How Much Money Do You Need To Buy Your First Home?
Purchasing your first home is an exciting time, yet it can be a huge learning curve! For some strange reason, we were never taught about mortgages or anything to do with buying a home while we were in school. This puzzles me since most people buy a house in their lifetime and it can be confusing if you've never had someone in your life to teach you about it. Now you might be wandering a very commonly asked question: how much money do you need to buy your first home? I'll go through each part of the home buying process that costs money and we'll go through an example at the end to make sure you completely understand the process.
This post is all about how much money do you need to buy your first home
If you're looking at this article, it means you're thinking about buying a home. If you haven't done so already, go get pre-approved for a mortgage. You can usually do this with your bank such as TD, Royal Bank, etc. I bank with RBC, and they have an online pre-approval process that literally takes 5-10 minutes to complete online. You'll put in a bunch of information (mostly pertaining to your income) and it will pop out a number of how much you can get approved for with your income. You NEED to do this before you start thinking about buying a house. So if you haven't do so, do it ASAP.
Your Down Payment
This question depends on a few things. First, it depends on how much the house is and on how much you want to put down. To buy a house, you need a down payment on the house. In Canada, your minimum down payment for homes under $500,000 is 5%. for homes between $500,000 to $1,000,000, you'll need to put down at least 10% and for homes $1,000,000+, it's 20%. I'm going to assume we are all probably in the first or second category if this is your first home purchase. A lot of first time home buyers may ask if there's a way to buy a house with 0% down; unfortunately there is not, you need your minimum down payment at least in order to buy a home. Minimum down payments are good to know, but it's important to note something called mortgage Insurance (we'll discuss this in the next section).
> $500,000 = 5%+
$500,000 - 1,000,000 = 10%+
< $1,000,000 = 20%+
The more money you put down (down payment) on your house, the less your monthly mortgage payments will be. In Canada, if your down payment is less than 20%, you will have to pay mortgage insurance. Your mortgage insurance is based on how much you put down (see the chart below). The percentage for mortgage insurance ranges from 2.8% to 4% and is spread out over your 25 year amortization period. The purpose behind mortgage insurance is to protect the bank (or other lenders) if the home owner cannot pay the mortgage and defaults it.
Once your offer is accepted, there are a few things you need to pay for before you own the home. I have explained all of our closing fees for the home we bought a few months ago in my First Time Home Buyer Tips That Actually Make A Difference blog post. If you want more detail, check it out HERE. I'll list the expenses and how much you should budget for each below!
Lawyers = $1500
Home Inspection = $500
Document Review = $500 (only if you live in a strata/complex)
It's important to note that these closing fees can be different depending on the companies and lawyers that you go with and what type of home you're buying, but these were my closing fees.
Accepted Offer Trust
Be prepared to put down about 2% of the purchase price right away when there is an accepted offer. If there ends up being a problem and you can't remove your conditions/subjects, you will get that money back. The only way you would lose this money is if you decided you didn't want the house during the time after you removed your conditions/subjects and when you sign the papers with the notary/lawyer. It's basically a trust; our realtor mentioned to us that many first time home buyers don't know about this step, so I thought I'd mention it so you're prepared to pay this right away. This 2% becomes part of your down payment, you're just paying it up front.
This expense has a lot of variability depending on a lot of different factors. This is how much extra money your lender will charge you in exchange for giving you the loan for your house. Research this on your own or go through your bank and speak to a mortgage specialist to get more information on this.
Budget for Furniture
This may sound obvious, but it's important. When we bought our first home, we didn't have much of our own furniture, so we had to make sure we had more than enough money left over in order to buy the furniture we want. We ended up buying a coach, a queen sized bed, queen sized bed frame, dresser, bar stools, and a 65inch TV. Yes, it was expensive, but we bought our furniture slowly over time. Still, it's important to budget for it before spending all of your money on a house and not being able to furnish it.
The Crappy Side of Being A Homeowner: Have an Emergency Fund
You need to make sure you have an emergency fund saved when you're buying a home. As a renter, if something broke in the home, you never had to worry about fixing it. Now, it's your responsibility. What if the furnace breaks? The fridge is leaking? The dryer won't turn on? These are all pretty important things in your home that you need to have working. Be smart with this. If you have to wait an extra few months to buy a house so that you can save this emergency fund, then I do it. Your emergency fund isn't just for fixing things in the house, it's also to be there in case you, your partner or both of you lose your job(s). You now have the responsibility of paying into your mortgage every month, so you need to be prepared for this scenario. I would recommend having a $7,000 - $10,000 emergency fund. So if you fall, you have a bit of a cushier landing until you can get back on your feet.
Have I scared you yet? Being a homeowner is actually really awesome if you're prepared. You never are under the control of a landlord, you get to change things in the house to exactly how you want it, and you get to build equity into your own home, instead of into someone else's. I've given you all the information you need to budget how much money you'll need to save when you want to buy your first home.
I'm going to end with a quick example of a $400,000 home with a minimum payment.
Down Payment = 5% = $20,000 (you'll have to put about 2% – $8,000 up front when there is an accept offer and pay the rest right before you move in)
Mortgage Insurance = 4% = $15,200 (400,000 - 20,000 = $380,000 x 0.4) – 4% of $380,000
Insurance Rate = 1.74 (example mortgage rate)
Mortgage Type = 5 years fixed
Amortization Period = 25 years
Total Mortgage Required = $380,000 + $15,200 = $395,200
Your bi-weekly payments (every 2 weeks) will be: $749 ($1498 per month)
Money You Will Need For This House
• $20,000 (down payment)
• $2,500 (closing fees)
• $10,000 (emergency fund)
• $1,500 per month (mortgage)
• + furniture (this can vary)
= $32,500 saved up + furniture budget + $1500 per month (mortgage)
There you have it! I hope this clears some things up for you! The whole home buying experience can be a steep learning curve, but if you have a good realtor, they will walk you through everything! I want to be the first say Congratulations for starting your home buying journey! If you have any questions, feel free to email or DM me and I will be happy to help!
Check out a similar blog post I wrote: First Time Home Buyer Tips That Actually Make A Difference
This post is all about how much money do you need to buy your first home