What Size Mortgage do I Qualify for?
Many people ask me, “How much mortgage can I afford?” or “What size mortgage do I qualify for?” They usually think they are the same question, however, what you can qualify for and what you can afford are actually two different things.
I’ll treat them as the same question to start, since most people do. At the end, I’ll treat them separately so you can understand why you sometimes can’t afford as much as you qualify for.
So before I show an example mortgage calculation, we’ll discuss:
– The three things your mortgage amount depends on
Then we’ll go through:
– The three things that limit the size of your mortgage
Just Tell Me the Size of the Mortgage I can Get!
Okay, if you just want a quick estimate of how much of a mortgage you can get, use a mortgage calculator like my free mobile mortgage calculator app.
All you really need to know is the amount of mortgage payment you are willing to pay each month. Then you can change the other inputs and play around with it.
The mortgage amount it will give you is just an estimate. As you’ll see below, the real amount can depend on many things.
How Much Mortgage Can I Afford / Qualify for?
The amount of mortgage you can qualify for will depend on many things but mainly:
- Your income,
- Your credit score, and
- How much you have available for a down payment
Mortgage Size Factor #1: How Much Income you Earn
The more you make, the bigger the mortgage you can qualify for. Pretty simple.
It can get complicated, however, because sometimes the amount of income you earn isn’t always the same as the amount you can use on your mortgage application.
Those two amounts can differ for a few reasons e.g. your income is not consistent from year to year (due to things like bonuses, tips, career changes, etc.), you have rental income, you have foreign income, you’re on sabbatical, etc.
For example, I had a client whose spouse made $80k in the most recent year and $20k the previous year. That variance is too high for lenders. In that situation, lenders won’t accept any income from the spouse at all.
Mortgage Size Factor #2: Your Credit Score
Your credit score will affect the mortgage rate you can get. If you have good credit, you can get a lower rate which will lower your monthly payments, keeping those payments within your affordability range.
Mortgage Size Factor #3: How Much You Have Available for a Down Payment
The bigger your down payment, the bigger the home you can purchase.
If you have $25k available for a down payment, the biggest home you can theoretically get is a $500k home (assuming you could qualify for and afford a $475k mortgage, which we’ll address in our example).
If you double that down payment to $50k, you can get a $750k home.
If you have $75k available, you can get a $1M home.
What Limits the Size of the Mortgage I can Get?
Now that we know what your mortgage amount depends on, let’s discuss the limiting criteria for your mortgage amount.
There are three things that limit the size of your mortgage:
- The minimum down payment required,
- Your GDS/TDS ratios, and
- Your budget
Mortgage Limit Factor #1: The Minimum Down Payment Required
Depending on your situation you may be allowed to put as little as 5% down on a home purchase, however, you may be required to put up to 20% down.
For example, as we saw above, if you are not required to put a minimum of 20% down and you have $75k available for a down payment, you could theoretically purchase a $1M home.
However, if your situation requires that you do put a minimum of 20% down, then for that same $75k down payment, you could only get a $375k home.
Mortgage Limit Factor #2: Your Debt to Service Ratios: GDS and TDS
GDS and TDS are measures of how much debt you have compared to how much income you earn. They are calculated by adding all your debts and dividing that by your total gross income.
Generally, your GDS cannot exceed 39% and your TDS cannot exceed 44%.
Read my previous article for more details on GDS and TDS and to see examples of how to calculate them.
Mortgage Limit Factor #3: Your Budget
Everyone has a limit as to how much they can afford for a monthly mortgage payment.
You may qualify for a mortgage that requires a monthly payment that is more than you are comfortable with, even if you satisfy the first two criteria.
After all, all of your money can’t just go toward the mortgage. After paying taxes, you still need money for things like car and life insurance, clothes, groceries, kids’ education savings, retirement savings, vacation savings, hobbies, having pizza on a Friday, etc.
Okay, let’s look at an example and put all of this together!
How to Determine Your Mortgage Amount: the Scenario
Let’s consider the following scenario.
Lender rate: 2.50%
Qualifying rate: 5.25%
Amortization period: 25 years
Total gross income of all applicants: $100k/year
Down payment amount: $100k
Total debts (credit cards, car loans, etc.): $400/month
Property taxes: $250/month
Heating costs: $125/month
No condo fees
Budget for mortgage payments: $2000/month
How to Determine Your Mortgage Amount: the Analysis
As we’ve already seen, if you have to put 20% down, the biggest home you can buy with a $100k down payment is a $500k home. But if you are allowed to put less than 20% down… you can get a bigger mortgage! Let’s see how much bigger.
Note that since you are putting less than 20% down, you will have to pay mortgage insurance which will be added on top of the mortgage.
You can use my calculator to calculate GDS/TDS or work it out based on my previous article. Either way, you will see that, using the qualifying rate of 5.25% and including mortgage insurance, you reach your GDS and TDS limits at a purchase price of $566k.
At $566k, your GDS will be 38.95% and your TDS will be 43.75%. Once you subtract the down payment from the $566k purchase price and add mortgage insurance, you’re left with a mortgage of $479k. That is the maximum amount you qualify for since you’re not restricted by a 20% down payment.
The last thing we have to check is to see if you can afford this mortgage.
In this case, your actual mortgage payments are based on the lender rate of 2.50%. Your monthly mortgage payments (which include mortgage insurance) would then be around $2150/month.
Since your budget for the monthly mortgage payments is $2000/month, the $2150/month mortgage payment is outside your budget. You cannot afford a $566k home even though you are qualified to buy one.
A $2000/month mortgage payment equates to a home purchase price of $535k. At that purchase price, all three criteria are satisfied i.e. your minimum down payment, your GDS/TDS ratios, and your budget.
How much mortgage can I afford? Final Answer
So, in this example, the answer to the question, “How much mortgage can I afford?” is: $447k.
That mortgage amount is equal to the purchase price of $535k minus the $100k down payment plus mortgage insurance.
Want to know how much mortgage you can afford? Give me a call and I’ll be happy to run the numbers for you.
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