How much can you afford to spend on your first home?

How much should you spend on your first home? As a new buyer, it can be hard to know what you can afford in the market. After all, you have never made such a large purchase before! If you are unsure how to start determining your buying budget, you are not on your own. Here are some points to consider to help guide your budgeting.

What factors are taken into account?

To start things off, let’s discuss some of the major factors that will influence your buying power. What exactly determines how much you can spend on a home? Of course, your income will play a large role. Lenders will examine your monthly earnings to determine how much you may be able to afford in terms of mortgage payments. Apart from your income, however, you should also be aware of your expenses and debts. How much do you consistently spend each month in regular expenses, such as rent, credit card bills, groceries, and subscriptions? Some of these expenses cannot be avoided. However, if you have several unnecessary expenses that could impact your mortgage approval, you should consider cutting back where possible. Similarly, if you have debts, you should be making regular payments towards them so you can dedicate your future income to your mortgage. Lenders will also look into your credit and your ability to make mortgage payments. They will examine your payment history as well as your current capabilities. 

Understanding debt service ratios

Your lender will closely examine your debt service ratios to determine how much they think you can afford to spend on your first home. If you are not familiar with what debt service ratios are, these are figures that compare your household income with your expenses. There are two types of debt service ratios – your Gross Debt Service (GDS) Ratio and your Total Debt Service (TDS) Ratio. Your GDS ratio compares your household expenses with your income, which includes rent or mortgage payments, property taxes, utilities, etc. It is calculated as a percentage, so if you spend $2500 per month on household costs and have a monthly income of $7500, your GDS ratio would be about 33 per cent. Your TDS ratio takes into account your homeownership expenses as well as your other monthly costs such as credit card bills, subscriptions, or loans. 

Lenders typically prefer borrowers to maintain a GDS ratio of 39 per cent or below, and a TDS ratio of 44 per cent or below. These figures will help determine how big of a mortgage they may be willing to finance, and the interest rates they will offer.

Let a pre-approval be your guide

Knowing what you can afford to spend on your first home can feel like a lot of guesswork, which may make you uneasy. The best way to help ensure you are on the right track is to get a mortgage pre-approval! A pre-approval is a preliminary examination of your financial situation, from which your potential lender can give you an estimate of what you may qualify for in mortgage financing. This will give you an idea of where you stand in the market, and what you can expect to afford based on your current situation. Keep in mind that your pre-approval is not a mortgage approval, so you are not guaranteed mortgage financing. If your financial situation changes, your approval may as well. However, this is the best starting point in terms of figuring out what you can afford to spend on your future home! 

The dangers of overspending

With all this in mind, why is it actually so important not to go over your budget when buying a home? A successful homeownership experience must keep affordability top of mind. If you overspend and buy a home you cannot afford in the long run, this can lead to major financial stress. You may start to miss mortgage payments and fall deeper into debt. You also run the risk of foreclosing on your home if you cannot make your payments over an extended period. To avoid overspending, it’s essential that you carefully evaluate your budget and your pre-approval, and work with a mortgage broker to determine the price that is right for you. When it comes time to view homes, do not waste time viewing properties you cannot afford. Stick to homes in your price range so you can set yourself up for success.

Landing on the right budget for your first home can be tricky. Luckily, you can have the knowledge and experience of a mortgage broker on your side throughout the process! No matter how confident you are about the market, it’s always a good idea to use a broker as you navigate the home buying process. We are here to ensure you get the right product at the right rate.

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.