Salary-Based Mortgage Sizing: How Much House Can I Afford?

When considering a mortgage, it's important to understand how much you can afford to borrow based on your salary and other financial commitments. This is known as mortgage affordability, and it refers to your purchasing power when buying a home. While lenders will consider your income, they will also take into account other factors such as your down payment, debt obligations, and credit profile. Online mortgage affordability calculators can help you estimate how much you can borrow and what your monthly payments might be, but it's important to remember that these are just estimates, and consulting a financial professional is always recommended.

Lenders consider income, down payment size, debt obligations and credit profile

Lenders consider multiple factors when assessing mortgage applications, and while income is important, it's not the only thing they look at. Lenders will also scrutinise your credit report, looking beyond your credit score to gain a sense of your track record with financial obligations. They will also consider your debt-to-income ratio (DTI), which shows how much of your income goes towards your debts each month and how you're doing financially overall. Lenders will also take into account your down payment size, with a higher down payment often improving your chances of securing a mortgage.

Income

A good income can make it less likely that you'll be viewed as a risk by lenders, as it indicates you're more likely to be able to pay all your obligations every month. However, a high income may not help you get a better rate if your fixed expenses are high. Lenders will also consider the stability of your income, so a spotty job history or recent unemployment could result in a higher interest rate. They will also take into account any additional income from investments, for example.

Down payment size

The larger the down payment, the less likely it is that you will default on your loan, so a higher down payment can improve your chances of securing a mortgage. For homes that cost over $1,000,000, the minimum down payment is typically 20% or more, depending on the property's location. For down payments of less than 20%, buyers are usually required to purchase mortgage default insurance, which can increase the total cost of borrowing.

Debt obligations

Lenders will consider your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. It helps them assess your ability to manage existing debt obligations and take on new ones. Lenders usually require a DTI under 43%, though some place the limit at 36%, and a lower DTI will improve your chances of mortgage approval.

Credit profile

Lenders will scrutinise your credit report, looking beyond your credit score to gain a sense of your track record with financial obligations. They will review your payment history on credit cards, loans, lines of credit and anything else on your credit report. They want to see a strong history of responsible, on-time payments and may ask for explanations for missed or late payments.

Affordability refers to how much you can borrow based on income, debt and expenses

Affordability, in the context of taking out a mortgage, refers to how much money one can borrow based on their income, debt, and expenses. This is also referred to as one's purchasing power when buying a home. The higher one's mortgage affordability, the more expensive a home they can afford to purchase.

Lenders use a formula to determine the level of risk of a prospective home buyer. This formula varies but is generally determined by using the applicant's credit score. Applicants with a low credit score can expect to pay a higher interest rate, also known as the annual percentage rate (APR) on their loan. Lenders also consider an applicant's income, debt obligations, credit profile, and the size of their down payment.

An applicant's income is a significant factor in determining affordability. Lenders will look at an applicant's gross income, which includes their base salary plus any bonus income, and can include part-time earnings, self-employment earnings, social security benefits, disability, alimony, and child support. Lenders will also consider the stability of an applicant's job and the potential for income in the future.

An applicant's debt is the other side of the affordability coin. Lenders will consider an applicant's monthly debt obligations, including credit card payments, car payments, student loans, alimony, and child support payments. Lenders will also take into account any down payment made by the applicant, with a larger down payment resulting in a lower amount needing to be borrowed and lower interest rates.

Affordability calculators are available online and can be used to estimate a comfortable mortgage amount based on one's current budget. These calculators take into account factors such as income, down payment, and monthly debts to provide an estimate of how much one can afford to borrow for a mortgage.

The higher your affordability, the more expensive a home you can buy

When it comes to buying a home, the higher your affordability, the more expensive a home you can buy. Affordability is calculated based on your income, debts, and down payment. Lenders will also consider other factors such as your credit profile and debt obligations.

Your income is a primary factor in determining how much you can afford to spend on a home. Lenders will assess your monthly income minus any fixed, recurring expenses to calculate how much you can borrow. A higher income will generally result in a higher borrowing capacity and, therefore, a more expensive home.

