When looking to buy a home and get a mortgage, an important first step is to answer the important question of, “How much mortgage can I afford?”. Some people want to purchase as much of a home as their pre approval limit will allow without going over their comfort level or having stress with cashflow.
There are a number of factors you need to account for when reviewing how much you can are able to borrow with a mortgage.
Some of the main factors are:
- How much money do you have in savings above your down payment for any possible emergencies?
- How much responsibility are you willing to take on with a larger mortgage payment that may be close to your maximum approval amount. Or, would you prefer to go with a smaller payment?
- Are you okay with having less cash flow or disposable income? Or, would you rather have more funds left over each month?
- How much do you need month to month for your living expenses?
- Do you think mortgage interest rates will go up or down?
- If you have funds for unexpected surprises, renovations, moving costs and more after your down payment?
- Do you have enough stability in your job?
Knowing the answers to these questions will assist with the planning of getting on a mortgage. Plus, you will also see what funds you have on hand for the mortgage and other responsibilities in life. As well as, you will see if you will need to make changes to your lifestyle or day to day spending happens as well.
What is my budget?
Completing a budget is a great first step in answering, “How much mortgage can I afford?“. This will help you discover how much money you currently have left over after all your expenses and knowing how much money you have to left over for a mortgage after your current obligations will help.
The money you have is based on:
- Do you receive any support payments from the government or from a separation?
- Are you selling your current home and if yes, how much will you receive from the sale. Also do you have an existing mortgage that can be ported?
- Will you be getting a gift from family?
- What savings do you have and if you can use your RRSPs?
Once you have the total of the funds that you can use towards the purchase, you will need to subtract the closing costs of buying a new house. Also, any extra funds that you may need for emergencies or unexpected expenses with the new house or to help furnish the new house. What is left can be your possible down payment total.
Your down payment size will help determine:
- If you are are putting less then 20% of the home price. With that, you will need to have mortgage default insurance from a mortgage insurer (ie CMHC).
- If putting down less then 20%, the mortgage insurer premium will need to be added into the calculations.
- When putting down more then 20% then you can qualify for a mortgage using a 30 year amortization which can help increase your pre approval price maximum.
After you have figured out how big your down payment will be, you are on step closing to knowing how much you can afford.
Learn more: What are all these insurances?
How much mortgage can I afford to borrow?
The pre approval mortgage amount will depend on:
- Your down payment as just mentioned
- Other current debt obligations such as credit cards, auto loans, lines of credit
- If you are co signed on any debt
- Your type of income. Depending on if you are salaried, self employed, commission and so on a lender will look at your income differently.
Contact me to learn more about how much mortgage you can afford
What if a bank declines me for a mortgage?
If your bank declines your mortgage application that may be a sign that there are parts of your finances that need to be improved. Or, parts that need to be changed before you buy. If you still feel like you are ready to buy and afford a home, then talk to a mortgage broker as they can review alternative lending options with you.
It can be upsetting when a bank declines you. However it’s important not to venture into buying a house before you are ready.
Learn more: Private mortgages
What is the total cost of buying a house?
When buying a house some other costs you may need to consider are:
- If you are selling and existing house, there will be legal fees and paying your real estate agent. Also any costs associated with cancelling or porting your current mortgage.
- Moving costs and furnishing costs. Do you have any furniture to bring with you?
- Renovation or improvement costs. Does the home needs improvements?
- Property taxes. This will be new to you if you are renting
- Condo fees, if looking at a condominium
In the end, how much mortgage can I afford?
With determining your down payment and finding out how much a lender will willing to left you, this will help you know what price of house you can afford. If you feel this is more then enough for your needs then you can reduce the amount and if it’s not enough then you can look to options like adding a co signer.
Learn more: Cosigning for a mortgage
Will I be able to afford my household bills and own a home?
If you have not owned a home before or are moving to a bigger home, knowing the household bills upfront can be hared. It’s important to budget for these extra costs.
You can ask yourself:
- Am I comfortable with the mortgage payment and have money left over?
- Is the mortgage payment and household costs more then 38% of my gross monthly income? This is usually a maximum that lenders like to stick to.
- Do I have a plan or savings if something breaks at the house and I need to repair it?
- Do you have any skills to fix things around the house or will you need to hire someone?
- What if rates increase over the years, will you still be able to make the mortgage payment?
- What if you are in an accident, do you have the right insurance?
How do I apply for a mortgage?
To apply for a mortgage, I invite you to contact me today to review a budget with you and to answer the question, “How much mortgage can I afford?“.