How Do You Know How Much Mortgage You Can Afford

The Key Question: How Much Mortgage Can I Afford

Buying a home in Canada is a big dream for many newcomers! But, buying a home that is more than you can afford, can turn that dream into a financial nightmare. If you have a good credit history, and a healthy down payment, your lender may approve you for a mortgage that is higher than what you need. For example, you may have a personal budget of $800,000 to buy your home. And, your lender may pre-approve you for $1,000.000. To get a general idea of how much mortgage you can afford, use this mortgage calculator.

But, does that mean you should borrow that much so you can buy a more expensive home? You need to factor in other costs so that you can answer this key question: how much mortgage can I afford?

This is a common mistake that many first-time homebuyers make. And, this often leads homeowners to a situation where they are house rich and cash poor. In other words, they are spending between 30 40% of their total income on:

• mortgage payments

When you spend too much of your income on housing, it means youll be cash poor. And this means youll have very little room to afford other expenses such as:

• a planned vacation

• home furnishing or decorating .

Or, you end up making these purchases on credit, increasing your debt level, and possibly affecting your credit history.

In addition, you need to consider your other expenses such as daycare, saving for retirement, or saving for your childrens education. All important expenses that you may also be saving for.

How Does Your Debt

An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio comparing your total monthly debts to your monthly pre-tax income.

Depending on your , you may be qualified at a higher ratio, but generally, housing expenses shouldnt exceed 28% of your monthly income.

For example, if your monthly mortgage payment, with taxes and insurance, is $1,260 a month and you have a monthly income of $4,500 before taxes, your DTI is 28%.

You can also reverse the process to find what your housing budget should be by multiplying your income by 0.28. In the above example, that would allow a mortgage payment of $1,260 to achieve a 28% DTI.

Most Affordable Markets For Homebuyers

According to 2020 data fromZillow Research, record low mortgage rates have helped to boost affordability for potential homeowners. The table below shows the top 10 most affordable markets to live in for December 2020 and is based on a typical home value of no more than $300,000 . The market and share of income spent on a mortgage may fluctuate based on the current mortgage rate, the typical local homeowners income and the typical local home value.

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Work With A Buyers Agent We Trust

For more guidance on buying a house you can afford, work with a real estate agent. A good agent will help you set the right expectations when shopping for a home in your price rangethey may even be able to find you a home for sale that other buyers dont know about.

For a quick and easy way to find a RamseyTrusted agent, try our Endorsed Local Providers program. We only recommend agents who truly care about your financial path and wont push you to overspend on a house so they can bring home a bigger commission check. Find your real estate agent today!

What To Provide To Your Lender Or Mortgage Broker

Before preapproving you, a lender or mortgage broker will look at:

Youll need to provide the following:

• proof you can pay for the down payment and closing costs
• information about your other assets, such as a car, cottage or boat
• information about your debts or financial obligations

For proof of employment, you may have to provide:

• a proof of your current salary or hourly pay rate (for example, a recent pay stub
• your position and length of time with the employer
• notices of assessment from the Canada Revenue Agency for the past 2 years, if youre self-employed

Your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments. This will help them determine if you have the down payment.

Your debts or financial obligations may include your monthly payments for:

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How To Calculate An Affordable Mortgage

Although you cannot determine an exact budget until you know what mortgage rate you will get, you can still estimate your budget.

Assuming an average 6% interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed. .

For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.

x $100,000 = $290,000

Ideally, you have a down payment of at least 10%, and up to 20%, of your future homes purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.

Note: if you put less than 20% down, your mortgage lender will require you to pay private mortgage insurance , which will increase your non-mortgage housing expenses and decrease how much house you can afford. Read all about PMI in our article here.

To get a better sense of your payments, check out our mortgage calculator below:

Gross Debt Service Ratio

The first debt ratio that lenders care about is the Gross Debt Service Ratio. The GDS ratio shows how much of your before-tax income is needed to cover the propertys expenses.

