With soaring house prices, the record low interest rates have made it possible for home buyers to attain big mortgages in recent years. Borrowing money is cheap right now, which can entice buyers to potentially bite off more than they can chew from an affordability standpoint. Obviously, it’s not just the mortgage that needs to be affordable, but also all the associated costs of owning a home, including property taxes, insurance, utilities, maintenance, etc. Before you toss a few numbers into an online mortgage calculator to see what you think you can afford, let’s take a look at some of the tangible factors that can affect your home buying power.
It’s important to look at more than just your income to get a good handle on your buying power. If you have made a major purchase that you’ve financed (eg. a new car, a home renovation, etc), that debt needs to be factored into your calculation. And, it’s not just current and potentially “good” debt you have to consider. Any financial skeletons in your closet that could be wreaking havoc on your credit score will directly impact how big of a mortgage you may be approved for, or how attractive your interest rate may be.
Another thing lenders are going to look at will be how stable your income is. When it comes to your income amount, bigger is often better, sure…but a lender is going to be looking to mitigate their risk if they are going to invest in you. Even if you just got a brand new job with great pay, your lender may be more concerned with the stability and longevity of that scenario, to provide them peace of mind that you will have the resources to service your loan over the lifespan of the mortgage. This is why lenders will often ask for some verification of your income from your employer, your tenure with that organization, and typically are looking for a concrete indication of what your income will be in the future. Essentially, they want to make sure they are comfortable taking that kind of financial risk on you.
Understanding your true buying power is probably not something you are able to do on your own. Meeting with a mortgage broker to walk you through the steps and to go through the process of getting pre-approved for a mortgage is a great starting point. We recommend going through this process even before you start your home search, so that you have confidence in what is going to comfortably work within your budget.
We can put you in touch with a mortgage broker who can help you understand your buying power potential. And, when you’re ready to search for your next KW home, we are here for you!