Alan Harris


Info About Lenders & How Much house you can afford

Yes, it’s true that your Lender decides what you can BORROW... but You decide what you can AFFORD.

Expect the Unexpected

It is important to remember that despite them being careful, Lenders base their decisions on averages and formulas. Only few would try to understand your lifestyle and spending patterns. The best way to handle home finance would be to leave a little room for the unexpected. All the requirements for your new home would involve you spending money on factors such as furnishings, landscaping and repairs.

Doing The Lender’s Math

Historically, banks use a ratio called 28/36 to decide how much borrowers can borrow. An approved housing payment is usually less than 28 percent of your gross monthly income (what you earn in a month without any deductions such as taxes).  On the other hand, your total debt load (including car payments, student loans and credit card payments) could only be less than 36 percent.

In Canada, lenders apply similar formulas to determine how much a buyer can afford. The Gross Debt Service (GDS) ratio can only be up to 32 percent of the buyer’s gross monthly income while the Total Debt Service (TDS) ratio should be below 40 percent of the buyer’s total debt load.

As home prices have risen, some lenders stretch the ratios to as high as 50 percent. Even if your market were expensive, it would be wise to think carefully before stretching your budget quite so much. People who grab this opportunity without considering their financial capability are often faced with money problems later on.

Deciding how much you can afford should involve some careful attention to how your financial profile will change in the upcoming years. In the long run, your own peace of mind and security should matter most.