Financial Ratios How do lenders assess how much I can afford per month

Financial Ratios

How do lenders assess how much I can afford per month?
Generally, lenders calculate that the homebuyer shouldn't pay more than 30 to 32% of gross income for principal, interest, taxes, and insurance (PITI), or 40 to 42% for both PITI and monthly debts combined.

The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas used by lenders for loan application. Keep in mind that the loan balance will vary over the term of the loan, although the monthly payment remains the same.

Two lender formulas:

30 to 32% formula	Total monthly housing costs (PITI) = 30 to 32% (or less) gross monthly income
40 to 42% formula	PITI + all monthly debts = 40 to 42% (or less) gross monthly income

How Much Can I Afford?

What amount should I establish for my monthly mortgage payments?
House hunting begins at home... with planning. Knowing your affordable price range will bring your house hunting into focus.

How much house you can afford depends on two things: how much you can afford for the monthly mortgage payment, and how much you can invest in the down payment. Monthly payments include the principal and interest on the mortgage loan and property taxes and insurance against fire and other hazards. These four costs are often abbreviated PITI.

The key items are the size of the down payment, the amount of the mortgage and the term – or length – of the loan.

HLC Home Loans Canada offers a Mortgage Affordability Calculator to determine how much you can afford and a Mortgage Comparison Calculator to compare different payment options.

Getting Pre-approved

Why should I apply for a mortgage pre-approval?
Having a pre-approved mortgage will give you the confidence of knowing exactly what you can spend on a home before you start looking. You will also be protected against interest rate increases while you look for your new home.