So you want to buy a house. Yay! This is fantastic – homeownership is incredibly rewarding! However – you need to be prepared. Of course this means knowing what you want, where you want to live and how much you can afford. But how do you know what you can afford? Let’s break it down and help clear things up before you even head out the door to your mortgage provider!
Determining how much you can afford may seem like a daunting task! There are a few simple things to keep in mind that will help you decide what you need to do before buying a home. When you head to your meeting with a lender, may it be a traditional or private, they will take into consideration many factors in your financial picture. They will offer you pre-approval for what you can ‘afford’ on paper. From a technical perspective – it will be something you can ‘afford”. However, it is often not practical when you take into account your monthly expenses and commitments. So:
- Prior to meeting with your advisor, determine your monthly income from all sources. This includes your job income, investment income, and regular ‘side hustle’ income (however business for self can be difficult – this article breaks it down a bit, but ask your lender how it works for business for self).
- Determine your monthly expenses. Home insurance, savings commitments, utilities, maintenance costs and taxes all add up – but be sure to consider things like groceries, entertainment, cell phone and Internet bills, and subscriptions, too.
- Determine your monthly debt payments. This is everything from car payments to student loan payments.
- Now subtract your debt and expense obligations from your total income. This is what you are ‘left’ with (in theory) and can help you see where a mortgage payment fits into your life. For example, if you made $2 200 per month, and had $1 180 in obligations, that would leave you with $1 020, so you would not want a mortgage payment to exceed this amount. Obviously, your lender will do the heavy-math-lifting in the end, but you should be confident in your ability to afford the mortgage payment of any home you’re considering.
As mentioned above, we know lenders rely on factors like your income, employment, debt and previous credit history – but what about some of the determining ratios (or a comparison of these factors against one another)?
- Total Debt Service Ratio (TDSR): Your TDSR is calculated by dividing your monthly housing costs and any other household debts such as auto and credit card debt by monthly gross income. As a general rule, this ratio should not exceed 40%.
- 32% Rule: Housing costs should not exceed 32% of your income. For example, if you make $3 750 per month, but your mortgage is $1000, then you add in utilities and property tax payments at a cost of $500 for example – this would exceed the 35% rule.
WHO CAN PROVIDE A MORTGAGE?
You can head to several places when you are ready to look to secure your financing. You have a few options in terms of who you can speak to:
- Banks – Best for those who have an advisor they refer to often and want to keep things simple, and aren’t looking for a highly competitive rate.
- Mortgage Brokers – Best for those looking for someone to shop around for the best deal on a rate, and you don’t have a preference to where the mortgage is held.
- Private Lenders – Best for those who are self-employed, have bruised credit, are seeking a short term mortgage or do not have a long credit history. Typically, these mortgages have higher rates than elsewhere but offer flexibility to those in extenuating circumstances.
Let's Be Social!
This is not intended to solicit those currently under contract. The information herein is deemed reliable but is not guaranteed. Please consult your financial professional or lender.