How to Know How Much Home You Can Afford
Before you begin your home search, it’s crucial to determine your budget to avoid wasting time on properties beyond your financial reach. Knowing your limits helps prevent disappointment when you view homes that are more affordable.
To gauge what you can afford, consider the following factors:
- Your household income
- Your down payment
- Your monthly expenses related to housing, such as mortgage payments, homeowners’ insurance, property taxes, condominium fees, utilities, school taxes, and maintenance costs
- Your existing debts and the monthly payments required to manage them
- Your spending habits
- Your closing costs and other one-time cost
Examine Every Expense Thoroughly
You need to cover essentials like clothing, food, and transportation, while also allowing for some leisure activities. Additionally, it’s important to be prepared for unexpected emergencies.
Your mortgage advisor will ensure you have enough funds for everyday expenses and some personal indulgences. Lenders typically use the following ratios as benchmarks to determine a comfortable limit for your housing and debt payments:
- Gross Debt Service (GDS) Ratio: Ideally, mortgage-related expenses, including principal, interest, property taxes, heating bills, and condo fees, should not exceed 30% to 32% of your total annual income.
- Total Debt Service (TDS) Ratio: This ratio evaluates the portion of your gross annual income that goes toward all debt payments, including your mortgage, credit cards, personal loans, and car loans. Typically, TDS should not exceed 37% to 40% of your gross income. Lenders often consider the combined income of you and your spouse when calculating this ratio.
If your monthly housing expenses are eating into your budget for other necessities, you have several strategies to explore.
- Start by cutting back on lifestyle expenses. Consider reducing travel, dining out less frequently, or spending less on clothing to boost your cash flow.
- Secondly, identify any temporary expenses that will soon be resolved. For instance, you might be close to paying off a car loan or see a drop in childcare expenses when your kids start school.
- Third, explore more affordable homes that still meet your needs while allowing you to comfortably manage your everyday living expenses.
You and your mortgage advisor should also consider upcoming expenses. For instance, you might need to budget for a car replacement in the near future, or if you’re planning to expand your family, expect changes in your budget due to child-related expenses and parental leave.
In the end, it’s essential to feel confident about your mortgage amount, term, and payment plan. You should also be satisfied with any adjustments you make to your lifestyle.