How much can you afford?
Before you start looking for a new home, be smart and figure out what you can afford to pay on a monthly basis for your mortgage - as well as property taxes, heat and hydro.
Calculate your Home Buying Household Budget
Once you have determined your budget, you need to know how much you can afford for a down payment. Using your net worth as a guideline, will help you decide what you can afford for a down payment.
Test your net worth
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If you discover that you can afford a down payment of 20%, you will qualify for a conventional mortgage, meaning there is no mortgage loan insurance required.
A down payment of less than 20% means you will require a high ratio mortgage. The mortgage loan insurance costs will be added to the total mortgage amount and amortized over the life of the mortgage so that you won’t have to pay this cost up front. The calculation is based on the purchase price of your home.
|
Financing Required |
% Insurance Cost |
| 80.01% up to and including 85% | 1.75 |
| 85.01% up to and including 90% | 2.00 |
| 90.01% up to and including 95% | 2.75 |
| 95.01% up to and including 100% | 2.90 |
Here’s an example:
Scenario A – Conventional Mortgage
| Purchase price of new home | $300,000 |
| Down payment: (30%)* | $ 90,000 |
| Mortgage amount | $210,000 |
*Qualifies for conventional mortgage |
|
Scenario B – High Ratio Mortgage
| Purchase price of new home | $300,000 |
| Down payment: (10%)* | $ 30,000 |
| Sub Total | $270,000 |
| Plus 2% (cost of financing 90% of purchase price) | $ 5,400 |
| Mortgage amount | $275,400 |
*Qualifies for a high ratio mortgage |
|
The first affordability rule for your mortgage loan is that your monthly principle, interest, taxes and heating costs shouldn’t be more than 32% of your gross household income. The lenders call this the GDS ratio or Gross Debt Servicing Ratio.
The second affordability rule for your mortgage loan is that your entire monthly debt, including credit cards, lines of credit, child support as well as the principal, interest, taxes and heating costs shouldn’t be more than 40% or your household income. The lenders call this is TDS ratio or Total Debt Servicing Ratio.
Even if your ratios don’t quite fit these guidelines, we have access to many alternative lenders that will assess your unique situation and provide mortgage loan financing based on your type of income or your credit rating.
Click here for additional mortgage calculation tools
Getting pre-approved for a mortgage
A pre-approval means that a lender will review your situation in advance, to establish the amount of mortgage that you can qualify for. Many lenders will guarantee a pre-approved rate for 120 days.
The factors that you have calculated above are used to determine your affordability:
- Household income – what type e.g. salary or commissioned; and how long have you been employed?
- Down payment – how much do you have and where is it coming from?
- Running a credit report – what is your “ BEACON score ” and does that score meet the lenders underwriting guidelines?
- Style and location - what type of home do you want to buy i.e. detached, semi-detached, condominium and where do you want to buy it?
Once you have your pre-approval, you can work with your realtor to find the right home within your budget.
