How Much Mortgage Can I Really Afford?

The first question people have after making a decision to start looking for a house is usually, “How much can I/we afford to borrow?” It’s a good question, and there is a lot that goes into it. You’ll need to work with a lender to determine how much you can technically afford. But then you’ll also need to think about how much mortgage you can realistically afford given how comfortable of a lifestyle you want to have.

how much mortgage

You start by determining how much you can repay every month based on your debt, income, and expenses. Then, you’ll want to look at some other factors so that you don’t end up in a situation that’s uncomfortable financially. Once you have that information, you’ll be able to clearly see how much mortgage you can afford. When you know your price range, the home buying process will be much easier and more enjoyable overall!

How much can you repay?

What lenders look at

Lenders will consider a number of different factors to determine how much mortgage you can afford. What they want to know is, “Can you afford to repay the loan?”

That means a lender is going to look at your credit history, your income, and potentially your future income as well. Lenders will also look at the cost of your home, its value, and its forecasted value. Finally, and probably most importantly, lenders are going to look at how much you already owe to other creditors, including credit card companies.

Lenders will use all of this information to calculate a debt-to-income ratio. By definition, debt-to-income is “a measure of how much of what you earn goes to pay debts each month.” (Read morea about it at Whichmortgage.ca).

In doing this, lenders will come up with two figures: a Gross Debt Service ratio and a Total Debt Service ratio. The Gross Debt Service ratio includes only the direct costs of homeownership, which include things like potential mortgage payment, property taxes, heating costs, fees, etc. The Total Debt Service ratio adds in any existing debt you owe.

The simplest way to think about this is “how big is your debt compared to your income?” If your debt is more than your income, you probably won’t have much ability to repay it all.

What you should be looking at

You should also be looking at and considering some things before you take out what will probably be the biggest loan of your life. When considering how much mortgage you can afford, ask yourself if you will feel comfortable with the proposed monthly payment. Maybe you can technically afford it. But paying it every month might be difficult because you’ll have to work more hours or won’t be able to take vacation very often. Or you won’t be able to travel as much as you’ve done in the past.

Hidden costs of homeownership

If you’re used to renting, living with your parents, or living with a roommate, you might be surprised at how much it actually costs to own a home!

Here’s just a short list of the things you’ll be required to pay for. Remember, when you own a home, you are responsible for every part of it, from the foundation to the roof. Even when you have an association that takes care of certain issues, the fee you pay is still what covers the cost.

  • Heating, cooling, and plumbing costs
  • Property taxes
  • Condo or association fees
  • Appliances (washer, dryer, refrigerator, dishwasher, garbage disposal, etc.)
  • Maintenance of appliances
  • Landscaping and lawncare
  • The driveway or garage
  • Upgrades
  • Installation

Pros and Cons of Using Mortgage Affordability Calculators

You can use a mortgage affordability calculator to help you determine how much mortgage you can really afford. Like most free tools out there, there are pros and cons to using them. Overall, they are great to use if you need a quick picture of whether or not home ownership fits in your budget or not.

Here are the pros:

  • You can play with the numbers to get a range of how much mortgage you can afford.
  • Using a calculator, you can quickly compare different home values against each other.
  • You can get a realistic picture of your total expenses.
  • Some calculators will provide realistic interest rates so you don’t have to hunt for them.

On the flip side, there are just a few downsides to mortgage affordability calculators. For example:

  • The results of a mortgage calculator can be deceiving, especially if you make a mistake while entering information and you don’t realize it.
  • You may overestimate your financial needs, and then be discouraged and think you can’t afford a mortgage.
  • Or worse, you may overestimate your ability to repay by not being realistic about your existing and future expenses.

At the end of this article there is a list of five different mortgage affordability calculators you can use. Play around with a few – it never hurts to use more than one.

3 Tips on Taking Out a Mortgage Loan

  • Factor in the hidden costs. Remember to think through the fact that homeownership is going to change your finances dramatically. There are property taxes to pay, and you may have condo fees if you buy a condo. Also, unless you buy a brand new house where everything is under warranty, you have to assume that you’ll have maintenance costs. And even when you buy a brand new house, everything in it is still yours. If it breaks, you have to fix it. You’ll have to be ready for anything and everything that might come up.
  • Keep in mind your need to live comfortably. Don’t take on a huge mortgage loan at the cost of everything else. You still want to have some money left over to live. Don’t forget that you have to eat, buy clothes, shop for the holidays, and take the occasional trip. If you have school tuition or expenses to pay, consider those costs, too.
  • When in doubt, keep saving for a better down payment. If you realize that you can’t afford the type of house you really want because the mortgage is too high, then save more of a down payment. (Tip: See my article on Creative Ways to Save for a Down Payment). The more you put down, the smaller your monthly mortgage payment will be.

Mortgage Affordability Calculators

Here’s a list of mortgage affordability calculators you can use to determine how much mortgage you can afford. If you have questions, let me know and I’ll do my best to point you in the right direction.

Conclusion

Home buying is a long process with a lot of steps, and many of the steps have to do with securing your financing. Hopefully this article gives you some good places to start. The most important thing to keep in mind is that your homeownership expenses are going to go beyond the mortgage payment, so make sure you are ready financially.

Ask Jen: Are you a first time home buyer with questions about the process? I’d love to answer it for you. Send me your question and I’ll feature it on my blog. Also, if this article was helpful to you, subscribe to the blog so that you get notified of new posts when they are published.

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