How much home can you afford?

Young couple reviewing their finances at the kitchen table and going online to determine how much home they can afford. Figuring out what you can afford to spend on a home is just as important as finding the right home. To determine the answer, you’ll want to look at a number of factors, including your household income, your essential expenses, your lifestyle and discretionary spending and the amount of debt you carry. These are all factors that will influence how much you can spend on a mortgage and on the other costs associated with maintaining a home. Your calculations from Get Organized will be a useful starting point.

Once you have these numbers, here are three calculations that can help you determine overall affordability.

Gross debt service (GDS) ratio

The GDS ratio looks at your proposed housing costs (mortgage payments, taxes, heating costs and 50% of condominium fees, if applicable). Generally speaking, this amount should be no more than 32% of your gross (pre-tax) monthly income, to be affordable.

For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 on monthly housing expenses.

Total debt service (TDS) ratio

The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your total debt payments should be no more than 40% of your gross monthly income.

Keep in mind that the GDS and TDS are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle.

$ gross annual household income x 3.4 = $ home price

For example, if your annual household income is $60,000, you can probably afford a $204,000 home. Here’s an idea of how home affordability and minimum down payments work out for a number of household income levels using this guideline:

On a family income of:

You can afford a house that costs:

Minimum down payment would be:

$50,000

$170,000

$8,500

$60,000

$204,000

$10,200

$70,000

$238,000

$11,900

$80,000

$272,000

$13,600

$90,000

$306,000

$15,300

$100,000

$340,000

$17,000

$125,000

$425,000

$21,250

$150,000

$510,000

$26,000

When you calculate home affordability, be sure to consider the extra closing costs you’ll need to complete the home purchase, as well as the additional ongoing costs involved with running a home.

Before falling in love with a potential new home, you may want to obtain a pre-approved mortgage. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

Table taken from: /products-services/banking/mortgages/canafford.jsp;