Note its the before-tax income your lender looks at for mortgage qualification purposes, even though you pay mortgage payments in after-tax dollars. Be sure to keep that in mind.

The GDS Ratio takes a propertys mortgage payments, property taxes, an amount for heat and maintenance fees and divides the sum of that by your before-tax income.

You dont have to worry about doing these calculations yourself. Lenders take care of them for you when calculating whether you qualify for a mortgage. It helps to understand them, though.

Prime lenders are looking for a GDS Ratio of 39% or lower. If your credit score is below 700, sometimes lenders will cap the GDS Ratio for you at 35% or lower.

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I Cant Afford A Housewhat Do I Do

Trying to buy a house when home prices keep going up can be frustrating. But with the right plan, you can do it! One big thing that holds people back from saving for a house is debt. Debt is dumb! So focus on cleaning up all your debtand never go back. Then save up an emergency fund of 36 months of living expenses to protect yourself from lifes unexpected surprises. After that, youll be ready to save for a house.

To buy a house you can afford, never buy one with a monthly payment thats more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional loan . Ideally, you want to save at least a 20% down payment. For first-time home buyers, a 510% down payment is okay tooas long as the extra PMI fee doesnt jack up your monthly payment beyond the 25% rule.

After youve set a down payment goal, itll take time to save toward it. Give yourself a year or two of intense saving. Try these smart ways to save for a home down payment.

Once you have a strong down payment saved up, work with an experienced real estate agent who knows your area. The best agents will work hard to find you a house that fits your budget.

About the author

Rachel Cruze

How Can I Get Assistance Buying A Home

There are quite a few opportunities to get financial assistance with buying a home. If its your first time or if you havent owned a home in the last three years start by exploring the first-time homebuyer loans and programs that cater to your state or city. There are also grant programs, many of which are tailored to help low- and moderate-income borrowers with money that does not have to be paid back. Additionally, you might be able to get assistance based on your line of work. For example, teachers and emergency service workers, like police officers and firefighters, can qualify for the Good Neighbor Next Door program, which lets qualifying individuals buy HUD-approved properties for 50 percent off their purchase price.

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What Factors Help Determine ‘how Much House Can I Afford’

Key factors in calculating affordability are 1) your monthly income 2) cash reserves to cover your down payment and closing costs 3) your monthly expenses 4) your credit profile.

• Income Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

• Cash reserves This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.

• Debt and expenses Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

• Credit profile Your credit score and the amount of debt you owe influence a lenders view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate youll earn.

How To Calculate Home Affordability

Looking for a quick answer to how much can I spend on a house is not always possible. There are a lot of factors to consider. But dont worry, once you understand these 12 factors, youll feel more confident in calculating a comfortable range. Lets discuss each one and how they affect how much house you can afford.

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How Much Mortgage Can I Afford In Canada

Mortgage loans are a popular way for people to buy their own homes and begin the process of homeownership. With this type of loan, a borrower can borrow money from the bank to pay for the purchase of his property. In most cases, mortgage holders will use part or all of their net equity as paid-in-full funds for the loan.

It is not easy determining how much mortgage you can afford based on Canadas current housing prices because interest rates vary depending on location. In order to obtain an accurate understanding of your mortgage potential, its essential to consider the average Canadian home price and the interest rate that you would need to pay to reach your desired purchase price.

This article will give you a good idea of what kind of mortgage you can afford with details of all the necessary costs that should be considered.

Can My Fha Monthly Payment Go Up

Yes. Here are a few instances when your monthly payment can go up, even after youve closed the loan and moved in:

• If you have an adjustable-rate mortgage, your interest rate can rise after your initial fixed-interest rate term ends.

• Escrow items built into your monthly payment, such as property taxes or homeowners insurance premiums, are likely to go up over time. While you can’t do much about property taxes aside from moving to a different area you can always shop around for a new homeowners insurance policy.

• If you run behind on making a monthly payment, you can expect a late payment fee.

