Save Yourself Time, Avoid Disappointment And Get The Right Results with our Mortgage Pre Approval Calculator
What's the point of using a mortgage pre approval calculator if you aren't using the numbers that a bank (or lender) would use when they tell you how much you can afford? You are wasting your time and potentially setting yourself up for disappointment when you find a home, then later realized that you can't qualify!
Work through the 3 step process described below to get a much more accurate picture of how much mortgage you can afford. By working out your income, your current debts and some estimated housing costs the mortgage amount you come up with will be much closer to the mortgage amount a bank would calculate.
Try our Mortgage Pre-Approval Calculator today and find out how much mortgage you qualify for.
Determine Exactly How Much Mortgage You Can Afford with a Mortgage Pre Approval Calculator
The best and easiest way to calculate how much mortgage you can afford is to first calculate a couple of thing:
- How much income do you earn annually?
- How much is your monthly debt?
- Estimated housing costs
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Step 1: Calculate Your Annual Income Using the Same Method the Banks Use
It may be simple to calculate your annual income, you may receive a salary and this is your annual income, $60,000 per year for example. If you earn income hourly or if you receive overtime or bonuses or are self-employed then you may have to do a couple more things...
If you are paid hourly, then most lenders will calculate your annual income by taking your hourly rate then multiplying your minimum guaranteed hours per week then multiplying by 52 weeks per year.
For example, if you earn $24.00 per hour and you are guaranteed to work 37.5hours per week, then your annual income would be $30.00 x 37.5 x 52. In this example, your annual income would be $58,500.
If you are paid hourly but you also receive overtime, then most lenders would either use your minimum guaranteed hours, as in the example above, or they would require a 2 year average of your annual income. To calculate the 2 year average, the lender would ask for the last 2 years of your Notice of Assessments & the last 2 years of your T1General Tax Returns. To use the 2 year average you must have worked for this employer for at least 2 years. Otherwise a lender would only consider your hourly rate and your minimum guaranteed hours.
If you are paid hourly with bonuses, the lenders would calculate your income based on a 2 year average. They would require the same documents as described above and would require that you work for the same company for at least 2 years to utilize the 2 year average.
If you are hourly plus commission, again the same as above would apply. Most lenders would utilize the base hourly rate and guaranteed hours unless you have 2 years tenure at this position. With 2 years tenure, then you could provide that last 2 years of your Notice of Assessments and your T1Generals to provide an average income over the last 2 years.
If you are salary plus bonuses or plus commission employee, then you can calculate your average income as described above with the last 2 years of your Notice of Assessments and T1General Tax Returns. Another method that some lenders will accept is to provide an employment letter that breaks out your income more clearly to the lender.
For example, let's assume you earn $50,000 salary and receive bonuses (they averaged $10k each year). Let's also assume that your salary last year was $45,000 and the previous year was $40,000. If you took a 2 year average, then the income used would be low compared to what you should earn this year. It's low because you received a significant raise each year.
If we average the last 2 years ($45k plus $10k) and ($40k plus $10k) then the result would be $52,500. If we took your current salary ($50k) and then added the average bonus over the last 2 years ($10k) then your average income would be $60,000 (much better than using $52,500).
If you are self-employed or if you have 2 jobs, then most lenders will again use the 2 year average to determine the annual income they will use for the mortgage pre approval calculator.
All of these examples resulted in an income of approximately $60,000. Let's use this $60,000 per year or $5,000 per month as your income for our Mortgage Pre-Approval Calculator.
Step 2: Calculate Your Other Minimum Monthly Obligations the Way Banks Do, When Using Our Mortgage Pre Approval Calculator
The next step is to calculate your monthly obligations. Lenders will consider any and all debts that are reported to the credit bureau in their mortgage pre approval calculator:
- Minimum credit card payments (typically 3% of the outstanding balance)
- Minimum line of credit payments (typically 3% of the outstanding balance, some companies will allow you to pay less than this, but lenders won't use less unless you can provide statements to prove it. In some cases, this won't convince them either)
- Minimum loan payments (car loan, consolidation loan, etc.)
- Minimum lease payments (car lease)
Any other loans, or credit cards reporting on to the credit bureau that you owe.
Lenders will not include items that don't report to the credit bureau, like:
- Monthly Gym memberships
- Insurance payments (car insurance, home content insurance, life insurance disability, etc.)
- Utility payments, like heat, electricity, cell phone, home phone, etc.
- Other monthly subscriptions
Once you have determined your minimum payments for all your cards, leases and loans then add them up and record the total. In this example, let's assume all these total to a minimum monthly payments of $400/month
Step 3: Calculate the Maximum Principle & Interest Payment that You Can Afford, The Way Your Bank Would...
The next stage is to determine how much of your monthly income can be used to pay for the new home you want...
When a Lender in Canada uses their mortgage pre approval calculator, they calculate 2 values. These values are called the Gross Debt Service (GDS) and Total Debt Service (TDS).
The GDS is 35% of the borrower's (your) monthly income and the TDS is calculated as 42% of your monthly income.
The GDS is the total of all the housing costs that the lender determines that you can afford. These costs are the Principle and Interest payment (P&I) on the mortgage, the monthly property tax cost, the estimated heating cost (typically $100/mth is used) and half of any condo fees.
The TDS is the total of all the housing costs as well as the total of all your minimum monthly obligations. We calculated this above as $400/month.
Following through on our example, the GDS would be calculated as $5,000 x 35%, or $1,750/month and the TDS would be calculated as $5,000 x 42% or $2,100/month
Next we must determine what the total household payments we can afford. This is calculated as the lower of either the GDS ($1,750) or the TDS minus the total minimum monthly payments ($2,100 minus $400 or $1,700). In this example we would use $1,700 per month as the total household payments.
We then have to calculate the minimum principle and interest payment. If we use $100/month for heat, we use $200/month for property taxes and then $0 for condo fees and we plan to buy a home. The principle & interest payment would be calculated as $1,700 minus $100 minus $200, therefore $1,400/month.
To calculate how much mortgage this payment will be, then use the following table to the right. Let's say that the rate you receive is 3.5%, then the factor is $499.27.
Calculate the total mortgage by dividing your calculated principle and interest payment ($1,400) by the factor ($499.27) then multiply by 100,000. (1400/499.27 x 100,000) works out to be $280,409.21. This is how much mortgage that you would qualify for if you earned $60,000 and had total minimum payments of $400/month for your credit cards and loans.
Related Articles for Mortgage Pre Approval:
- Mortgage Pre-Approval
- Pre-Approval Mortgage Calculator
- Mortgage Pre-Approval Calculator
- Pre-Approved Mortgage Calculator
- Why Should You Get Preapproved for a Mortgage Before You Look For A Home?
- PreQualify For Mortgage - The First Step in the Mortgage Pre Approval Process
- 5 Steps to Get Preapproved For A Home Loan
- We Answer Your Questions about the Mortgage and Home Loan Pre Approval Process