How Do I Figure Out How Much House I Can Afford?
July 2, 2010 – 12:52 am
To determine how much you can afford, why not use the same rules and formula lenders apply? Think of it as your pre-pre-qualifying, and especially think of it as excellent practice for your real mortgage application. As you check and double-check all your digits and data, remain aware that your lender will ask you to verify and document all your information—especially about income and assets. Seize the opportunity to request all the documents you need.
Meanwhile, you can do some quick and dirty calculations in the privacy of your own home. More than a dozen lenders feature mortgage payment calculators on the websites, and you can extrapolate the monthly income requirements from estimates of your monthly payment. For example, the median priced Canadian home costs approximately $380,000(CAD), which at current rates will cost you approximately $2400(CAD) per month. Lenders expect that your mortgage payment will represent 35% of your monthly take-home pay. Calculate the income requirement by the formula $2500=0.35x . Or just divide 2500 by 0.35 if the algebra seems a little too mysterious. Therefore, in order to buy an average home, you must earn at least $6,900 per month or $83,000 per year. Given that the median Canadian income is approximately $64,000 annually, “you” here translates to “total household income.”
For a more accurate reading on your readiness for a home purchase, gather a little more information and do a little more arithmetic.
• Check your credit score— Wary about the causes of “the housing bubble” in the United States, lenders have grown extremely concerned about home purchasers’ credit worthiness. Although they will grant a few exceptions for borrowers with exceptionally high incomes or tremendous net worth, lenders generally want their borrowers to post credit scores of 720 or above. 740 is considered optimum. If your score isn’t quite there yet, start paying-down your debts and saving your down-payment. Often, two or three simple steps can raise your score dramatically in just three or four months.
• Work-out your down-payment plan— Yes, some lenders still will accept just 5% down…warily. To assure qualification for a mortgage at a preferred rate, prepare to put 10% down on your purchase of a home. Therefore, if you are buying the average Canadian home, you must have $38,000(CAD) ready to hand over as you make a purchase offer. Most buyers take funds from their retirement plans, and first-time borrowers enjoy some privileges others do not. If your family will contribute to your down-payment, make sure they make their contributions as “gifts” rather than “loans.” Even if you intend to repay mom and dad for their generosity, as far as you and your lender are concerned, they gave you the money.
• Figure the most important debt ratio—Figure out the 35% standard according to your income…as it is today, not as it may be if the genie pops out the bottle and grants your wishes. That one ratio gives by far the best estimate of what you really can afford.
• Figure the other debt ratios—Your lender will scrutinize your other debts in proportion to your take-home pay, using the figures as measures of your ability to make your mortgage payments and also as indicators of your prudence and frugality. Ideally, you do not pay more than 10% of your income for your cars. Your total utilities—electric, gas, internet and cable—should not exceed another 10% of your pay. Most importantly, you should be up-to-date on all your credit card payments, and the total of your monthly minimums absolutely must not exceed 20% of your net. If any of your debt-rations is grossly out of line with the banks’ guidelines, you should take aggressive measures to correct it before you apply for a mortgage.
More Information:
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