Homes come in every size, style and price range. Knowing what you can afford – and all those other financing details – before beginning your search can save you both time and disappointment.
First Affordability Rule
Lenders such as banks and trust companies allow you to spend approximately 32%* of your gross monthly income on housing costs (including property taxes, heating and, if applicable, 50% of condominium fees). Professionals might also refer to this as the ratio of debt to income, or the Gross Debt Service ratio (GDS).
Second Affordability Rule
The second affordability rule is that your entire monthly debt load shouldn’t be more than 40% of your gross monthly income. This takes into consideration housing costs and other debts, such as car loans and credit card payments. Lenders add up these debts to determine what percentage they are of your gross household monthly income. This is known as your Total Debt Service (TDS) ratio.
Being qualified or pre-approved for financing should actually happen before beginning to house hunt. By seeking pre-approval, you’ll completely understand what you can afford. This also gives your real estate agent access to a written confirmation or certificate for a fixed interest rate good for a specific period of time. To obtain pre-approval, contact your real estate agent or mortgage broker. One reason you may want to search out a mortgage broker is that he or she operates independently of the lender. In short, this means they can help you find the best financial product at the best rate from a variety of sources. Usually, the mortgage broker can complete this with no added expense to you.
The maximum amount of a conventional mortgage is 80% of the purchase price. The amortization – length of time in which to repay the loan – is usually 25 years. The term of the mortgage is the number of months or years, usually six months to five years, for which the rate of interest is set.
High Ratio Mortgages
For most people, the hardest part of buying a home – especially the first one – is saving for the necessary down payment. Understanding how much down payments can cost will help make this process easier. It’s also a good thing to keep in mind when looking at homes.