Before heading out with your REALTOR to find your dream home, your Salesperson will likely suggest that you get pre-approved for a mortgage amount so you have an idea of what price range you should be looking in. Even though it is less exciting than house hunting, this is an important first step in the home buying process and should not be skipped!
There are a host of mortgage calculators to be found online on each major bank's website, as well as independent lenders, and Mortgage Broker websites (check out Centum's variety of calculators here!). But your best bet for getting pre-approved and ready for home buying is to sit down with a Mortgage Broker and have them help you determine your affordability.
Your mortgage broker will go over your pay stubs, any loans or debts you may have, and any additional expenses you are responsible for on a monthly basis. Based on this info they will calculate 32% of your taxable income for use toward a mortgage payment, property taxes and heating costs. If you're looking at condos, half of the estimated monthly condominium maintenance fees will also be included. Secondly, all of your monthly debt payments, loans, credit cards, lines of credit payments, etc are deducted from 40% of your taxable income. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment.
These calculations are based on lenders' usual guidelines. But in addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 32% of your income, you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don't leave yourself "house poor".
In addition to helping you determine you affordability, your Mortgage Broker will know where the best rates can be found and they have the knowledge required to present a proposal for financing to lenders in the best way possible to successfully obtain mortgage financing.
All of this sound a bit confusing? Don't worry! Your Mortgage Broker should make the process clear and easy to understand. Your REALTOR will be able to suggest a reliable and experienced Mortgage Broker for you to work with in your home buying process.