Learn how much home you can realistically afford by considering these key factors.
As with any big purchase, when buying a home there is a clear difference between how much you can spend and how much you can realistically afford to spend.
Knowing how much you can afford will help tailor your mortgage to your lifestyle so you can balance out your expenses, enjoy life with more fullness, and, of course, make a wise property investment that can become a cornerstone in your financial plan.
There are four key factors you should consider to ensure you can afford your home comfortably:
1. Down Payment
Knowing how much money you have set aside for the down payment is the first step in determining your home price range. A conventional mortgage will require a 20% down payment of the total price.
For example, a 20% down payment on a $300,000 home would be $60,000. With the help of mortgage insurance however, you may be able to purchase a home with as little as a 5% down payment, which would be $15,000 in this example.
In addition to the down-payment, having 3% of the purchase price available in cash to cover legal fees and land title transfer taxes would also be advisable as these will be costs required to complete the purchase. Your trusted Access Credit Union lender will help you compare your down payment options.
2. Mortgage Payments
Your monthly mortgage payments will be based on your mortgage principal (the purchase price minus the down payment), plus interest (the amount you owe to your financial institution for borrowing the money).
For example, if the purchase price was $300,000 and your down payment was $60,000, then your mortgage principle would be $240,000.
The most popular mortgage payment frequencies are monthly and bi-weekly. For convenience and ease, you can schedule your automatic payments to withdraw on your pay day.
The general rule is to have 32% or less of your gross household monthly income go towards covering your mortgage payments. This is known as your Gross Debt Service (GDS) Ratio.
For example, if your monthly income (gross) is $4,000, you can likely afford around $1,200 a month in mortgage payments because that is within the 32% GDS.
3. Other Debts
Your other debts will also be a major factor in determining your price range. This could include vehicle/personal loans, credit card balances, and any other monthly debt commitments you have.
The general rule is to have 40% or less of your gross household monthly income go towards your mortgage payments and all other debts. This is known as your Total Debt Service (TDS) ratio.
For example, if your monthly income (gross) was $4,000 and your monthly mortgage payment was $1,200, you would want to pay no more than $400 to other debt expenses to stay within a 40% TDS ratio.
4. Price Range of Suitable Homes
By using your down payment value and mortgage payment, you can determine your maximum price range for your home purchase.
You can then view houses on the market to see what your ideal home is selling for, and then use this number together with your maximum purchase price in order to find your price range.
To find a more detailed explanation on how to calculate your GDS/TDS and maximum purchase price, you can download our free “Facts About Mortgages” pamphlet below or speak to an Access Credit Union mortgage specialist or lender.