Whether you are buying your first home, trading up to accommodate a
growing family, or even downsizing, one of the most important things you
must do when house hunting is create a monthly budget. A budget is
simple to put together and will help you avoid financial headaches in
the future.
In order to create your budget, the first thing the experts will recommend us to do
is make a list of all our current monthly obligations. Start with
items that will likely continue after we have bought the house, such as
credit card payments, student loan payments, car payments, retirement saving
contributions and so on. Now add in the discretionary spending such as
the latte we get every few days, the dining out with friends and the
money we are setting aside for a vacation. Are there things that we
are willing to give up that would free up some cash to put towards the
mortgage? After looking closely at our own budget, how much do you
have left over, and how much of that are we comfortable putting towards
a mortgage payment?
At this point I think it’s important to introduce the term "Total
Debt Service," or TDS for short. This number is the result of dividing
all our monthly obligations by our gross (before tax) income.
Here is an example of a TDS calculation: Assuming the gross monthly
income is $6,000 (before tax) and the monthly expenses include:
$1,500 Mortgage payment
+ $400 Property taxes & Utilities
+ $200 Credit card bill
+ $400 Car lease payment
= $2,500
Total monthly obligations $2,500/$6,000 gross monthly income = 41.6%.
TDS is important because it determines what we can afford, and
lenders use this number to qualify us for a mortgage as well.
Technically, the lenders has a limit of 40%, but generally the cut off point is 42% to 44%. If
you are applying for a mortgage and your TDS is higher by a per cent or
two, be sure you can back it up with an excellent credit score and a
down payment of at least 20%.
There are a number of online calculators at your disposal and they will help to determine the maximum mortgage
payment we can afford. Now ask ourselves, do we want to max out on your
mortgage payment? Most online calculators do not have space to put your
morning coffee in or your gym membership or the tickets you bought for
TIFF. The reality is that most of us will have to sacrifice some of the
fun things in life to own a home, but don't let your mortgage payment
control you.