If you're looking to purchase a home in Calgary, it's important to determine how much housing you can afford before you start your search. This will help you avoid falling in love with a home that's outside of your budget and ensure that you're able to comfortably make your mortgage payments. Here are some tips on how to determine how much housing you can afford in Calgary in 2023.
Homeownership can be a significant financial goal, but it's important to approach it with careful consideration and planning. By choosing a less expensive home, taking advantage of first-time homebuyer programs, considering a longer loan term, and improving your credit score, you can make homeownership more affordable and achievable.
Here are some factors to consider when determining how much housing you can afford.
1. Calculate your monthly income
The first step in determining how much housing you can afford is to calculate your monthly income. This includes any regular income you receive, such as your salary or wages, as well as any additional income sources, such as bonuses or investment income. Be sure to include any income changes you expect in the near future, such as a raise or a change in employment.
2. Determine your monthly expenses
Once you have calculated your monthly income, it's time to determine your monthly expenses. This includes any recurring expenses you have, such as rent, car payments, and credit card payments. Be sure to also factor in any one-time expenses, such as medical bills or home repairs. Subtract your monthly expenses from your monthly income to determine your disposable income.
3. Calculate your debt-to-income ratio
One of the first things you should do is calculate your debt-to-income ratio (DTI). Your DTI is the percentage of your monthly gross income that goes toward paying debts, including credit card bills, car loans, student loans, and housing expenses. Lenders typically use your DTI to determine your eligibility for a mortgage and the amount of loan you can qualify for.
To calculate your DTI, add up all of your monthly debt payments and divide by your gross monthly income. For example, if you have a total monthly debt of $2,000 and a gross monthly income of $6,000, your DTI is 33%.
4. Consider your down payment
Another important factor to consider is your down payment. The amount of money you put down upfront will impact your monthly mortgage payments and your overall loan amount. The more money you can put down, the less you'll need to borrow and the lower your monthly payments will be.
Most lenders require a down payment of at least 3% to 5% of the home's purchase price, although some may require as much as 20%. If you're unable to make a large down payment, you may be required to pay for private mortgage insurance (PMI), which can increase your monthly mortgage payments.
5. Evaluate your other expenses
In addition to your housing expenses, you should also consider your other monthly expenses. This includes things like utilities, groceries, transportation, and entertainment. Make sure to factor in these expenses when calculating your monthly budget to ensure that you have enough money left over for other essential expenses.
6. Use a mortgage calculator
Using a mortgage calculator can help you determine how much housing you can afford based on your income, expenses, and down payment. There are many mortgage calculators available online that can help you estimate your monthly mortgage payment and the total cost of the loan.
7. Get pre-approved for a mortgage
Getting pre-approved for a mortgage can also help you determine how much housing you can afford. This process involves providing a lender with your financial information and having them review your credit score, income, and debt-to-income ratio. Based on this information, the lender can provide you with a pre-approval letter that outlines the amount of money you can borrow.
Keep in mind that just because you're approved for a certain amount doesn't necessarily mean you should borrow that much. Only borrow what you can comfortably afford to repay.
8. Take advantage of first-time homebuyer programs
There are several programs available to first-time homebuyers that can make homeownership more affordable. These programs can include down payment assistance, lower interest rates, and reduced closing costs. Some programs are offered by state or local government agencies, while others are offered by private lenders.
It's important to research these programs and determine if you qualify. Some programs may have income and credit score requirements, while others may require you to complete a homebuyer education course. By taking advantage of these programs, you can reduce your upfront costs and make homeownership more affordable.
9. Consider a longer loan term
When purchasing a home, you'll typically be required to take out a mortgage loan. The length of the loan term can significantly impact the amount of your monthly mortgage payments. A longer loan term, such as 30 years, can reduce your monthly payments, making homeownership more affordable.
However, it's important to remember that a longer loan term also means you'll pay more interest over the life of the loan. If possible, aim to make extra payments towards your mortgage principal each year to reduce the amount of interest you'll pay over time.
10. Improve your credit score
Your credit score plays a significant role in the interest rate you'll receive on your mortgage loan. A higher credit score can result in a lower interest rate, which can significantly impact the affordability of your monthly mortgage payments.
To improve your credit score, focus on paying down any outstanding debts, making on-time payments, and avoiding new credit inquiries. It's also important to regularly review your credit report for errors or discrepancies that may be impacting your score.
At Last, determining how much housing you can afford requires careful consideration of your income, expenses, down payment, and other financial obligations. By taking the time to evaluate these factors and working with a qualified lender, you can find a home that fits your budget and your lifestyle.