For many first time home buyers, one of the most confusing – and frustrating – parts of the purchasing process is knowing how much mortgage they’ll qualify for. While it’s always a smart idea to get a pre-approval before embarking on the house hunt, they are usually a more conservative estimate of your affordable home purchase range. Buyers paying less than 20% own must now also factor in the Bank of Canada’s 4.64% stress test, regardless of the mortgage rate they actually qualify for.
What do Mortgage Lenders Look At?
While the size of your down payment will certainly impact your mortgage qualification, other factors such as debt levels, income and credit score are closely scrutinized by lenders when granting you a mortgage.
How to Calculate Your Mortgage Affordability
Wondering how much mortgage you’ll qualify for? Here’s the equation generally used by mortgage brokers when estimating a client’s affordability (keep in mind that this is for a purchase ranging from $1-$500,000 as this equation becomes a bit more complicated when you purchase a property above $500,001 to $999,999):
calculate your base annual income X 4.1 + down payment amount (must be at least 5% of total purchase price)
So, if you make a base salary of $50,000 then multiply that by 4.1
Add the percentage of down payment (in this case, 5% at $11,000)
= $216,000 is an estimate of what you can afford, based on your income and down payment.
It is important to note that things like monthly car payments, carrying a credit card balance, student loan payments, and unsecured lines of credit will all have an effect on the above equation.
You’ll Pay Added Costs With a Smaller Down Payment
The high ratio insurance premium that is added to your monthly mortgage payment when you have less than 20% down payment will also have affect your range of affordability. Again, this above calculation is a conservative method to figure out what the maximum mortgage amount you can afford from your base income.
Work with a Mortgage Pro
The best method is to contact a mortgage agent to assess your financial situation and offer you the best advice. They can offer guidance on your credit score and history, what lenders and products you would qualify for, your employment status and how you are paid, and so much more. There are no two applications the same as every single person has a unique financial situation.
All the best in your continued home search!