The numbers

What’s your home buying budget?

Your Home Buying Budget - Ingrid Bjel McGaughey - Toronto Mortgage BrokerBuying your first home will require a fair bit of number crunching. How much can you afford? Do you know what the maximum sticker price is for your new home?  In other words: what is your home buying budget?

Yes, budgeting is a four-letter word

Ugh…  As much as you might hate it, you do need to know what your home buying budget is.  Otherwise, you risk a lot of heartache…  Falling in love with a home that seems perfect, but way outside your price range.  Or worse: offering to purchase a property and finding out that you can’t follow through.  Before you go looking at homes – and definitely before you offer to purchase one – figure out the numbers.  You’ll be armed you with the information you need to make smart home-buying decisions.

Take a look at the PITH

To figure out whether you can – according to lenders’ guidelines – afford to buy a home, we need three numbers:

1. PITH

You know the financial industry LOVES their acronyms.  This one’s used in our calculations for figuring out how much you can afford.  It stands for [mortgage] Principal, [mortgage] Interest, [property] Taxes and Heating (P.I.T.H.).  In other words, PITH refers to your shelter costs.  We use the PITH number to figure out if you can comfortably pay for your shelter costs, with the money you’re making.  Speaking of which…

2. Your income

Your income plays a really big role in determining how much you can borrow. Note that this should include the income of anyone else who is going on this home ownership journey with you. Once you have that monthly income, we are getting closer to finding out how much you can afford in monthly housing costs every month.

3. Your other debt payments

People are often surprised that we do need to look at the other debts you have when figuring out if you qualify for a mortgage.  The logic behind this is that if you already have big financial commitments – car loans, student loans, line of credit balances, credit card balances, and so on – you might not have enough money left over to comfortably pay for a mortgage and all the associated costs of owning a home.

The GDS and TDS

Remember what I said about acronyms?

Check out my post on the Gross Debt Service ratio (GDS) and Total Debt Service ratio (TDS) to see how these work.  The bottom line is this:

  1.  Your GDS can’t go over 34% (if your credit is average) or 39% (if your credit is fantastic)
  2. Your TDS can’t go over 42% (if your credit is average) or 44% (if your credit is fantastic)

There are exceptions to the TDS and GDS guidelines

If your down payment on the property you’re purchasing is large – 20% or more – you may be able to get an exception with your lender.  This is especially true if you’re putting 35-50% toward the purchase of your property.  Or, if you’re using an alternative or “B” lender, they may be able to go up to 50% for the TDS, although again, your down payment must be more than 20%.

How much can you afford according to Genworth?  Try this calculator:

Want to be extra sure you’re ready to buy?  Take a budget selfie

Do you know how much money you have coming in, and where that money’s going? How much are you spending every month on food, clothes, transportation, and other things? Work out your current household budget using this worksheet from GetSmarterAboutMoney.ca.

Get some professional guidance

There’s more to home ownership than a mortgage payment.  Meet with us first. Independent mortgage brokers are expert at providing the advice, education and resources that first-time buyers are looking for.  I’m happy to help!

Next up: the down payment!

Photo credit: [c] fantasista for freedigitalphotos dot net
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