DreamScape Realty 403-253-7326 : 712 Alderwood Pl. S.E. : How Much Can You Afford? A description of mortgage financing

How Much Can You Afford?

So, you are thinking of buying a home. Before you can start your search you need to know just how much home you can look for. Such things as initial down payment, legal costs and other things should be considered. Ongoing costs like interest costs, taxes and maintenance should also be taken into consideration.

Lenders will qualify you taking several things into consideration. Employment history and credit score are two important items. Assuming both of those are solid, they then do some math looking at two calculations.

GDS (gross debt service ratio) To find your GDS, multiply your gross annual income (before deductions) by 32% and then divide that figure by 12. The result is what you are allowed to spend each month on mortgage payments including principal, interest, taxes and heating costs. And….

TDS (total debt service ratio). To find your TDS, multiply your gross annual income (before deductions) by 40% and divide by 12. This result is what you will be allowed to spend on mortgage payments including all the above and all of your other payments (i.e. car payments, credit cards etc.) combined.

The calculation that allows for the smaller payment is the deciding calculation.

The following example is for someone earning $75,000 per year with an outstanding loan with payments of $400/month and no other debts.

$ 75,000 x 32% = $ 24,000 / 12 = $ 2,000 per month GDS

$ 75,000 x 40% = $ 30,000 / 12 = $ 2,500 per month TDS

$ 2,500 - $400 = $ 2,100 per month is allowed on the TDS

Since the smaller number is the one the lender uses, the GDS figure of $2,000 per month is used. This figure must include Principal, Interest, Taxes and Heat.

If we assume:

Total Allowed Payment $ 2,000

less taxes of $1,800 per year $ 150 per month

less average monthly heating costs $ 100 per month

The total mortgage payment (P & I) $ 1,750 per month

The interest rate of the mortgage will determine just how large the mortgage may be. For example, an interest rate of 5.5% per year has a payment of (approximately) $5.33 per thousand dollars of mortgage (assuming a 35 year amortization). This means this person could qualify for a mortgage of $1,750 / $5.33 = 328.33 x $1000 = $328,330 based on the "GDS" calculation. Even if you do not want to spend the maximum amount, this does serve as a guideline.

Using the same numbers for the "TDS" calculation it would look like this. $2,500 - $150 - $100 - $400 (loan payment) = $1,850. Since the maximum "GDS" monthly allowable payment is the smaller of the two, that is the calculation used.

Please note that all of these figures are approximate. Some lenders may use percentages other than 32% or 40%. Your lender will be able to tell you the criteria that they use. A pre approved mortgage is a great idea. Even if you do not want to spend the maximum amount, this does serve as a guideline.

Mortgage Insurance

In Canada, lenders may only loan up to a maximum of 80% of the value of the home unless mortgage insurance is purchased. There are a couple different mortgage insurers, Canada Mortgage & Housing (CMHC) and GE Capital. Both use very similar criteria for the insurance.

If a purchaser is putting less than 20% down on the home, there is an insurance premium that varies depending on the borrower and the amount of down payment. This premium is added to the mortgage amount. For simplicity here we will use an average of 3%. Therefore, in the example above, 3% of the $328,330 or $9,850 would be added to the mortgage making the payment slightly higher (by about $52.50). This would mean the buyer would have to reduce the mortgage amount by either putting $10,000 more down or reduce the purchase price by about $10,000.

The minimum down payment allowed today is 5%. Previously some mortgages were approved with zero down but the federal government has changed the rules. 40 year amortizations were once allowed as well but that has been reduced to 35 year maximum.

There is a mortgage calulator on the home page of this web site that you can use to calculate how much mortgage you can qualify for using your numbers. And, there are several lenders listed here as well. If you have any questions, please feel free to contact me.

DreamScape Realty 403-253-7326

712 Alderwood Pl. S.E.

"turning dreams into reality"