First time home buyer

Ma & Pa say it’s time to move out

Also known as yes you can afford your own place.

They think you’re ready, your significant other thinks your ready, heck even the family dog thinks your ready. Here is why they know that.

1) You have a good job and are getting a steady pay check.

2) You have credit established and pay all your bills on time.

3) You plan on buying something that should increase in value over time, unlike that Xbox you bought a few years ago.

4) You have put away enough to cover your downpayment.

That covers a few of the major C’s of mortgage borrowing right there, so you’re heading in the right direction. In case you were wondering the 5 C’s of credit are Collateral, Credit, Capacity, Character and Capital.

Now you should find out how much you can afford to buy. To do this the lender is going ask you some questions like the following:

  • Name, date of birth, SIN, current and past address.
  • Where you work.
  • How long you have worked there.
  • Employment status.
  • Income level.

And lastly info about your assets and liabilities. All of these are important to determine your credit worthiness and to calculate your debt service ratio’s to prove your ability to carry the loan.

You should be able to so most of this on your own to prepare for your meeting. For a small fee you can log on to Equifax Canada website and pull your credit to see where you stand. Once you have that you should sit down with a pen, paper and calculator to figure out your debt service ratio’s.

Ok you found out by visiting CMHC’s website that they require that you meet the debt service ratio’s of 32% Gross Debt Service (GDS) and 40% Total Debt Service (TDS).  I know at this point you may be a little confused so I’ll explain some of the jargon. GDS is a percentage of your gross income to support house hold expenses and TDS is a percentage of your income to support all your debts.

Ok now comes the fun part. Let’s write down some numbers so we can calculate your ratio’s. Your engineering job pays you 65K a year, your car payment is 248 a month, your credit cards are paid in full every month and you have been able to save 30K to use as a downpayment thanks to hotel Ma & Pa.

So here we go. Let’s look at GDS first. 65,000 /12=5,416.66 X 0.32=1,733.33 this is the maximum mortgage payment for GDSR before house hold expenses. You calculate that the 250K house you  like will cost $2,485  (12/2485=207.08 monthly)per year in property tax and you were told that the monthly heating bill would be $125. Now take 1,733 – 207 ( taxes) – 125 ( heat) and you get 1,401.33 which is your maximum mortgage payment for GDS

Now for the TDS. 65,000 / 12= 5,416.66 X 0.40= 2,166.67, this is your maximum mortgage payment for TDSR before house hold and debt payments. So to finish the ratio we take 2,166.67-207 (tax) – 125 ( heat) – 248 ( car pmt) =1,586.76. This is your maximum monthly mortgage payment for TDSR.

Hope your are still with me cause we are almost done. Now we take the lower of the two maximum ratio’s, in this case that’s 1,401.33 and divide that by the 5 year posted mortgage rate of 4.74% and multiply by 1,000, and now we find out your maximum mortgage you can afford is 295K based on the info provided.

If math is not your favourite past time, I would be happy to act as your personal mortgage calculator. I look forward to hearing from y0u.

Cheers,

Pat

P.S- Now that you know how to do it on your own, you can use CMHC calculator for the next time. Playing with the downpayment amount will also effect how much you can afford to buy.