You’ve made the decision. You want to buy a house. Through your initial estimates of your finances, you conclude that you have approximately zero dollars for this.
Hopefully, dear reader, you are a smarter person than I am and you have some savings set aside, because you imagined that someday this might be your goal, so you could be prepared for that. If not, you’ve now gotta figure out a way to find that money – maybe you need to ditch some discretionary expenses, or maybe you need to take on a roommate, or maybe you need to move back in with your family – who will let you live with them rent free so that you can get back the hell out of their house as soon as you can. That’s what I did. It was drastic, it was not an easy decision, but it was absolutely the right one. Thanks, mom.
But how much do you need to save? When you have the coin for a house, how much house can you afford? My thought process around finances went something like this:
How much can I borrow?
What is the bank willing to lend me? I started figuring this out by googling mortgage affordability calculators and trying a few of them to see what they said. A few you might want to consider:
You’ll need to enter your gross income, a downpayment amount, any debt information you have, an estimate of what your property tax might be, and an estimate of what your heating costs might be, in addition to a mortgage rate and an amortization period.
After trying these calculators, you’ll have a rough idea of what a lender might be willing to give you. But, as they say, the banks will loan you just enough rope to hang yourself.
How much can I afford?
How much does “what a lender is willing to give me” line up with “how much should I actually consider borrowing”? To figure that out, you’ll need to figure out what your debt service ratios are.
First, there’s your Gross Debt Service ratio – your monthly housing costs (including mortgage principal and interest, property taxes and heating) should not be in excess of 32% of your gross monthly income.
Then, there’s your Total Debt Service ratio – your entire debt load (so, the above things plus any other debt you might be carrying, like credit cards, student loans, your car, etc.) should not be in excess of 40% of your gross monthly income.
You can learn more about calculating your GDS and TDS on the CMHC website.
Now you know how much you can borrow and how much you can afford to borrow, according to what “they” say.
But how much am I comfortable borrowing?
Me? I wanted to be more conservative. These calculations above are all about where you max out – they really don’t consider what your spending habits are like on other things (discretionary expenses like, oh, I dunno – food, entertainment, Apple products, handbags… ok, so maybe some of those are just my problem). My point is that they’re not necessarily calculations as to what you should do; they’re not necessarily what you’re comfortable doing, not what makes the most sense for you based on other things like ‘if you take on your max affordability, are you actually pretty terrible at sticking to your budget, and will you run out of money for wine?’ I don’t want that happening to you, and I absolutely cannot have that happen to me.
So now that you know your maxed-out ceiling, you should sit down and write out a budget. You should include paying off your debts, as well as your spending habits on food, entertainment, medical expenses, travel, gifts, etc. You should think about cash savings for short term goals and emergencies, and how you’re going to approach longer-term savings and investing. When I did this, I started whittling down my desired mortgage payment.
For help with budgeting, check out this list of Best Budgeting Apps – I’ve tried YNAB and Spendee, but always find myself just creating my own spreadsheet in the end.
Let’s just get to looking at houses already, amirite??
Okay. So now you have a pretty solid idea about your money situation. At this point, I started looking at what houses in my affordable range looked like – and you know what? I wasn’t exactly thrilled. So I had to take some time to think about what I really wanted (more on that in the next post) and reconcile that with what I could actually afford and be comfortable with. I now had an idea of the kind of downpayment I was going to be shooting for – I had a goal.
With that goal in mind, I set up a plan – save a certain amount, every month – and I had to remind myself that I needed to actually put in the effort to stick to that plan and reach that goal, while also not beating myself up about it if I didn’t rigidly stick to that plan – off I went.