The size of your down payment also plays a crucial role in affordability. A larger down payment can lower your monthly payments, avoid the need for private mortgage insurance, and increase your affordability. For example, a 20% down payment on a $250,000 home would be $50,000, significantly increasing the maximum purchase price you can afford compared to a smaller down payment.

Additionally, your debt obligations will impact your affordability. Lenders will consider your monthly debt payments, including credit card payments, student loans, and other loan payments. A lower debt-to-income ratio will improve your affordability and allow you to qualify for a more expensive home.

It's important to note that interest rates also play a significant role in affordability. A lower interest rate can decrease your monthly mortgage payments and increase your purchasing power. Your credit score and down payment amount can influence the interest rate you qualify for, so improving your credit score before applying for a mortgage may be beneficial.

Overall, by increasing your income, making a larger down payment, reducing your debt obligations, and securing a favourable interest rate, you can improve your affordability and, consequently, buy a more expensive home.

Affordability is also used to describe overall housing affordability and the cost of living

Affordability is a critical factor in determining the feasibility of purchasing a home. It is influenced by various factors, including income, housing costs, and the overall cost of living in a particular region. Housing affordability is typically assessed by comparing housing expenses, such as rents, mortgage payments, or prices, to household incomes.

The Housing Affordability Index (HAI) is a valuable tool for evaluating housing affordability and is used by real estate professionals, including realtors and property developers. The HAI is calculated by considering data on sales of existing single-family homes, monthly mortgage rates, and household income. A higher HAI value indicates improved affordability, suggesting that a family with a median income has more than enough income to qualify for a mortgage on a median-priced home. Conversely, a lower HAI signifies reduced affordability.

The National Association of Realtors® (NAR) employs the HAI to assess whether a typical family can secure a mortgage loan for a typical home. The NAR defines a typical home as the national median-priced, existing single-family home, and a typical family as one earning the median family income. By comparing these factors, the NAR determines if the median-income family can obtain a mortgage for a median-priced home. A value of 100 on the NAR's HAI indicates that a family with the median income has sufficient funds to qualify for a mortgage on a median-priced home.

In addition to income, lenders consider other aspects when determining mortgage affordability, such as the size of the down payment, debt obligations, and credit profile. For instance, a higher down payment can increase the likelihood of qualifying for a mortgage and potentially reduce the overall cost of borrowing. However, it is essential to note that factors like rising interest rates can negatively impact affordability, making it more challenging to purchase a home.

The cost of living in a particular city or region also plays a significant role in overall housing affordability. This includes considerations such as property taxes, heating costs, home insurance, utilities, and other monthly expenses. These additional costs can impact an individual's ability to afford a home or maintain a rental agreement. Therefore, it is crucial to consider not only the mortgage or rent costs but also the broader financial context of the desired location.

GDS and TDS ratios: housing costs should be 35% and 42% of pre-tax household income, respectively

When it comes to determining how big a mortgage you can get based on your salary, lenders use two debt ratios: the Gross Debt Service (GDS) ratio and the Total Debt Service (TDS) ratio. These ratios are a significant factor in deciding whether your mortgage application will be approved.

The GDS ratio is the percentage of your monthly income that covers your housing costs, including heating costs, property taxes, mortgage payments, and condo fees. It is calculated by adding up these housing costs and dividing the sum by your annual income. Ideally, your GDS ratio should be below 35%.

The TDS ratio, on the other hand, takes into account your total debt and housing expenses. It is calculated by adding up your utilities, property taxes, principal, interest, debt payments, and housing costs, then dividing that sum by your gross income. Lenders prefer a TDS ratio of 44% or less.

Keeping your GDS and TDS ratios within these limits indicates your ability to manage housing costs and debt payments. If your ratios are too high, you may need to save for a larger down payment or work on reducing your outstanding debts.

It is important to note that these ratios are not the only factors considered by lenders. Your income, down payment amount, credit profile, and other financial factors also play a role in determining your mortgage eligibility. Additionally, ratios may vary slightly depending on the lender and their specific guidelines.

Frequently asked questions