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How much mortgage can I afford? (and calculating income and debt impacts)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

September 26, 2019 - Karl Yeh

Wondering if you can actually afford to buy that home you've been eyeing? How much can you  afford? How much will your lender provide? In this episode, we discuss how much mortgage you can afford and how the banks/lenders determine how much they can lend you. We explore how your income and debt impacts mortgage affordability and how you should set up a monthly budget to include your mortgage payments. 

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What we discussed:

Karl Yeh:

Hi everyone. I'm Karl. Welcome to another Homebuyer's School video, a channel where to get the latest strategies, tactics, and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below. Hit the little notification bell so you don't miss anything.

[00:00:30] Today I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal.

And the question we're going to answer today is:

How much mortgage can I actually afford?

How would you know that? Do you use the calculators online? How would you start? And I guess how do the banks actually calculate that?

Mujtaba Syed:                  

First, find out what you're comfortable with at the monthly budget before you even look at a calculator or anything like that.

Because the calculators, we just look at numbers, right. We don't look at certain lifestyles, we don't look at stuff that we don't consider [00:01:00] it to be mandatory payments.

So first and foremost, set a budget for yourself that you're comfortable with every month, no matter what happens that you can pay.

Say you fall sick, or you get an injury, you want to travel, you want to make sure that you can pay that mortgage no matter what. That's the first step.

Mujtaba Syed:                  

Second step is going through a pre-approval process, so most banks, if your credit score is the optimal credit score, which is 680 or higher, then we will look at 44% of your annual household income for all your debts.

That includes the mortgage payment, property taxes, utilities, [00:01:30] any condo fees that might be there, any other debts that are mandatory debts.

The reason why the bank do that, they want the other 56% available to you just in case there's some unforeseen circumstances, you do have a little bit of a life, something that we don't consider to be mortgage poor.

You have some savings, so a lender in Canada will not go over 44%.

Some lenders might make a discretion on a case-by-case scenario, but you won't be an insured mortgage with CMHC (Canada Housing Mortgage Corporation), it'll be a conventional mortgage and every lender has their own discretion that they'll [00:02:00] do.

Now sometimes people will come back to me and say, "Listen, my total debt ratio is only 40% and I'm still not getting approved because there's also a gross debt ratio that we take a look at."

You might have zero debts, but this house, it's now gone over a threshold, so only your housing costs, which is your mortgage payments, property taxes, utilities, condo fees, they can't be more than 39% of your income if you have the optimal credit score.

How to finance your home

Now, if you go up to 40% once again, hard stop, CMHC will now take a look at it. [00:02:30]

Even if it's 39.01 right, it's 39%, that is a hard stop for just gross household debt, total debt 44% you don't want to go over if you have a normal credit score.

Karl Yeh:                             

So you only have actually five percent extra of the 39% of total debt.

So if you have like a car loan and credit card loans, and if you're kind of maxed out, you're kind of out of luck then, right?

Mujtaba Syed:                  

You're kind of out of luck, but not necessarily.

You can find a cosigner or you can find other options. [00:03:00] Or, maybe you decide this house is too expensive for you.

Maybe find something that's a little bit closer to your budget.

You might want to reduce the purchase price by a certain 50, 60,000, maybe 10, 20,000, depending until you get to the ratios in line so you can comfortably afford it. Those ratios are in line to protect you and the bank, but mostly you so you can afford those payments.

Those 56% is available to us, God forbid anything happens.

That breathing room is very, very important so it might not get you into the perfect home, but it will get you into [00:03:30] a home that you're comfortable with.

It is very difficult for a lot of people to get into the dream home right from the get-go, but maybe just take it as a step-by-step approach.

Get into something that you can afford, is comfortable for you. Do it for a couple of years.

We assess your situation and then look from there and see what you want to do after that.

Karl Yeh:                             

We actually have a great video where we talk about everything in terms of TDS, gross debt ratio, everything in terms of credit score. We're going to leave that video up here and in description below for you to watch.

Debt and mortgage affordability

Karl Yeh:                             

So how did they come up with that 44%? Why isn't [00:04:00] it 45%? Why isn't it 50%? Like what led to that percentage?

Mujtaba Syed:                  

It's hard to say, but I think the bank account [inaudible 00:04:07] to 44% is the ideal number, where it's not too risky, gives you the ideal purchasing power without going slightly overboard, and keeping in mind this is across the board, right, it's not just based on one specific person.

It's a safe number to use for everybody who needs to kind of follow the same guidelines, and then that is a reason why.

 I think it is because the last thing they want you to do is go into a house that you can [00:04:30] afford, and unfortunately, now you are struggling to make payments.

You are struggling to make ends meet.

You might be making the mortgage payment, but now you're having issues with your car payments, or you're having issues with your grocery bills. Like those are the things we don't want.

We want you to be comfortable in every aspect of your life, and getting the perfect home within those ratios is a big part of it.

Because your biggest expense is going to be your living expense, which is your mortgage expenses, one of the biggest expenses that you have in your life, and that has to kind [00:05:00] of fit with your lifestyle and your income.

Karl Yeh:                             

In the terms of when you talk about 39% of total home debt, right, like home payments-

Mujtaba Syed:                   Gross debt.

Karl Yeh:                             

Gross debt, that five percent, does that mean the like, let's say you have a car that's worth 20,000, is that included, or just the monthly payments?

Mujtaba Syed:                  

We do look at it to see what kind of debts you have, but more important than that is see what the monthly payments going on with your monthly income coming in.

So your monthly payment per month will impact your ratios [00:05:30] more than what the balance of the debt is at that time.

Income and mortgage affordability

Karl Yeh:                             

How much does your income actually play into the calculations of how much mortgage you can afford?

Mujtaba Syed:                  

A 100%.

Your income is a major deciding factor in your monthly obligations, right, because you have a certain level of income that comes up every month, and from that a certain goes towards your debt.

So we will take a look to see how much is left after those debts are paid to see how much you can afford. So your income is a very, very strong factor.

One of the very important parts of the five-Cs of credit, which is capacity, is to look [00:06:00] at the income.

Karl Yeh:                             

Got it. And do you have anything else to add in terms of how much mortgage you can afford?

Mujtaba Syed:                  

Take a look, right. Assess your situation.

You can even explain to the lender even, "So listen, this might seem like it's too expensive for me, it's right on my ratios, but hey listen, I just graduated, I'm a professional, and my income potential is going to rise over the years so it's going to be a lot more comfortable. I'm expecting a big raise pretty soon that maybe the lender doesn't know about."

All of that stuff can play a big factor into helping you get approved for that loan if you're close [00:06:30] to your limits, and if you're already close your limits, maybe stay a little bit under those limits, right.

You do want to be comfortable with your monthly budget.

You don't want to over-extend yourself or overpay. You always want to be able to be comfortable and you want them to be able to live your life, right. That's a very, very important part.

Karl Yeh:                             

And I think what probably you want to know is what are some programs to help you with your mortgage payments?

And I'm going to leave a video up here and in the description below talking about all those payments, especially for first time home buyers who want that help, right, in terms of getting a mortgage approval.

 [00:07:00] So if you want to know more about the mortgage approval process, we got a great video series here on understanding the steps required for mortgage approval, as well as a great video series here on understanding mortgage rates.

Don't forget to subscribe to keep learning from the experts, and I'll see you in our next video.

 

Your turn:

Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts. 

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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