If you are a first time home buyer, your answer probably is: “I don’t know”. To help you figure it out, I am providing an easy formula that will give you the straightforward answers you need. If you need further assistance, your mortgage specialist or I will work through the calculations with you.
A quick way to calculate what you can afford
It all starts with a general rule regarding how much of your household income should go to household expenses. Typically household expenses should not exceed 32% of your gross income. This is called Gross Debt Service Ratio – they will allow up to 40% towards all debts – this is called Total Debt Service Ratio.
Insurance for High Ratio Mortgages
The insurance premium for a high ratio mortgage is 0.5% to 4.25% of the total mortgage amount, depending on the size of your down payment and whether it is new construction or an existing home. This premium may be paid in cash, or to make it more convenient the mortgage company will add it to your mortgage amount and calculate your payments on the total amount (this is the most common).