You also need to determine if you have enough cash resources to purchase a home. Being able to calculate an estimate of how much you're able to borrow is an important part of setting your budget. When you're looking to buy a home, it's handy to know how much you can afford. As mortgage default insurance is backstopped by the Government of Canada, this further protects lenders while giving higher-risk borrowers better access to mortgages, and lower interest rates than they would otherwise qualify for due to their risk profile. High-ratio borrowers are considered to pose an extra level of risk in this regard, because they have less equity in their home due to their smaller down payment. The purpose of mortgage default insurance is to protect lenders in the event a borrower cannot continue to make their regular mortgage payments, effectively defaulting on their mortgage loan. They are paid right from the start of the mortgage. Mortgage default insurance costs home buyers between 2.8% to 4% of their total mortgage amount, and premiums are rolled up into the borrower’s monthly mortgage payments. However, this insurance coverage is also provided by two other companies: Canada Guaranty and Sagen. This coverage is often also referred to as CMHC insurance, as the Crown Corporation has historically been the largest provider of this coverage. These metrics, combined with other elements such as your credit score, will help your lender determine how much mortgage you can afford.Ī home buyer who is making a less than 20% down payment on their home purchase – also referred to as a “high-ratio borrower – is required by law to take out mortgage default insurance. The second metric is your total debt service ratio (TDS), which includes broader expenses such as your housing costs, credit card interest, car payments and loan expenses, divided by your annual income. As a rule of thumb for mortgage qualification, your GDS ratio should not exceed 39%. The first is your gross debt service ratio (GDS), which takes into account your mortgage principal and interest, along with your taxes and heating expenses, divided by your annual income. Two of the most important metrics taken into consideration by your mortgage lender at qualification will be your debt service ratios. Your affordability will be based on several factors including the total income of all mortgage applicants, existing monthly expenses and debt obligations (such as car payments, daycare, credit card payments, etc.), as well as the monthly expenses associated with homeownership (for example utilities, property taxes, condo fees). But figuring out just how much you can afford isn’t as straightforward as working monthly payments into your budget. Determining how much you can afford to pay when purchasing a home, as well as your monthly mortgage costs, is likely your biggest consideration when on the real estate hunt.
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