Before you start your home search, it’s important to know how much you can afford. The first step in househunting is getting pre-approved, but in case you’re not quite ready to commit, here is an outline of a few guidelines that can help answer the question of: how much can I afford?
Most financial experts say housing expenses should be no more than 25% of your total pre-tax (gross) income. This includes you monthly principal and interest mortgage payment, homeowners insurance, property taxes, and any condo fees.
For example, if your salary is $72,000 per year, your gross monthly income is $6,000 ($72,000/12). Therefore, your total housing costs shouldn’t exceed $1,500 per month – which is 25% of $6,000.
It’s important to keep in mind as well that mortgage lenders will look at your debt-to-income ratio (DTI), which is a comparison of your monthly income to your monthly debt, before approving you for a mortgage. A lower DTI will improve your chances of getting a loan. To increase your chances of approval, you want a DTI below 43%.
To calculate your DTI, divide your total monthly payments by your total monthly income before taxes.
Let’s say your housing costs, car payment, student loan and credit card payments add up to $3,000 a month and your income is $6,000 a month:
$3,000/$6,000 = 0.50, or 50%
If you need to lower your DTI to qualify for a loan or afford the mortgage you want, start paying down those debts.
If you think it may be time to take the leap and start your home-buying journey, contact expert Toronto and Greater Toronto Area based Real Estate Agent Caryn Parchment, to discuss your options.