Friday, December 2, 2022

How To Know How Much Mortgage I Can Afford

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

How much mortgage can I afford? (and calculating income and debt impacts)

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 coverclosing 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.
  • 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 themortgage interest rateyoull earn.

More:

For more information about home affordability, read about thetotal costs to consider when buying a home.

What Can I Afford Calculator

Includes mortgage default insurance premium of $

A maximum purchase price that is over $1,000,000 will use 20% minimum down payment for illustrative purposes, however a higher percentage may be required by your lender. Speak to your lender for exact amount.

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Calculator: How Much Home Can I Afford

How much home can I afford? Its a common question that new homebuyers ask. And the answer isnt always straightforward. A lot depends on your income, debt payments, down payment, and other factors.

This home affordability calculator examines your financial details and tells you how much you might be able to spend on a home.

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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:

  • car payments
  • 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.

Budget For Homeowner Costs

How Much Mortgage Can I Afford?

Beyond the costs of purchasing a home, youll likely have expenses related to owning and maintaining your home:

Homeowners insurance

Lenders will require that you carry homeowners insurance, which protects your property in case of damage. The amount will vary depending on your homes value and location. Certain areas that are prone to floods or earthquakes may have higher premiums.

Property taxes

You will also pay property taxes to your local government. This amount is based on the value of the property and land and is used to cover costs such as infrastructure, school, law enforcement, and fire service.

Maintenance and repairs

Maintenance includes the ordinary expenses that come with owning a home, such as painting, taking care of a lawn, fixing appliances, and cleaning living spaces. The average homeowner spent $2,289 a year on maintenance and repairs in 2016, according to Bureau of Labor StatisticsConsumer Expenditure Survey. If youre preparing your home for sale or just curious about general upkeep, review our home maintenance and repair checklist.

The average Homeowners Association fee is $200 to $300 per month for a typical single-family home, according to Realtor.com. This money usually covers shared amenities and services for a community such as a pool or gym, trash removal, snow removal, or maintenance to common areas.

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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 homeowner’s income and the typical local home value.

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Save A Bigger Down Payment To Make Your Home More Affordable

Remember, your down payment amount makes a big impact on how much home you can afford. The more cash you put down, the less money youll need to finance. That means lower mortgage payments each month and a faster timeline to pay off your home loan! Just imagine a home with zero payments!

Now, were always going to tell you that the best way to buy a home is with 100% cash. But if saving up to pay in cash isnt reasonable for your timeline, youll probably wind up getting a mortgage.

If thats you, at the very least, save up a down payment thats 10% of the home price. But a better idea is to put down 20% or more. That way you wont have to pay private mortgage insurance .

PMI protects the mortgage company in case you dont make your payments and they have to take back the house . PMI is a yearly fee that usually costs 1% of the total loan value and isyou guessed ityet another expense thats added to your monthly payment.

Lets backtrack for a second: PMI may change how much house you thought you could afford, so be sure to include it in your calculations if your down payment will be less than 20%. Or you can adjust your home price range so you can put down at least 20% in cash.

Trust us. Its worth taking the extra time to save for a big down payment. Otherwise, youll be suffocating under a budget-crushing mortgage and paying thousands more in interest and fees.

Calculator: Start By Crunching The Numbers

How Much Mortgage Can I Afford? How to Calculate
  • Begin your budget by figuring out how much you earn each month. Include all revenue streams, from alimony and investment profits to rental earnings.

  • Next, list your estimated housing costs and your total down payment. Include annual property tax, homeowners insurance costs, estimated mortgage interest rate and the loan terms . The popular choice is 30 years, but some people opt for shorter loan terms.

  • Lastly, tally up your expenses. This is all the money that goes out on a monthly basis. Be accurate about how much you spend because this is a big factor in how much you can reasonably afford to spend on a house.

  • Input these numbers into our Home Affordability Calculator to get a clear idea of your homebuying budget.

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    How Is My Affordability Calculated

    Heres a breakdown of each factor impacting your home affordability and the limit it places on your asking price. Your affordability is the minimum of all the values shown.

    Limiting Factor
    1,207,0001.21m
    • Your down payment directly imposes a limit on your maximum asking price.
    • UnderCMHC regulations, your total debt service ratio cannot exceed44%. The TDS ratio is calculated by dividing your total annual housing-related and debt expenses by your gross annual income. These expenses include:
    • Yourmortgage payment
    • Your property tax
    • Half of your condo fees
    • All forms of debt payments
  • UnderCMHC regulations, your gross debt service ratio cannot exceed39%. The GDS ratio is calculated by dividing your annual housing-related expenses by your gross annual income. These expenses include:
  • Your mortgage payment
  • Your property tax
  • Your heating costs
  • Half of your condo fees
  • Your total monthly expenses cannot exceed your net monthly income.
  • How Will My Debt

    When you apply for a mortgage, lenders usually look at your debt-to-income ratio your total monthly debt payments divided by your gross monthly income written as a percentage.

    Lenders often use the 28/36 rule as a sign of a healthy DTImeaning you wont spend more than 28% of your gross monthly income on mortgage payments and no more than 36% on total debt payments .

    If your DTI ratio is higher than the 28/36 rule, some lenders will still be willing to approve you for financing. But theyll charge you higher interest rates and add extra fees like mortgage insurance to protect themselves in case you get in over your head and cant make mortgage payments.

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    Likely Rate: 3022%edit Rate

    Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.

    Confirm your affordability with a lender. Based on your inputs, we recommend the following lenders:

    Getting ready to buy a home? Well find you a highly rated lender in just a few minutes.

