How Much Can You Afford?


Lending institutions such as banks and trust companies use two simple rules to determine how much you can afford in monthly expenses for housing including your mortgage payment:

Gross Debt Service (GDS) Ratio: The first rule is that your monthly expenses for housing can not be more than 32% of your gross monthly income.  Your monthly expenses for housing include:

Principal mortgage payment
Interest on the mortgage
Taxes – property
Heating

If applicable, half of the monthly condominium fees

These expenses are known as PITH for short.  Lenders add up these housing expenses to determine what percentage they are of your gross monthly income.

Total Debt Service (TDS) Ratio: The second rule is that your total monthly debt load should not be more that 40% of your gross monthly income.  This includes housing expenses (PITH) and other debts such as car loans and credit card payments.  Lenders add up these debts to determine what percentage they are of your monthly gross income.

This only leaves 8% (40%-32%) for other debts. If the difference between your GDS and TDS is greater than 8% then the percentage allowed for housing expenses will be lower by the same amount.

Keep in mind that most homebuyers keep their debt ratio comfortably below the maximums prescribed above.  The lower your debt load, the more affordable will be your home and lifestyle.

The Down Payment: If you have a down payment of 25% or more, you may qualify for a conventional mortgage loan that does not require mortgage loan insurance.  A minimum down payment of 5% is required for a high ratio mortgage.  A down payment of less than 25% requires mortgage insurance.

 

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About wojciechpianka

After a few years of studying English and History at the University of Toronto, I decided to transfer to Ryerson University and pursue a Bachelor of Commerce degree. While studying, I worked various jobs where I acquired many skills. Starting as a teller at Scotiabank, I moved on to being a manager of a restaurant, admin staff at a medical clinic, a sales agent for INGDirect and a manager at One King West Hotel. While all these jobs challenged me, I never felt my potential being utilized. Finally in 2008, I completed the Ontario Mortgage Agent Course and signed up with The Mortgage Alliance Company of Canada. This was a great decision, as it allowed me to use the skills I learned working to help people achieve their real estate and financial goals. My passion for real estate and numbers has lead me to becoming a mortgage agent. Growing up in New York City, I always had a fascination of historic buildings and skyscrapers. At 21, I bought my 1st property and have been investing in real estate ever since. I firmly believe thru steady, safe and conservative investing a one can obtain long term financial wealth. One day, I hope to develop the same buildings I help clients purchase.
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One Response to How Much Can You Afford?

  1. Congratulations on a fine website. Good job. Interesting post…

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