A New Home – What Can I Afford?

Whether you are buying your first home or your third home, the big question is usually – What can I afford? This is a big question that is made up of two parts:

1. How much do you have for a down payment and what will someone lend you to buy a home?
2. How much mortgage will you take on and still sleep at night?

I’ll never forget the feeling I had walking over the threshold of my first home. It was one of panic and the question I asked myself was – What have I done? I owe soooo much money. Luckily it didn’t last long and it turned out to be a great decision financially and for me.

The answer to the first part of the ‘What can I afford?’ question is that your down payment must meet at least a minimum amount of the purchase price of the home and the housing payment (including property taxes and any monthly condo/home ownership fees) must not exceed 32% of your gross monthly income. Add to this any other loan and minimum credit payments and the total must not exceed 35% of your gross monthly income. 40% tops. There are other aspects of your financial life that must also fit their criteria such as a steady job, the down payment good credit and that the home you’re buying is good value.

The answer to the second part of the question is more complex because everyone’s situation is different. Your household income may be enough to cover a large housing payment but does it cover other payments such as childcare and lifestyle (vacations, entertainment and recreation)? Can you still afford the payments if there’s an expected or unexpected life event such as a lost job or a new child? How much debt do you feel comfortable taking on?

It’s a simple question but the answer is not always straightforward. At the end of the day, it’s important to remember that it’s you that has to make the payments and be able to sleep at night, regardless of what your banker or realtor say you can afford.

We’ll cover some other aspects of taking on the mortgage to buy your new home in the next post.