7 Steps to Get Ready for Home Ownership

While I've written about what you have to do when it comes time to buy a home, there are also things you should do well in advance of hitting the pavement to go shopping.

1. Figure out how much you'll spend. Do you know what kind of home you want: a condo, a townhouse, a semi-detached or a mansion?  Will you live in the city, in suburbia, in the bush? How much will it cost? Those are some of the basic questions you should answer as you move from dreaming about a home of your own to making it a goal. If you don't have a clear picture of what you want in your mind, it'll likely just stay a pipedream. Making the picture concrete by nailing down the specifics will turn it from something ethereal to something you can actually work towards.

2. Calculate your carrying costs. People who leap into home ownership without a clue about the financial responsibility they're undertaking. Home ownership is NOTHING like renting, so if you figure you can afford a home because the mortgage payment is almost like rent, you're a dope. You'll have utility costs. You'll have taxes. You'll have insurance. And then there's maintenance… the cost everyone likes to ignore. Resist the urge to guestimate what these costs will be. Find out. If you can't afford to carry the sucker, then you'll know you're not ready to buy.

3. Practice. If you figure it'll cost you $1,850 a month to carry your home, that means you actually have to come up with $1,850 a month every single month. To see if you'll be comfortable with that cost, live like you're spending that money while you're still renting. So take that $1,850 a month, less whatever you may be paying to keep a roof over your head right now, and stick it in a savings account. Hey, I'm not talking about if you can THEORETICALLY come up with the money. I'm talking about taking that money and socking it away every single month. First, you'll learn to live on less disposable income; you better start practicing before you buy your home so you're ready for the adjustment in your lifestyle when you do take the big steps. Second, that money is going to get you to your downpayment faster… speaking of which…

4. Save a downpayment. When I tell people they should have a minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money? Well, sweat is one way. Cutting back on what you're spending is another. Here's the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years.

5. Calculate your closing costs. Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that's realistic. There are legal fees and expenses, a home inspection fee (don't skimp), adjustment costs for things like pre-paid property taxes, an appraisal fee, land transfer tax, title insurance, an interest adjustment, a property survey (maybe), water quality inspection if you're living in a rural area, and hook-up fees for setting up your new services like a phone line. And don't forget taxes.

6. Budget for what you will need or want to buy for your new home. From window coverings to appliances, from a new bed to new broadloom, there are always ways to spend money on a home. If you have grass, you'll need a lawn-mower. If you buy a house with a pool, you'll have to calculate the on-going costs to open, maintain and close the pool each year. If you have a driveway, you'll need a snow blower or a shovel and a body with a strong back to do the shoveling for you.

7. Build your team. You'll likely want to work with a real estate agent. You'll need a lawyer. You'll need a lender to give you a mortgage. And you should have a home inspector working for you too. If you don't put together your own team – ask family and friends for referrals – then you'll end up using any warm body your real estate agent recommends.

While the prospect of home ownership is very exciting, taking on that big a responsibility without a plan is just dumb. Don't get so caught up in the thrill that you fail to make a solid plan.

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