What Size of Mortgage Do I Qualify For?
Buying a home is an exciting experience and is usually one of the largest purchases you will ever make. When you decide to buy your first home, it is possible to let your emotions run the show. All of a sudden, you are admiring homes listed on your home browsing app, surfing the internet in search of creative financing options, you’ll even find yourself scheduling for drive-bys and searching the web for the best financial options available to facilitate your home buying process. Landing in a house you can’t afford is easy and can affect your ability to build wealth in the long run. In this article, we have researched and compiled some of the factors you need to consider when you are looking to buy your first home. Read on to find out the size of mortgage you qualify for.
Choosing the right mortgage for you
Before you embark on the home buying journey, you need to critically look at what you can take on. How will your income and lifestyle affect the amount of mortgage you qualify for? With many mortgage options available in the Canadian mortgage market today, choosing one that matches your lifestyle and purchase needs can be a treacherous affair. If you’ve found yourself wondering how much mortgage you can afford, then you are familiar with this experience first-hand. Fortunately, there are several tools available to help you assess your mortgage affordability. One such tool is the mortgage calculator. It comes in handy when you want to calculate how much mortgage you qualify for.
How lenders determine your mortgage affordability
An important metric that your lender uses to calculate the amount of mortgage you can borrow is the Debt to Income Ratio (also known as a mortgage to income ratio). This is the percentage of you your gross income that will go towards debt payments. It is divided into two categories.
Gross Debt Service Ratio (GDS)
The Gross Debt Service ratio is the fraction of your gross income that goes to housing expenses. Housing expenses are also known as PITH: Principal and Interest (mortgage payment), Taxes, and Heating costs. Condominium buyers are required to include half of their condo fees.
Total Debt Service Ratio (TDS)
The second category that leaders look at is the Total Debt Service ratio. This is the fraction of your gross income that goes into your housing expenses and your recurring debt. Recurring debt includes auto loan payments, credit card payments, and other loans.
While GDS ratio only factors in your housing expenses, TDS ratio looks at your housing expenses as well as your recurring debt. From a borrower’s perspective, TDS ratio makes more sense when deciding on the size of mortgage you qualify for as it will determine whether you can afford the monthly mortgage payment in addition to your monthly debt payments. Lenders look at both GDS and TDS before qualifying you for a mortgage
Lenders generally use a debt to income ratio of 35/42 when calculating the amount of mortgage you can borrow. The first percentage is your GDS while the second percentage is your TDS. If you find your GDS and TDS figures are below 35 and 42 respectively, you will be able to make your monthly payments
Online mortgage calculators
Online mortgage calculators are a dime a dozen. These automated tools come in handy when you want to find out how much mortgage you qualify for. They also help to determine unforeseen financial implications resulting from mortgage variables such as your loan amount, your interest rate, number of payments and monthly payment amount. Equally important are affordability calculators and just like mortgage calculators, they are easily found on the internet.
While it is good practice to play around with online mortgage calculators to find out how different variables will affect your monthly payments, it is a great idea to consult a mortgage expert and based on your financial needs, the two of you can craft a mortgage plan that meets your needs.
It is worth mentioning that some affordability calculators are programmed to bump up the down payment figure that you key in so that it meets the 5% minimum that is required by CMHC (Canada Mortgage and Housing Corporation) instead of reducing the qualified value of the home that equals that figure. Be sure to read the results carefully. Remember, the amount suggested by the online calculator may increase or decrease when you visit and are qualified by your lender.
What to Do if Your Loan Application Is Rejected
You might find that all your calculations add up to one conclusion: You simply can’t afford a mortgage right now. It is important to know that such cases are normal and it’s totally fine. In order to afford that home you’ve always dreamed of, you need to increase the percentage of your income that goes to savings. Of course you need to pay yourself first and in fact; you may want to consider running a separate savings account specifically for your home purchase. You might find that your monthly budget is so tight that you can’t stretch farther to save anymore. In that case, re-strategize to come up with the best way out. Consider a semi-detached home as opposed to a stand-alone home. Perhaps it makes sense to move to a more affordable location. You could also consider working extra hours to increase your income. The bottom line is that there are quite a number of ways to increase your monthly income. Be sure to dig deep into all the options available.
Make use of online calculators designed to help you calculate your expected monthly savings in order to reach a specific saving goal by a certain period of time-based on a specific rate of return.