When browsing real estate listings for a new home, the first step is to figure out how much you can afford. Affordability is based on the household income of the applicants purchasing a home, the personal monthly expenses like car payments, credit cards expenses, etc, and the expenses associated with owning a home, such as property taxes, condo fees, heating costs.
The calculator below will show you the maximum purchase price that you can qualify for.
You also need to determine if you have enough cash resources to purchase a home.
The cash required is derived from the down payment put towards the purchase price, as well as the closing costs that must be incurred to complete the purchase.
To get the accurate picture of what you qualify for you should speak to a mortgage broker about
getting a mortgage pre-approval.
How to Estimate Affordability
Lenders look at two ratios when determining the mortgage amount you qualify for, which generally indicate how much you can afford. These ratios are called the Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio.
They take into account your income, monthly housing costs and overall dent load.
The first affordability role, as set out by the Canada Mortgage and Housing Corporation (CMHC), is that your monthly housing costs - mortgage principal and interest, taxes and heating expenses (P.I.T.H.) - should not exceed 32% off your gross household monthly income. For condominiums, P.I.T.H. also includes half of your monthly condominium maintenance fees.
The sum of these housing costs as a percentage of your gross montly income is your GDS ratio.
The CMHC's second affordability rule is that you total monthly dent load, including housing costs, should not be more than 40% of your gross montly income. In addition to housing costs, you total monthly debt load would include credit card interest, car payments, and other loan expenses. The sum of your total monthly debt load as a percentage of your gross household income is your TDS ratio.
Mortgage Principal & Interest + Taxes + Heating Exp. / Annual Income
Ratio should be <32%
Housing Exp. + Credit Card Interest + Car Pymts + Loan Exp / Annual Income
Ratio should be <40%
Note that while the industry guideline for GDS and TDS is 32% and 40% respectively, most borrowers with good credit and steady income will be allowed to exceed these limits. The maximum allowed is 39% and 44%. The calculator uses these maximums to estimate affordability.
Your down payment is a benchmark used to determine your maximum affordability. Ignoring income and debtlevels, you can determine how much you can afford to spend using a simple calculation:
down payment / 5% = maximum affordability
down payment amount -$25,000 / 10% + $500,000
For example, if you have saved $50,000 for your down payment, the maximum home price you could afford would be:
$50,000 - $25,000 = $25,000 / 10% = $250,000+$500,000 = $750,000
Any mortgage with less than a 20% down payment is known as a hgh-ratio mortgage, and requires you to purchase mortgage default insurance, commonly referred to as CMHC Insurance.
In addition to your down payment and CMHC Insurance, you should
set aside 1.5% - 4% of your home's selling price to cover closing costs, which are payable on closing day. Many home buyers forget to account for those costs in their cash requirement.
Other Mortgage Qualification Factors
In addition to your debt service ratios, down payment, and cash for closing costs, mortgage lenders will also consider your credit history and your income when qualifying you for a mortgage. All these factors are quially important.
For example in the event if you have a good credit, a sizeable down payment, and no debts, but an unstable income, you might have difficulty getting approved for a mortgage.
Keep in mind that the mortgage affordability calculator can only provide an estimate of how much you'll be approved for, and assumes you're an ideal candidate for a mortgage.
To get the most accurate picture of what you qualify for, speak to a mortgage broker about getting a mortgage pre-approval.
|Courtesy of RateHub.Ca|