Finding out how much you can afford on your mortgage is ideally something you should do before you start looking for a home. That way, you don’t spend time looking at homes that are out of your price range, and you avoid disappointment when you realize that you need to be looking at lower priced properties.
When figuring out your budget, keep these things in mind:
- The amount of your down payment
- Your household income
- Your current debts and the monthly payments
- Your monthly bills, such as your property taxes, insurances, utilities, home care costs, and your current mortgage, if you have one.
- Your closing costs
- The spending habits of your household
Examine all of your expenses.
Remember that outside of your mortgage, you need to feed and clothe the family, pay your bills, and keep your car running. Maybe have some fun from time-to-time, and be ready for any unexpected curve-balls or emergencies.
A good mortgage specialist will help make sure you have money left over above your mortgage payment for your everyday needs and lifestyle. Lenders tend to use the ratios below as guides to figuring out the most you should be spending on housing costs, debts, and regular monthly outgoings:
- Gross Debt Service (GDS) Ratio. No more than 30%-32% of your gross annual income should go to mortgage expenses, property taxes, heating costs and other fees.
- Total Debt Service (TDS) Ratio. TDS takes into account the gross annual income required for all debt payments, such as your house, credit cards, and loans. TDS payments should generally be no more than 37%-40% of your gross annual income. Lenders usually look at the combined income to determine this figure.
If your monthly housing and bills don't leave you enough money for other expenses, there are some options that you can look into that can improve your cash flow.
- Take a look at your lifestyle. Can you possibly reduce the amount you spend on travel, eating out, or spend less on other non-essential items and activities?
- Think about any short-term expenses; could you, for instance, pay off your car loan quicker?
- Start looking at lower-priced homes that still meet your needs. Doing so would still let you afford your everyday expenses.
You may also need to think about future expenses that may affect your budgets. Take into account that large appliances need replacing occasionally; maybe your family is growing and you need a bigger car? All of these possible scenarios need to be considered when figuring out your mortgage and expenditure limits.
Above all else, you need to be comfortable with the amount of your mortgage, the term, and the payments. And you need to be sure that any financial sacrifices that you make are worth it.
If you need any additinal information, please contact us and we'd be happy to help!