Pénélope, a 35-year-old healthcare professional, earns a comfortable salary and wants to buy a condo. But, is her financial situation really good enough for her to realize her dream?
Until now a tenant, Penelope would now like to buy a condo. With an annual income of $82,000 plus overtime, she thinks she can afford it, but she’s not sure. She also has an outstanding balance of $8,000 on her credit cards and a car loan of $29,000.
His parents have offered to pay the 20% down payment, which will save him from taking out loan insurance. Thanks to this contribution, she hopes to be able to embark on the adventure. Questions about his level of indebtedness before and after the purchase as well as his credit report remained unanswered. So she chatted with an advisor from the licensed insolvency trustee firm Jean Fortin et Associés to make sure she wasn’t making a mistake. Here is the result.
Before making a decision, Penelope will have to follow several steps.
“First, we drew a portrait of his financial situation. She pays $1,100 in rent a month as well as $478 for her car loan, which still has five years left on it. She also has to pay off her credit cards. In the end, we calculated that its debt ratio is 28%, an enviable rate,” explains Pierre Fortin, Licensed Insolvency Trustee and President of Jean Fortin et Associés.
Next step: prepare a preliminary budget. Since she has never made any before, it was based on her known fixed expenses (rent, insurance, electricity, etc.) and on an estimate of variable expenses (groceries, clothes, outings, etc.).
“This preliminary budget shows a surplus of $720 per month, a tidy sum,” says Mr. Fortin.
Moreover, his credit report shows a very good score (755) and an impeccable rating (R-1) is associated with each of his creditors.
Are all these favorable elements enough for her to consider becoming an owner?
By making projections on the basis of a mortgage of $325,000, a five-year fixed loan at an interest rate of 3%, we arrive at a monthly payment of $1,541.
“But that’s not all, you also have to add condo fees and taxes to this amount. We must also take into account non-recurring costs (transfer costs, notary fees, moving, etc.), which further increases the bill,” underlines Mr. Fortin.
The calculations indicate that if she buys a condo, Penelope will not only have to give up her surplus of $720 per month, but that she will also have to tighten her belt and cut her expenses to be able to meet the new monthly payments. Its level of indebtedness would also increase to 39%, very close to the limit of what is accepted by financial institutions to grant a regular loan.
Faced with this observation, the young woman decided to wait an additional year before buying a property. This will give him time to pay off his credit cards, put more money aside and maybe by then the real estate market will be a little less overheated…
- Always check your credit report before approaching a lender. If an error taints your file, it is possible to have it corrected, but this may take several weeks.
- Take the time to assess the additional cost of your purchase, both recurring expenses (mortgage, taxes, maintenance, condo fees) and non-recurring expenses (transfer fees, notary, moving, furnishings, etc.).
- Buying a property is often the biggest expense in life and the longest commitment you will make. Don’t let your home become a golden cage!
- To assess your ability to meet fixed expenses, do not base yourself on income that includes overtime. Indeed, your employer could stop giving you some, not to mention the fact that it can lead to overwork. Money earned this way should be considered a bonus and used to quickly pay off debts, save money or spoil yourself.