How much can I afford to pay for a home?To find out how much you will be able to pay for your new home, you need to analyze your taxable income along with the amount of debt that you have to pay off through monthly payments. If it is your main residence that you are going to purchase, calculate approximately 32% of your income to make the mortgage payment, property taxes and heating costs.
Next, you need to calculate 40% of your taxable income and from that, deduct all of your other monthly payments such as car loans, credit card bills and other such debts. The lesser of these two calculations will be used to determine how much of your income may be used towards housing related payments, including your mortgage.
Apart from what the ratios tell you, you should make calculations of your own to determine how much you can afford. If the payment amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you take all other expenses into consideration too so that you can easily afford the basic luxuries.
It is always advisable to get a home inspection done before making a purchase decision. A thorough inspection is likely to clear a majority of the doubts that you might have when purchasing a home. The inspection gives an idea about the quality of the construction and indicates whether any major repair work will be required. This allows you to calculate all the add-on costs before making the final decision. An inspection will definitely give you a more secure feeling about your purchase decision by removing most of your doubts.
As a rule, at least 5% of the down payment must be from your own cash resources or a gift from a family member. This cannot be a borrowed amount. Several programs are available in the market that allow some alternate sources of down payment. The CMHC is one organization offering such programs. Certain lenders also accept gift money from a family member or friend as a down payment. However, such a sum needs a signed letter from the donor stating that it is a gift and not a loan.
For any down payment that is less than 25% of the total value, a loan insurance from either the CMHC or GE is required.
The benefits of getting a pre-approved mortgage are many. First of all, pre-approval gives you an idea of what you can afford, making your search for a new home much simpler. It also does away with the tension of trying to find out what your monthly installments are going to be. Probably the greatest advantage of getting a pre-approved loan is that it allows you to lock in a rate. As the lender guarantees a fixed rate when pre-approving the mortgage, the borrower can secure that same rate even when the market prices climb up. In case a situation arises where the interest rates fall below those that were pre-approved, the lenders usually offer the lower rate.
- Personal information and identification such as your drivers license or passport.
- Job details, including confirmation and proof of income.
- Your sources of income.
- Proof of financial assets.
- Information and details of all your bank accounts, loans and other debts.
- Source and amount of down payment.
- Proof of source of funds for the closing costs (usually about 2.5% of purchase price)
If you are receiving child support and alimony from another person, the amount paid to you will be added to your total income before determining the mortgage that you will qualify for. However, you will be required to produce a regular receipt for the same for a set time period as specified by the lender.
In a variable or floating rate mortgage, the payments are fixed for a period of one or two years but the interest rates can fluctuate every month depending on the market conditions. If the interest rates drop, more of the payment goes towards reducing the principal; if the rates go up, a larger portion of the monthly payment goes towards covering the interest. The interest rate is based on a predetermined formula which is in-turn based on the prime-lending rate.