The Greenhouse
by Pine

How much home can you afford?

However, you may not necessarily want to borrow the full amount you're pre-approved for.

It's important to calculate ahead of time.

Buying a home is a major milestone in many people's lives. But before you start browsing homes online, you need to answer a critical question: How much home can I afford?

The answer to this question will depend on a variety of factors, including your income, debt, and credit score. 

Step 1: Determine your budget

The first step in figuring out how much home you can afford is to determine your budget. This means taking a close look at your income and expenses to figure out how much you can realistically afford to pay for a mortgage each month.

To start, look at your monthly income. This includes your salary or wages, any rental income, and any other sources of income you have. Next, calculate your monthly expenses. This includes your rent or current mortgage payment, utilities, groceries, transportation, and any other monthly bills you have.

Once you have a clear picture of your monthly income and expenses, you can calculate how much money you have left over each month. This is the amount of money you can put towards a mortgage payment and how much you can afford.

Step 2: Calculate your debt ratios

The next step in figuring out how much home you can afford is to calculate your debt ratios, specifically your Gross Debt Service (GDS) and Total Debt Service (TDS). 

These ratios help lenders determine your ability to make your mortgage payments on time, without experiencing financial hardship.

The GDS ratio takes into account your housing expenses, such as mortgage payments, property taxes, and heating costs. To calculate your GDS, divide your total monthly housing expenses by your gross monthly income, and then multiply the result by 100 to get a percentage. The maximum GDS ratio that most lenders in Canada will accept is 39%. This means that your monthly housing expenses should not exceed 39% of your gross monthly income.

The TDS ratio, on the other hand, takes into account your total debt obligations, including your housing expenses. This ratio helps lenders determine if you can handle all your debt payments, including credit card payments, car loans, and any other debts you might have. 

To calculate your TDS, divide your total monthly debt payments by your gross monthly income, and then multiply the result by 100 to get a percentage. Most lenders in Canada will accept a TDS ratio of 44%, which means that your total monthly debt payments, including your housing expenses, shouldn’t be more than 44% of your gross monthly income.

Step 3: Check your credit score

Your credit score is another important factor that lenders will consider when determining how much home you can afford. Your credit score is a measure of your creditworthiness and is based on your credit history.

A higher credit score will typically result in lower interest rates and better loan terms–and in Canada you need a score of at least 680. So, before you start shopping for a home, it's important to check your credit score and make sure it's in good shape.

If your credit score is low, you may need to take steps to improve it before you can qualify for a mortgage. This may include paying down debt, disputing any errors on your credit report, and making sure all of your bills are paid on time.

Step 4: Get pre-approved for a mortgage

Once you've determined your budget, calculated your debt ratios, and checked your credit score, it's time to get pre-approved for a mortgage. This will give you a better idea of how much home you can afford and will help you narrow down your search.

To get pre-approved for a mortgage, you'll need to provide your lender with documentation of your income, assets, and debts. Your lender will then review this information and give you an estimate of how much you can afford to borrow.

It's important to remember that the amount you're pre-approved for isn't necessarily the amount you should borrow. You'll want to make sure that your monthly mortgage payment is affordable and won't put a strain on your finances.

However, you may not necessarily want to borrow the full amount you're pre-approved for. You want to make sure your monthly mortgage payment is affordable and won't put a strain on your finances. It’s really up to you and your finances and what you think you can and cannot manage. 

How does your mortgage interest rate affect how much you can afford?

Choosing between a fixed-rate or variable-rate mortgage can impact how much of a home you can afford in Canada. A fixed-rate mortgage is one where the interest rate remains the same for the entire term of the mortgage. This means that your monthly payments will remain the same, regardless of any changes in interest rates. A variable-rate mortgage, on the other hand, is one where the interest rate can fluctuate during the term of the mortgage. This means that your monthly payments can go up or down, depending on changes in interest rates.

If you choose a fixed-rate mortgage, your monthly payments will be predictable and stable, which can make budgeting easier. However, fixed-rate mortgages usually have higher interest rates than variable-rate mortgages. This means that you may not be able to afford as much of a home with a fixed-rate mortgage as you would with a variable-rate mortgage.

On the other hand, if you choose a variable-rate mortgage, your monthly payments may be lower at first, which can make it easier to afford a more expensive home. However, if interest rates go up, your monthly payments will go up as well. This can make budgeting more difficult and may make it harder to afford your home in the long run.

Ultimately, the choice between a fixed-rate or variable-rate mortgage will depend on your financial situation, risk tolerance, and future plans. It's important to do your research and speak to a mortgage professional to help you make the best decision for your needs.

The bottom line

In conclusion, figuring out how much home you can afford is an important step in the home buying process. By determining your budget, calculating your debt ratios, checking your credit score, and getting pre-approved for a mortgage, you can make an informed decision. 

Calculate ahead of time how much you can afford and remember, it's always better to be conservative with your budget and not overextend yourself financially. By taking the time to do your research and crunch the numbers, you can find the perfect home that fits within your budget and helps you achieve your financial goals.

But if you’re ready to kickstart your home buying journey, apply with Pine in just 10 minutes or less and we’ll connect you with a mortgage agent to answer any questions you may have. 

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