How Much Mortgage Can I Afford?
When you find yourself browsing real estate listings for a new home, the first thing you must do is figure out exactly how much you can afford. Mortgage affordability is based off of several things such as:
- The total annual household income of the applicants purchasing the home
- The personal monthly expenses of those applicants (such as car payments, credit expenses etc.)
- The expenses associated with owning a home (property taxes, condo fees, heating costs and more)
Another thing you need to determine is if you have enough cash resources to purchase a home. This cash required is taken from the down payment put towards the purchasing price, as well as the closing costs that must be acquired in order to complete the purchase.
How to Estimate Affordability
When lenders want to help determine the mortgage amount you qualify for, they look at two ratios:
- The Gross Debt Service (GDS) ratio
- The Total Debt Service (TDS) ratio
Then they also take into consideration your income, monthly housing costs and overall debt load.
The Canada Mortgage and Housing Corporation set out two main affordability rules:
The 1st Affordability Rule: your monthly housing costs (taxes, heating expenses, mortgage principal and interest) should not exceed 39% of your gross household monthly income. The sum of these house costs is your GDS ratio.
The 2nd Affordability Rule: your monthly debt load, including the housing costs, should not be more than 44% of your gross monthly income. The monthly debt load will include credit card interest, car payments, other loan expenses etc. The sum of your total monthly debt load is your TDS ratio.
What About Down Payment?
Your down payment is a great way to determine maximum affordability. This will ignore the income and debt levels and help figure out how much you can afford to spend with a simple calculation.
- If your down payment is $25,000 or less, you can find out your maximum purchase price by taking the down payment and dividing it by 5%.
- If your down payment is more the $25,000, you can find your maximum purchase price by taking the down payment amount, subtracting $25,000 and dividing it by 10% plus $500,000 (down payment price – $25,000/10% + $500,000).
Any mortgage that has less than a 20% down payment is a high ratio mortgage which will require you to get mortgage default insurance.
Also ensure that, in addition to your down payment and mortgage default insurance, make sure to put aside 1.5% of your home’s purchase price to cover the closing costs. This is one of the main things that home buyers forget to take into consideration.
Other Qualification Factors
Mortgage lenders will also consider your credit history and your income when qualifying for a mortgage. To get a more accurate estimate of how much you qualify for, speak to a mortgage broker about getting a mortgage pre-approval. Contact Collin Bruce today!