Sarah Colucci's Mortgage Blog
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The question above is a great one, and also one that will produce different answers for different people depending on whom they consult or what website they visit.
Shopping around for a mortgage is an excellent financial exercise because it offers up an opportunity for potential borrowers to confirm mortgage qualification and the best rate with certainty. However, without knowing how lenders qualify borrowers and the limitations of online mortgage calculators, for example, purchasers may receive inaccurate information that compromises not only the home buying process but may inadvertently force them to settle for a property they don't want.
BIG BANKS VS. BROKERS: SOME FLAWS
One of the main reasons borrowers call a mortgage broker is because they feel the broker channel can bend the rules to their advantage. In reality, it's not about whether or not a broker can bend the rules but rather, that a mortgage broker is highly specialized in mortgages and can employ his or her experience to yield the best results.
Additionally, mortgage brokers have access to more than one lender that has more than one product, so this can create significantly more opportunities for borrowers to get the best interest rate, best mortgage product and ultimately, get approved for what they need.
For example, big banks will require a borrower who is not guaranteed their hours at work to produce filed income tax documentation for the last two years. On the other hand, a mortgage broker may use a person's year to date income as indicated on their pay stub in conjunction with only the last year's taxes if the numbers make sense.
Keep in mind, brokers work exclusively with more lenders who appreciate income not accepted by banks such as the child tax credit and disability income as just a couple of examples.
Considering mortgage brokers work with major banks in addition to many other lenders in different lending spaces, borrowers can exercise a high level of due diligence using one mortgage broker they trust with the home mortgaging process.
ONLINE MORTGAGE CALCULATORS: THE FLAWS
Online mortgage calculators are extremely limited in functionality since they don't incorporate a person's current debt level outside of the hypothesized mortgage payment.
Mortgage calculators will use a person's income to service a mortgage payment but won't include the Government-mandated monthly payment calculation on any unsecured liabilities that a person may have. For example, revolving credit must get calculated at 3 percent if it's under $50,000. In contrast, if the balance is over, for mortgage qualifying purposes, the credit facility's balance must be amortized out to 25 years and calculated at the current five-year posted rate.
If someone is using a mortgage calculator and excluding necessary financial information as mentioned above, he or she won't receive accurate information about their mortgage approval, which can waste a tremendous amount of time in the search for a home.
Therefore, back to the original question: How much income do you need to earn to be able to afford an $800,000 home?
The general rule of thumb is you will qualify for up to 5 times your gross income. However, this amount does not consider any other monthly liabilities that you have that once included, will scale back the loan amount.
Additionally, if you have more than a 19.99 percent down payment, you can also qualify for a mortgage with an alternative lender that can lend up to 7 or 8 times your gross income amount in exchange for a higher mortgage rate.
Therefore, in theory, if you have the minimum down payment, and require a mortgage of $745,000 (plus CMHC insurance premium, which will equal a total mortgage loan of $774,800), you need a gross annual household income of $149,000 CDN. If you have a car loan or student loan along with credit debt, you will require more gross income to service your mortgage debt.
Keep in mind that a purchase price of over $500,000 will require a down payment of an additional 10 percent of the amount over the first $500,000.
If you have a 20 percent down payment of $160,000, your mortgage will equal $640,000. You will require approximately $128,000 CDN gross household income to qualify, or if you choose an alternative lender, you might only need $91,000CDN. Of course, these calculations also don't include any other liabilities, as previously stated.
In conclusion, borrowers should not delay the home buying process or get trapped using the wrong avenue for financing. Pre-approvals through a mortgage expert will ensure borrowers receive the right information the first time.
Sarah A. Colucci, Mortgage Agent Lic. M14000929, Mortgage Edge, Broker 10680 Direct: 647-773-4849/Website: www.coluccimortgages.com
Want to win $10,000? If you complete a mortgage with me through my "Mortgage with Me" Contest Draw between January 1, 2020, and December 31, 2020, you will automatically be entered into the contest for a chance to win.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929