How much house can you afford?

Along with the excitement of buying a home comes many challenges and questions. It’s a complicated process and you’ll need to ask yourself if home ownership is right for you, if you are financially ready for it and how much house you can afford.

Many first-time buyers want their dream home right away. A white picket fence, trees shading a huge yard, several thousand square feet of living space may spring to mind. However, you may find that your first home is not exactly your dream home and you might have to make some lifestyle sacrifices and compromises in order to afford a home. In other words, you may not be able to “have it all” when you first buy a home.

Your first step in determining how much house you can afford is to figure out your Gross Debt Service (GDS) ratio. This is the figure lenders will use to help “qualify” you for a mortgage. Most lenders will not allow borrowers to take on a debt load they can’t afford and will want to ensure that your monthly housing expenses (mortgage payment and taxes), plus condominium maintenance fee if applicable, do not exceed 32 per cent of your monthly gross family income.

Lenders will also use a second calculation in qualifying you for a mortgage called the Total Debt Service (TDS) ratio. Generally speaking, no more than 40 per cent of your gross family income may be used when calculating the amount you can afford to pay for mortgage payments and taxes plus other fixed monthly expenses. These other fixed costs include auto, student or personal loans as well as revolving credit accounts such as Visa, MasterCard and department store accounts.

A lender will look at both your GDS and your TDS ratios and usually select the smaller of the two amounts to calculate your gross income available for housing costs (mortgage payments and taxes). Once you have determined your income available for housing costs, subtract the estimated monthly property taxes for the home you may be considering. Property taxes vary from region to region, but a Realtor can help you estimate the taxes for homes in your area. After you have subtracted the monthly tax amount, the remainder is the amount you have available for mortgage payments.

Now that you know the portion of your monthly income available for mortgage payments, you are ready to calculate the mortgage amount you can arrange. This will depend on the current interest rates being charged by lenders and the amount of money you have as a downpayment. The easiest way to do this is with a mortgage calculator. If you have access to the Internet, several Canadian banks have mortgage calculators on their websites. You simply fill in the numbers for homes you are considering and the online calculator will show you the payments for different interest rates and amortization periods. In calculating how much home you can afford, don’t forget to include the “closing costs” for completing your purchase including legal fees and taxes.

For help figuring out what you can realistically afford as a first time buyer, enlist the services of a Realtor. A Realtor will help you identify the type of home you want and take you to homes and neighborhoods that fit within your lifestyle, needs and price range. This individual will also help you understand property financing, taxes, insurance and all of the steps you will have to take as a first-time buyer to complete a real estate transaction.

This article is provided by local Realtors and the Ontario Real Estate Association for the benefit of consumers in the real estate market.

~EMC News