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Whats Your Credit History

Now dont assume you will automatically qualify for this amount. Just because you make enough money for a $1,400 payment doesnt mean you have the credit history to qualify for it. A lender will look at your credit history and/or FICO score to determine if you qualify. Like we said above, you can go the pre-qualification route if you arent quite ready to shop for a home, but just want to know what you can afford. This step doesnt involve the lender pulling your credit, so youll have to give them a ballpark estimate of your score and history.

If you are ready to shop for a home once you know how much you can afford, you can get pre-approved. The lender will pull your credit with this step and will write you a letter stating how much money you can receive for a loan should you decide to move forward and if you can satisfy any outstanding conditions.

View Affordability From Two Perspectives:

• Your overallmonthly paymentswhich included household expenses,mortgage payment, home insurance, property taxes, auto loans and any other financial considerations
• How lenders determine what you can afford. Just like lenders, our Affordability Calculator looks at your Debt-to-Income Ratio to determine what home price you can afford.

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What Goes Into A Monthly Mortgage Payment

Say you can afford $1,600 a month for your mortgage payment. Great! But before you start trying to figure out how much house that could add up to, realize there’s more to a mortgage payment than just paying back your home loan. Here’s what could be included in that monthly bill:

Bear in mind that these aren’t all the housing-related expenses you may have as a homeowner. You might want to have a repair fund, for example, that you set aside money for each month. Costs to maintain your property like if you pay for lawn care or snow removal can figure in here, too.

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Should I Wait To Buy A New Home

If you dont qualify for the rates youd like, have enough income to buy the type of house you want or have enough saved up for a large down payment, you face a tough decision: You can go ahead and buy a home now, or wait until you can more easily afford the home youd prefer.

There are pros and cons to each option. If you wait, you may be able to get a better interest rate later, which could save you thousands of dollars in the long run. And buying a home means assuming the risk that the propertys value could fall, or that it might need expensive repairs sometime down the line. If you postpone a home purchase, you can put off those risks until youre in a better financial position.

On the other hand, if you wait to buy a home, you wont start building equity. Because building equity can grow your net worth and give you better borrowing options, you may be better off if you begin that process sooner rather than later.

If you cant afford to buy a home with a conventional loan, you might benefit from one of these government loan programs designed to make home ownership more accessible.

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What Your Monthly Mortgage Payment Includes

Once you get approved for a mortgage, youâll find out what your monthly payment will be. Mortgage payments consist of four parts:

• Principal. This is the amount that you borrow to purchase the home, and itâs paid off over the life of the loan
• Interest. This is the percentage that you pay to the mortgage lender in exchange for lending you the money. The interest amount you pay decreases over the life of the loan as you pay down the principal
• Taxes. Homeowners are required to pay property taxes, which are based on a percentage of the property value. Taxes vary from place to place and may change every year
• Insurance. Lenders require homeowners insurance to protect your home. You may also owe mortgage insurance, depending on your down payment amount and the type of loan youâre using to buy the home

If you buy a home in a community with a homeowners association , those fees will also be factored into your monthly mortgage payment. All of these thing will impact how much house you can afford on $100k a year.

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Benefits Of A Larger Down Payment

Saving enough money for a substantial down payment takes time, so a zero- or low-down-payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages, which include:

• A better mortgage interest rate. Lenders may shave a few fractions of a percentage point off of your interest rate if you make a larger down payment. When you borrow less of the home’s price, there’s less risk for lenders, and they tend to reward this with more favorable terms.

• More equity in your home right away. Your home equity is your home’s value minus the amount you owe on your mortgage. In other words, it’s the extent to which your home is an asset rather than a debt. More equity means more wealth.

• A lower monthly mortgage payment. Borrowing less of your home’s price lowers your principal, which also means you’ll pay less interest over the life of the loan.

• Lower upfront and ongoing fees. Low- or no-down-payment government-backed mortgage programs reduce lenders’ risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender. In order to offset some of that cost, these loans can come with significant one-time costs, like the VA funding fee, or added ongoing costs like FHA mortgage insurance.

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