How Much Income Does a First-Time Home Buyer Need to Buy a Home?
If you’re buying your first home, one of the first questions you’re probably asking is:
How much income do I need to qualify for a mortgage?
It’s a question we hear often from first-time home buyers, and unfortunately, there isn’t one income number that works for everyone.
When we look at how much you may be able to borrow, we consider your income along with your down payment, existing debts, credit history, interest rate, property taxes and other factors.
Your income is an important part of the equation, but it’s only one piece of the puzzle.
How Much Income Do You Need to Buy a Home?
The income required to qualify for a mortgage depends on your overall financial situation and the price of the home you’re looking to purchase.
For example, two first-time buyers could have the same annual income but qualify for different mortgage amounts. If one buyer has a large car payment, student loan or line of credit and the other has very little debt, their borrowing power can be quite different.
Your down payment also makes a difference. The more money you put down, the less you need to borrow.
That’s why we don’t recommend looking at your salary alone when trying to figure out what you can afford.
Instead, we look at your complete financial picture.
How Much Down Payment Do First-Time Home Buyers Need?
For homes priced at $500,000 or less, the minimum down payment is generally 5%.
However, the amount you should put down will depend on your financial situation and the home you’re purchasing.
A larger down payment means you need to borrow less, which can reduce your mortgage payment and potentially make it easier to qualify.
If you’re putting less than 20% down, you’ll generally need mortgage loan insurance.
As a first-time home buyer, it’s important to know that you don’t necessarily need a huge down payment to purchase a home. However, your down payment isn’t the only expense you’ll need to plan for.
You’ll also want to have money available for closing costs and other expenses that come with buying a home.
These can include:
- Legal fees
- Home inspection
- Property taxes and adjustments
- Home insurance
- Moving expenses
- Potential appraisal fees
- Other closing costs
Your Debt Can Affect How Much You Qualify For
One of the biggest things we look at when helping first-time buyers is existing debt.
Your monthly payments for things like:
- Car loans
- Student loans
- Credit cards
- Lines of credit
- Personal loans
- Other financial obligations
can affect how much you can borrow.
This is why someone earning $100,000 per year with very little debt could have more borrowing power than someone earning the same amount but carrying several significant monthly payments.
When we help a first-time buyer determine their price range, we look at both income and debt to get a better picture of what they may qualify for.
Don’t Forget About the Mortgage Stress Test
The mortgage stress test is another important part of qualifying for a mortgage in Canada.
The stress test is designed to make sure borrowers can handle higher interest rates if rates increase in the future.
For federally regulated lenders, the qualifying rate is generally the greater of your actual mortgage rate plus 2% or 5.25%.
That means the interest rate used to determine whether you qualify can be higher than the rate you actually receive on your mortgage.
For first-time home buyers, this can affect how much you’re able to borrow, which is another reason why getting pre-approved can be so helpful.
Qualifying for a Mortgage Doesn’t Mean You Should Borrow the Maximum
This is something we always encourage first-time buyers to keep in mind.
There’s a difference between how much you can qualify for and how much you can comfortably afford.
A lender may determine that you qualify for a particular mortgage amount, but you’ll still need to live with the monthly payments and other costs of owning a home.
Before deciding on your budget, consider expenses such as:
- Mortgage payments
- Property taxes
- Home insurance
- Utilities
- Maintenance and repairs
- Condo fees, if applicable
- Car payments and other debts
- Savings and investments
- Your regular lifestyle expenses
We’d rather see a first-time buyer purchase a home that fits comfortably within their budget than stretch themselves to the absolute maximum.
What If You Don’t Earn Enough to Buy the Home You Want?
If you don’t currently qualify for the mortgage you need, that doesn’t necessarily mean you have to put your home-buying plans on hold.
There may be several ways to improve your borrowing position.
Increase Your Down Payment
Putting more money down reduces the amount you need to borrow, which can help with qualification.
Pay Down Existing Debt
Reducing your monthly debt payments can potentially increase the amount you qualify for.
Buy With a Partner
If you’re purchasing a home with a spouse or partner, their income may also be considered as part of the mortgage application.
Consider a Different Price Range
Sometimes the simplest solution is looking at homes in a slightly lower price range. This can also give you more breathing room in your monthly budget.
Our goal isn’t simply to find the largest mortgage you can qualify for. It’s to help you understand your options and choose a mortgage that makes sense for your situation.
How Can You Find Out How Much You Can Afford?
If you’re not sure how much you can afford as a first-time home buyer, we recommend starting with a mortgage pre-approval.
A pre-approval can give you a better idea of how much you may qualify for before you start seriously shopping for a home.
We also have mortgage calculators available on our website to help you explore different scenarios, including our Required Income Calculator and Maximum Mortgage Calculator.
These tools can be a great starting point, but they can’t replace a personalized assessment of your finances.
When you work with the Collin Bruce Mortgage Team, we’ll look at your income, debts, down payment and overall financial situation to help determine what you may qualify for.
Ready to Buy Your First Home?
Buying your first home can feel overwhelming, especially when you’re trying to figure out how much you need to earn, how much you should save and what price range you should be looking at.
You don’t have to figure it all out on your own.
At the Collin Bruce Mortgage Team, we work with first-time home buyers to help them understand their mortgage options, get pre-approved and move forward with confidence.
If you’re thinking about buying your first home, get in touch with our team to find out how much you may qualify for and what your next steps should be.
Contact the Collin Bruce Mortgage Team today to get started.
