This is perhaps one of the most asked questions by home buyers. Everyone wants to know what their maximum purchase price is and how much they can afford. The answer depends on several factors. Primarily, how much down payment you have and how much of your income can we use to qualify your deal.
How much house can I afford based on my salary?
This is not a straightforward question. We must first determine how much of your current income we can use to determine how much house you can afford. Specifically:
- What is the nature of the employment relationship? Are you full-time regular non-probationary? Are you part-time regular of part-time casual or temporary? Each of these situations has a different application in determining usable income.
- How is your income derived? Is there any overtime, shift premiums, bonuses etc. that are above the base salary? If so, a two-year average of the non-guaranteed income must be determined and added to the base salary figure.
- Are you self-employed? If so, the most ideal situation is using your net income amount as reported to the CRA. If this amount is lower due to business write-offs, there may be amounts we can “add-back” to your net income or a “gross-up” percentage may be applied; whichever is most beneficial in increasing the net income amount.
Once a usable income figure is determined, the rest is a mathematical equation including:
- Current debt obligations (i.e., credit card payments, car loans, student loans, support payments etc.)
- Total available down payment
- Desired home mortgage payment, property taxes, heating, and condo/strata fees (if applicable)
These numbers are represented as ratios set forth by the government which are more commonly known as Gross Debt Service (GDS) and Total Debt Service (TDS).
How much do you realistically need to buy a new house?
How much you realistically need to buy a house is primarily determined by the current real estate market conditions in the market where the house is being purchased. Please connect with a reputable Real Estate Agent in your market to get an understanding of current market values.
How much money should you save before buying a house?
When purchasing a principal residence (where you will live), the minimum down payment required is 5% of the purchase price. This rule applies to any buyer regardless of how many homes they have previously owned. It must be noted that although 5% is the minimum down payment required, a larger down payment may be required based on the overall affordability on the deal and the desired purchase price.
When purchasing a multi-family property with a rental component (up to four units) the down payment varies based on number of units. For an owner-occupied rental of two units, the 5% down payment minimum applies. For an owner-occupied rental of three of four units, the minimum down payment is 10%.
For non-owner-occupied rental properties, the minimum down payment required is 20% or more depending primarily on property type, property use and location.
What is the ideal credit score to buy a house?
For most lenders, a credit score of 680 or higher is required to access best rates and products. There are some lenders that offer competitive products to those with credit scores as low as 600, but 680 is more the norm. For credit scores lower than 600, there are some options available. In this situation, the down payment would be a minimum of 20%.
When planning to purchase your home, there are lots of great online resources available. Check out our mortgage pre-approval calculator to help you understand your potential maximum purchase price. We also have a fantastic mortgage application called My Mortgage Planner. Make sure to download it – it is full of great tools! If you’d like help or more information please email us at info@TheMortgageGuyNiagara.com or book a no obligation consultation.