To determine ‘how much house can I afford’, there is a standard rule that your monthly expenses should not exceed 36%. The 36% rule is based on dividing your monthly mortgage payments and other monthly debt payments by your gross monthly income. If you haven’t got a budget yet, it’s time to do that before you sit down with your mortgage broker to ensure you know what your budget looks like and what is reasonable for you.
Plan out a budget by factoring everything you can. Don’t lowball things because you want a nicer house, you’ll only loose your nicer house faster if you lie to yourself about how many stops you’ll make at Starbucks this month.
It’s easy math. Shoot for 30% and calculate. If you bring home $3000 per month, your mortgage (insurance and all) should be no more than $1000. If you bring home $6000 per month, it should be no more than $2000 per month. But even if your math makes 36% or better sense, you should be aware of your actual debt commitments. Is your car payment pretty high? How about that outstanding student debt? How much of your income goes to travel and savings? What will you have left over after making that kind of mortgage payment every month, and can you survive comfortably on that?
Key factors in calculating affordability are 1) your monthly income; 2) available funds to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.
- Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
- Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
- Debt and expenses – It’s important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
- Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged.
We’ll provide you with an appropriate price range based on your situation. Most importantly, we’ll take into account all your monthly obligations to determine if a home is comfortably within reach.
It’s also important to plan for the future. Consider creating a savings plan for upcoming life events, such as having a child.