Calculating How Much Mortgage You Can Afford
When you apply for a mortgage, it is a good thing to know what lenders use to qualify you for a mortgage loan and find out how much mortgage you can afford.
Lenders usually look at six factors to determine if they will approve you for the loan:
- Your income - lenders will only approve you on a mortgage that you can comfortably afford to pay with a portion of your income every month.
- Debts - generally include monthly house payments, payments on all your loans, credit cards, child support, car loan, student loan, etc.
- Employment history - A history of steady employment within the same job industry for several years will help strengthen your application. However, if you have not yet been in your job long enough, it shouldn't prevent you from getting a loan, as long as there are no gaps in your income for the last two years and you are on a permanent status with your current employer (if fully employed). Lenders usually will take an average between two years of your income to see how much you can afford. Different individuals may have different situations when it comes to their employment status. The best way to find out if you can qualify is to speak with us by calling 1-888-853-8372.
- Credit history - a good credit rating is very important to qualify for a loan. Read our article on What You Need To Know About Credit Scores to learn more on how you can improve your credit rating.
- Value of the property you want to buy - lenders want to know if the house you want to buy is worth the price you are paying for it. An appraisal is usually used to verify its value.
- Size of your Downpayment - coupled with the mortgage you get approved for, determines the price of the house you can afford. Homes can be purchased with little or no downpayment. A larger downpayment will mean your monthly mortgage payments will be lower due to a lesser mortgage balance required. However, it may be easier and faster to come up with a smaller downpayment, even if you end up paying a larger mortgage payment every month. A downpayment of 20% or more will qualify you for a conventional mortgage. If it is less than 20%, the mortgage must be insured with a mortgage insurance company and premium fees will be charged to you, or added to your mortgage amount.
How do you calculate the mortgage can you can afford?
To determine how much mortgage you can afford, we usually use the following information:
- Combined gross annual taxable income for yourself and other co-applicants
- Total debt payments for credit card, car loans, student loans and other debts you and your co-applicants have.
- If you have a property in mind, get the monthly property tax payment (equal to annual property tax divided by 12), 50% of the condo fee (if applicable), and approximate monthly heating cost (unless it is included in the condo fee).
First calculate your GDSR (Gross Debt Service Ratio). Divide the combined gross annual income of yourself and your co-applicants by 12 and multiply it by 32%. Then subtract your heating cost, property tax and 50% condo fee. This will give you the total monthly mortgage (principal and interest) payment you can make every month based on GDSR.
Second, calculate your TDSR (Total Debt Service Ratio). Divide the combined gross annual income by 12 and multiply it by 42%. Then subtract all your debt payments, heating cost, property tax and 50% condo fee. This will give you the total monthly mortgage (principal and interest) payment you can make every month based on TDSR.
Whichever is lower between your GDSR and TDSR will be used as the monthly payment lenders think you can afford. Depending on the interest rate and amortization period you can get, you can determine the mortgage amount you'll qualify for. A longer amortization reduces the payments, therefore allowing for a bigger mortgage amount. In order to find out the total mortgage amount based on these factors, you may use our Mortgage Affordability Calculator. The resulting total amount of mortgage may be added to your available downpayment to find out the house price you can afford. However, if the monthly payment you are comfortable with based on your income is less than both your GDSR and TDSR, you may want to apply for a lower mortgage amount.
When you are ready to make your purchase, don't forget closing costs such as land transfer tax, legal fees, building inspection, home insurance and other costs, which can usually amount to approximately 1.5 per cent of the purchase price. For a list of possible closing costs, read our article on Additional Costs You Need To Consider.
When budgeting, also consider other monthly-related expenses such as insurance and household maintenance, in addition to the condominium fees, heat, hydro, water, and property tax that was included in the debt ratio calculations. And one last tip - get a pre-approved mortgage. This free service from Canada Mortgage Hub comes with no obligations, helps to confirm your financial boundaries, and frees you to focus on finding the home you want.
