How Much Mortgage Can I Afford? - Properly

Your Question Answered: How Much Mortgage Can I Afford?

Properly is a different kind of real estate brokerage. It's the stress-free, full-service, modern way to move.
Learn more

By Jaswantee Ravi

When it comes to buying a home, a mortgage is a big investment. The amount of money you put down and the interest rate you are charged affect the monthly payment, so it is important to look into your options and make an educated decision.

The single most important aspect of purchasing a home is putting a firm value on the property—this allows you to make an informed decision when it comes to choosing what type of mortgage to take out. If you don't know what your mortgage options are, or what your mortgage rate will be, you may be at a loss when it comes to choosing which option is best for you. In this blog post, we will examine how much mortgage you can afford.

How Lenders Determine Mortgage Amounts

Every lender has different requirements, but most of them will consider the following factors when determining your rate:

  • Gross Income: Your current or expected income level, including both your salary and any estimated bonus/incentive income.
  • Property Value: The value of the property you plan to buy. Lenders will typically require a 10-20% down payment before they extend credit for more than 80 percent of the home's price (80 percent loan-to-value).
  • Front-end ratio: The front-end ratio, also known as the mortgage-to-income ratio, is the percentage of income that can be dedicated towards your mortgage each month. This consists of the four components known as PITI: principal, interest, taxes, and insurance.
  • Back-end ratio: the back-end ratio or debt-to-income ratio is the percentage of your gross income required to cover your debts. These debts include credit card payments, any loans, and child support.
  • Credit score: Lenders are concerned about your credit score to help determine whether or not you are a responsible borrower.

The 28/36 Rule

You can estimate your monthly mortgage payment in a couple of different ways. These methods are discussed below and include the rule of 28, the debt to income ratio, and the front-end ratio. The rule of 28 is based on how much you make each month (gross income) and tells you roughly how much house you can afford (mortgage payment). The rule of 28 states that you can afford to pay no more than 28% on your monthly pre-tax income. In this way, it's useful because it shows how much house you can afford using a simple ratio. However, while it gives an estimate of how big of a mortgage you can afford, it's not always accurate. If you have bad credit or low income, for example, the rule of 28 might overestimate your ability to afford a house. Also keep in mind that the rule of 28 does not take into account your day-to-day living expenses and other debt payments like student loans and car payments.

The other part is the rule of 36, which states that you ought to spend no more than 36% of your pre-tax income on housing and all expenses relating to the property, including taxes, maintenance, and insurance. In many ways, it's a better rule because it takes into account all of your living expenses. The only problem is that you have to keep track of a lot of information to properly apply this rule, and it might not be realistic for everyone.

While the 28/36% rule is the most common guideline for how much house you can afford, it's not infallible. It was created as a rule of thumb and doesn't account for many different factors that might influence your finances and mortgage loan. For instance, if you're applying for a mortgage at the same time you get married or have kids, your expenses are likely to increase even before your mortgage payment does. As well, as interest rates rise (which is happening now), it might be harder to reach the 28% threshold without incurring high costs in other areas of your life.

But remember that the 28% guideline only applies to your housing costs. If you want another 5% for emergencies, a phone bill, or something else entirely, make sure to factor it into your budget. You don't want to find yourself on track for an 80% mortgage with no savings in the bank, which could result in financial hardship in the long run.

Other Considerations for Home Buyers

No matter how much you have saved, or the current state of your finances, your mortgage is one of the biggest financial commitments you'll ever make—and one of the most important. Yet, despite the potential importance of this loan, coverage of mortgage financing is still greatly misunderstood, particularly among first-time home buyers. 

A lender has their own means to determine if you can afford a mortgage, but this doesn't mean that you shouldn't figure out what you can realistically afford given all of your other expenses. Even if you can pay your monthly mortgage, you want to have enough wiggle room for other expenses you may encounter or in the case of financial hardship—such as a job loss.

It's important to remember that a mortgage lender will also look at your credit score as well. A higher credit score can make it easier to be approved for a loan and get you lower interest rates (which is generally better for you), but there's no hard-and-fast rule about what the perfect credit score should be. However, if you manage your finances and credit responsibly, you should be able to get a mortgage with a credit score somewhere between 620 and 740 (higher is even better). If you're shopping for a home at the moment, find out what your credit score is before starting to look.

When deciding on an amount to spend on a home, consider your long-term goals and objectives as well. Do you plan on having children? Will your family be growing in the next five years? If so, it's important to factor this into your decision-making process when gauging how much you can afford on monthly mortgage payments.

Properly is a Canadian tech-enabled real estate brokerage transforming the home buying and selling experience as the only service in Canada that helps homeowners to buy before they sell.