What is a Realistic Purchase Price I
Should Look At?
Buying a home is the likely the single largest
investment for most of us, and we should take care to find
the ideal home that fits our budget and is located in a neighbourhood
that suits our lifestyle needs. What we think we can afford
and what the bank thinks we can afford are often two different
things. Everyone's lifestyle may not be the same, but the
banks have established some general affordability guidelines.
Below you will find some methods you can use and some methods
the banks use - together.
To estimate a realistic purchase price, here is a good
rule of thumb.
Follow These Steps:
- Determine how much you are prepared to put as a Down
- Calculate the Estimated Affordable Mortgage: multiply
your total gross (before tax) family income by 2.5
- Add the two amounts and you have a good idea what price
you can afford.
Ex.: You have $10,000 for your down payment.
Your gross income is $60,000, and when multiplied by 2.5%,
your estimated affordable mortgage is $150,000. With your
$10,000, your realistic purchase price is $160,000.
What Are The Estimated Monthly Carrying
Now that you can estimate the price, you
should also look at what it will cost to carry the property.
Another good and simple rule of thumb is the "3% rule".
To estimate the monthly carrying costs, multiply the purchase
price you determined above by 3% and then divide this by amount
Ex.: Using the above purchase price for our
example, we multiply the $160,000 by 3% and then divide this
amount by 12 to get the estimated monthly carrying costs $400.
How Much Can I Qualify For?
Most lenders rely on two basic formulas as
a simple and reliable method to determine the maximum mortgage
they will approve you for. These are the Gross Debt Service
(G.D.S.) and Total Debt Service (T.D.S.) Ratios.
The G.D.S. Ratio:
Most lenders will approve using up to 32%
of the total gross (before tax) income for the mortgage principal
and interest, property taxes, estimated heating costs (sometimes
all of these referred to as PITH), plus 50% of any maintenance
fees. To calculate your maximum mortgage, multiply the total
gross income by 32%, then subtract an estimated property tax
portion, heating, and 50% of any maintenance fees. What you
are left with is the mortgage payment (P&I).
The T.D.S. Ratio:
Most lenders will approve using up to 40%
of the total gross (before tax) income towards the mortgage,
property taxes, estimated heating cost, and 50% of any maintenance
fees PLUS any other debts and obligations. These debts and
obligations could be car loans, lines of credit, credit cards
with outstanding balances, personal loans, auto leases, furniture
and appliance loans, etc.
Let Us Calculate It For You:
A mortgage specialist at CanadianMortgageRates.com
will be pleased to work out your specific qualification. Please
remember that the above ratios are not the only thing considered
in the approval process. I good credit rating, together with
the amount of down payment and employment stability are important
details. Since we work with many different lenders who offer
lot of different products, and knowing their particular guidelines,
we are your one-stop-shop for approval.