How much can I afford to pay for a home?

To determine affordability you will first need to know your taxable income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence you are purchasing, calculate 35% of your income for use toward a mortgage payment, property taxes and heating costs. If applicable, half of the estimated monthly condominium maintenance fees will also be included in this calculation.

Second, calculate 42% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders’ usual guidelines.

In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. Extended amortizations may allow smaller payments for the same mortgage amount as previously under the 25-year amortization scenario. Make sure you don’t leave yourself house poor. Structure your payments so that you can still afford simple luxuries.