    Enter your ZIP code to get started on a personalized lender match.

    How Much House Can I Afford Calculator

    How Much Mortgage Can You Afford

    Maximum Mortgage Payment

    How Much House You Can AffordBased on a interest rate on a -year fixed mortgage.

    Now that you know what you can afford, get your mortgage here or try our full mortgage calculator.

    As you can see from our calculator, how much house you can afford really depends on the relationship between your income and mortgage.

    To figure out how much mortgage you can afford with your income, different lenders use different guidelinesbut most lenders dish out mortgages that are way too expensive and keep borrowers in debt for decades!

    We want to help you buy a home thats a blessing, not a burden. And the only way to do that is to calculate your home-buying budget the smart wayand stick to it!

    Thats what our calculator does for you. How does it work? Well show youget ready for some math!

    Read Also: How To Get Assistance With Mortgage Payments

    How Much House Can You Afford

    Monthly Pre-Tax Income
    $3,000 $523,000

    The table above used $600 as a benchmark for monthly debt payments, based on average $400 car payment and $200 in student loan or credit payments. The mortgage section assumes a 20% down payment on the home value. The payment reflects a 30-year fixed-rate mortgage for a home located in Kansas City, Missouri. Plug your specific numbers into the calculator above to find your results. Since interest rates vary over time, you may see different results.

    In practice that means that for every pre-tax dollar you earn each month, you should dedicate no more than 36 cents to paying off your mortgage, student loans, credit card debt and so on. This percentage also known as your debt-to-income ratio, or DTI. You can find yours by dividing your total monthly debt by your monthly pre-tax income.

    What To Do If You Want More Home Than You Can Afford

    We all want more home than we can afford. The real question is, what are you willing to settle for? A good answer would be a home that you wont regret buying and one that wont have you wanting to upgrade in a few years. As much as mortgage brokers and real estate agents would love the extra commissions, getting a mortgage twice and moving twice will cost you a lot of time and money.

    The National Association of Realtors found that these were the most common financial sacrifices homebuyers made to afford a home:

  • Cut spending on entertainment
  • Paid minimum payments on bills
  • Earned extra income through a second job
  • Sold a vehicle or decided not to purchase a vehicle
  • These are all solid choices, except for making only the minimum payments on your bills. Having less debt can improve your credit score and increase your monthly cash flow. Both of these will increase how much home you can afford. They will also decrease how much interest you pay on those debts.

    Consider these additional suggestions for what to do if you want more home than you can afford:

    • Pay down debt, especially high-interest credit card debt and any debt with fewer than 10 monthly payments remaining
    • Work toward excellent credit
    • Ask a relative for a gift toward your down payment, especially if you can demonstrate your own efforts toward becoming an excellent candidate for a mortgage

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    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.

    Check Your Credit History

    How Much House Can I Afford? (Canada 2021 Mortgage Calculator)

    When you apply for a mortgage, lenders usually pull your credit reports from the three main reporting bureaus: Equifax, Experian and TransUnion. Your credit report is a summary of your credit history and includes your credit card accounts, loans, balances, and payment history, according to Consumer.gov.

    In addition to checking that you pay your bills on time, lenders will analyze how much of your available credit you actively use, known as credit utilization. Maintaining a credit utilization rate at or below 30 percent boosts your credit score and demonstrates that you manage your debt wisely.

    All of these items make up your FICO score, a credit score model used by lenders, ranging from 300 to 850. A score of 800 or higher is considered exceptional 740 to 799 is very good 670 to 739 is good 580 to 669 is fair and 579 or lower is poor, according to Experian, one of the three main credit reporting bureaus.

    When you have good credit, you have access to more loan choices and lower interest rates. If you have poor credit, you will have fewer loan choices and higher interest rates. For example, a buyer who has a credit score of 680 might be charged a .25 percent higher interest rate for a mortgage than someone with a score of 780, says NerdWallet. While the difference may seem minute, on a $240,000 fixed-rate 30-year mortgage, that extra .25 percent adds up to an additional $12,240 in interest paid.

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    What Is A Credit Rating

    Your credit rating is a ranking that indicates your financial health at a specific point in time. It compares the risk you pose for lenders to that of other Canadians.

    Your overall credit rating is an important factor in determining the type and amount of credit you may be eligible to receive at any given time. That’s why it’s so important to establish and maintain the highest rating possible.

    Rbc Royal Bank Mortgage Affordability

    Before you get a mortgage from RBC, it is important to know how RBC calculates your mortgage affordability. RBC takes into account the following factors:

    • Your household income
    • Your down payment
    • Your monthly debt payments to loans and lines of credit including credit cards, car loans, student loans, and leases.

    If your down payment is less than 20%, RBC’s mortgage affordability calculator also considers your mortgage insurance premiums. Unlike some other mortgage affordability calculators, RBC’s mortgage affordability calculator does not take into account your location for property taxes and utility costs.

    RBC calculates your mortgage limit using the current qualification rate and a maximum gross debt service ratio of 32% and a maximum total debt service ratio of 40%. These ratios are more strict than CMHC regulations, but you may still be able to get a mortgage with RBC even if you exceed these limits.

    Another factor in determining your mortgage affordability is your down payment. According to RBC, home buyers must have a minimum 5% down payment for homes worth less than $500K. For homes between $500K and $1M, home buyers must have at least 5% for the first $500K and 10% for the remaining amount. For homes worth more than $1M, home buyers must have a minimum 20% down payment.

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