal to save that amount within a specific time frame; just keep in mind the longer you save, the more the average selling price will change. Although the majority of buyers saved for six months or less, 29 percent of all buyers (and 31 percent of first-time buyers) saved for more than two years for a down payment.4
2. Cut back on expenses. Review your monthly expenses and look for ways to save. Twenty-nine percent of buyers cut spending on non-essentials items and 22 percent cut spending on entertainment while they were saving for a home.4 Think about items you can live without or cut back on temporarily while you’re saving.
3. Look for ways to boost your income. Get a side job or sell items online or at a garage sale to increase your income in a short amount of time. Be sure to save any windfalls you get, including your annual income tax refund or work bonuses.
4. Check out home-buying programs. Your country, province or local government may offer special programs, such as grants, for first-time buyers to use.
5. Ask your family. Thirteen percent of all buyers, and 24 percent of first-time buyers, were given money from family or friends to use toward the down payment of their home.4
More than 52 percent of repeat buyers used the proceeds from the sale of their primary residence toward the down payment on their next home.4 Similarly, 76 percent tapped into their savings accounts.4 If you’re thinking of buying another home, here are more ways to save more money, in addition to the tips listed above:
1. Rent a room. If you have an income flat (or mother-in-law unit) attached to your home, rent it out and channel the income into a high-interest savings account.
2. Make your money work for you. If you don’t plan to buy for at least five years, invest it and let the compound interest work for you. Discuss this option with your financial planner or broker to see if this is ideal for you and your goals.
3. Tap into your RRSP’s. First Time Buyers are allowed to borrow up to $35,000 from their RRSP contributions under the Canadian Governments RRSP Home Buyer’s Plan (HBP) for a down payment. Remember, it’s a loan so you’ll have to pay it back under the programs guidelines.
If you want to buy an investment property
Whether you’re buying a second home or a rental property, here are a couple tips to save for a down payment.
1. Tap into your equity. If you’ve paid off or paid down your mortgage on your primary home, you may be able to tap into your equity to purchase another property. Contact your lender to learn more about a HELOC or home equity loan.
2. Get a partner. Find a friend or relative who’s willing to purchase property with you. Typically, you’ll split the costs and profits equally. Just make sure to work with an attorney to create a partnership agreement to fit your situation.
If you haven’t sold your current home yet, a Comparative Market Assessment (often referred to as a CMA) will give you a general idea of how much you may get for your home based on what other homes in the area have recently sold for. You can contact our team for a FREE home valuation.
Do you want a clearer picture of your buying power? Would you like to see what kind of homes you can get with your buying power.
Give us a call! We are happy to provide insight so that you can make best and informed decisions for you and your family. You can call or text 905-965-5902 or schedule a 20 min no obligation phone consultation- simply visit: https://calendly.com/evelynlopes/consultation-meeting-evelyn-lopes-realty-team
?? Free Download REPORT- What’s Your Home Buying Power? For access click on the link below
Sources: 1. National Association of REALTORS https://www.nar.realtor/topics/housing-affordability-index/methodology
2. Moneyunder30.com https://www.moneyunder30.com/percentage-income-mortgage-payments
4. National Association of REALTORS, 2016 Profile of Home Buyers and Sellers
5. Iowa State University Extension, What is your house-buying power? https://store.extension.iastate.edu/product/pm1460-pdf
6. HSH.com http://www.hsh.com/mopaytable-print.html