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Determining Your Budget

     The type of home you purchase will depend on three things; your income (including your assets minus your debt), the amount you have for a down payment and your mortgage interest rate. When determining your monthly income you must remember that the number one rule in home financing is that your monthly housing costs, i.e. principle mortgage, interest, taxes and heating (P.I.T.H), cannot be more than 32% of your earnings. This percentage of your monthly income is known as your GDS: gross debt services ration. In order to calculate your GDS all you have to do is add your family's monthly income and multiply it by 0.32. For example if your family's gross monthly income is $3300, then your GDS is $1088.

    Once you have calculated your gross debt service ration, you then have to calculate your TDS: total debt service ratio. Your TDS is the total of all of your mandatory monthly payments. You entire monthly debt payments should be no greater than 40% of monthly income. In order to calculate you TDS, you record your mandatory monthly payments, that is, your monthly car payments, any loan repayments, credit card payments and any other non-housing expenses you may have. In order to calculate how much of your monthly income you have available for housing costs, you subtract your TDS from 40% of your gross monthly income. For example, if your gross monthly income is $3300, the monthly debt you can afford in $1320. If your TDS equals $350, than your amount you have available for monthly housing income is ($1320 - 350) $970.00.

     If your gross debt service ration is greater than your available monthly housing income you will either have to produce a down payment greater than 10% of the price of the home or find a way to lower your total debt service ratio.

     Any lender you approach for a mortgage will take all of the above information into account when calculating the amount of your mortgage loan. You should be aware of exactly how much income you have available for housing costs before you approach a lender for mortgage consideration.

     Remember that home owners usually have a debt ration far less than the maximum and as such are able to lead a far more comfortable lifestyle than those who live off the 32% rule.

     Because the length of the mortgage you assume, as well as its interest rates, effect the affordability of home, you may want to calculate your expected monthly mortgage payments using many of the on-line mortgage calculators. The chart seen below will give you an idea of your income to down payment ratio. Simply locate your approximate monthly income and the amount of your down payment and you will be able to see the price of a home you can afford.

Mortgage Affordability Guide
Household income 5% down payment Max home price 10% down payment Max home price 25% down payment Max home price
             
$25,000 $3,000 $60,000 $6,300 $63,000 $18,900 $75,
600
$30,000 $3,900 $78,000 $8,200 $82,000 $24,700 $98,
800
$35,000 $4,800 $96,000 $10,100 $101,000 $30,300 $121,
200
$40,000 $5,700 $114,000 $12,000 $120,000 $36,000 $144,
000
$45,000 $6,600 $132,000 $13,900 $139,000 $41,700 $166,
800
$50,000 $7,500 $150,000 $15,800 $158,000 $47,400 $189,
600
$60,000 $9,300 $186,000 $19,600 $196,000 $58,800 $235
,200
$70,000 $11,050 $221,000 $23,400 $234,000 $70,100 $280,
400
$80,000 $12,500 $250,000 $27,200 $272,000 $81,500 $326,
000
$90,000 $12,500 $250,000 $31,000 $310,000 $92,800 $371,
200
$100,000 $12,500 $250,000 $34,800 $348,000 $104,300 $417,
200
Figures based on an 8% interest rate

     When determining your home buying budget, you must keep a few things in mind. Firstly, if you have less than a 25% down payment, and the amount of your loan is greater than 75% of the home's value, then you will require mortgage loan insurance, just in case you default on your loan.