What can you afford?
Before you start looking for a new home, it is important that you become aware of how
much you can afford to pay. This knowledge will allow you to spend your valuable time
looking productively at home which are within your predetermined price range. You
can calculate a relatively accurate figurefor yourself if you assemble the following
information:
(The cash you have saved to be used for this home purchase called the)
DOWN PAYMENT
plus
BORROWED MONEY
(you are able to arrange)
Less
CLOSING COSTS
(and other “last minute” costs
associated with a real estate purchase)
Equals:
MAXIMUM PRICE
The Down payment:
Lending institutions will require you to make a down payment of at least 5% to 10%
of the purchase price of the home. Lending Policy may vary from time to time. However,
as a general rule, you should make your cash down payment as large as possible.
The less money you borrow, the smaller your monthly payments. Your deposit will
form part of your down payment.
The Borrowed Money:
Almost everyone who purchases a home borrows some of the money needed to pay
for it. The easiest way to determine how much money you will be able to borrow
as a mortgage loan is to consult with one or two lending institutions or mortgage brokers.
These lenders will apply standard tests, based on your
family’s current income and debts in order to decide the amount of money they will
lend you. They will ask for information about your finances and make a thorough
credit check, in order to be sure you are able to repay a loan.
How much can you afford to pay in mortgage payments?
Based on your income: Allow no more than 30% of your gross monthly income (before
deductions) to make your monthly housing payments. This test of your ability to repay
a mortgage loan is generally referred to as the Gross Debt Service Ratio. Complete
the following calculation to determine the approximate amount you will be able
to spend for the mortgage payment, the property taxes and, where applicable, 50%
of the condominium maintenance fees. Some lenders will require that this total
maximum monthly payment also covers heating costs.
YOUR GROSS MONTHLY INCOME
Plus
SPOUSE’S GROSS MONTHLY
INCOME
Plus
OTHER INCOME
(Monthly, potential revenue)
Equals
TOTAL MONTHLY INCOME
Multiply the line above by 30% to calculate your
TOTAL MONTHLY MAXIMUM
HOUSING PAYMENT
Based on your other Financial
Obligations:
If you have other financial obligations, such as car or credit card payments, the
lending institutions will also apply the Total Debt Service Ratio test to determine the
maximum mortgage loan for which you can qualify:
Monthly Housing Payment
(as calculated previously)
Plus
Monthly Debt Payments
(car, credit card, etc.)
Equals
TOTAL MONTHLY PAYMENT
The total of your monthly housing payment added to your other monthly debt payments
should not exceed 40% of your monthly gross income. The Gross Debt Ratio and
the Total Debt Service Ratio tests protect both you and the lender by ensuring that
you do not take on more debt than you can reasonably afford to repay. Many lending
institutions will pre qualify you for a specific size and type of mortgage loan before
you begin searching for your new home. Taking the time to apply for a pre-approved
mortgage will give you the security of knowing how much you can afford to spend.
Before concluding the loan agreement, most lending institutions will require an
appraisal of your selected property. The appraised value is a professional opinion
of the value of the home and may differ from the purchase price you are willing
to pay. The appraised value may affect the final size of the loan.
