When buying a home, the mortgage affordability test is an integral component of the process. It determines whether you can afford your monthly repayments on a loan and also provides lenders with insight into how you may cope if you lose your job or face unexpected financial hardship.
Passing the test can enable you to move forward with a formal mortgage application and become pre-qualified by a lender. Unfortunately, failing can be an unpleasant setback in your plans. It’s essential to remember that it may still be possible for you to purchase a home if you take steps towards improving your finances, such as getting a lower interest rate on your loan or clearing debt.
To start, calculate your income and expenses, then determine your maximum monthly housing payment based on that budget. You can do this using either a personal budget spreadsheet or various online tools. Once you have this data, enter it into our free home affordability calculator for an accurate calculation.
Your mortgage interest rate is an important factor in determining your affordability, as it determines how much you pay over the course of the loan. With a lower rate, you may be able to purchase more expensive homes since you’ll be making lower monthly payments.
You may opt to save a larger down payment in order to make your home purchase more accessible. Doing so will reduce your total monthly payments and enable you to pay off the loan sooner.
Low credit scores can negatively impact your ability to qualify for a mortgage, so work on improving it before applying. Doing so will enable you to secure a better interest rate on the loan and make it simpler to purchase a larger home.
Saving for a rainy day fund to cover housing costs in case of an emergency is wise. Doing so ensures you can continue making payments even if the economy takes a downturn or your job situation changes.
Decide how much money you can spare toward a down payment, which usually amounts to 10% to 20% of the cost of your new home. While this may seem like a lot, remember that investing in real estate pays off over time.
Finally, you need to decide how long you want to repay your mortgage and which term (usually 15 or 30 years) works best for you. Our free home affordability calculator can help determine how much you can afford based on these factors.
Once you’ve determined your maximum mortgage affordability, you can begin searching for a new home and applying for a mortgage loan. In order to ensure all necessary paperwork and documents are in order, it would be wise to get pre-qualified by a lender before beginning your search for a home.
