28 Nov 2016
Why You Shouldn’t Trust “What Can I Afford Calculators”
Your maximum mortgage amount is determined by your credit profile, your usable income (which is determined by each lender), your down payment among other requirements. Not all applicants fit into one box and this is why you should never trust the “What do I Qualify for Mortgage Calculators”.
Let me tell you a story about Jack and Jill who want to buy a home with city water for their growing family (yes, I have been reading a lot of nursery rhymes lately with my toddlers and have always thought they were a couple).
Jack has a long-term $65,000 per year salaried job with guaranteed pay. Jill is just out of nursing school and has been working as a temporary part-time employee making $25 per hour. They have one child and earn Child Tax Benefit income of $350 per month. They figure because Jill typically works 20 hours a week that they should be able to use all their income of $7,933 per month to qualify.
They decide to check out their bank’s online mortgage qualifying calculator. They are excited as they have $25,000 saved to cover the down payment and closing costs and their bank’s calculator says their “income” is sufficient to buy a $375,000 home.
After getting an accepted offer on a home they head to their bank to get a mortgage. The banker checks their credit, runs some numbers and determines shelter costs (mortgage payment, property taxes and heat) at today’s rates will be $1,993 per month for the property.
It turns out that with Jack and Jill’s credit report results, both with a credit rating of 650 (an average rating but not excellent) that they cannot go over 35% of their usable gross income for shelter expenses. The key words here are “usable income”. The banker then explains that though Jill is now earning income that they would not consider this temporary positions income in calculations until she has at least 2 years from the same employer to show income stability. The bank also does not use Child Tax Benefit income. The 35% of their usable income (Jack’s salary only) works out to $1,895, which is not enough to cover the shelter expenses for the purchase . They do not qualify for the purchase with their bank.
Jack and Jill thought it would be no problem. They are upset and confused so they contact a Mortgage Broker recommended by The Old Woman who just moved out of the shoe. The broker reviews their application and reconfirms that their application doesn’t fit with their current bank (which the broker also works with).
However, the broker has a relationship with many lenders including one that helped the Old Woman move out of the shoe. This lender will uses the Child Tax Benefit income. This means with the brokers connections that their usable income will increase by $350 per month putting them at $2,018 of income allowed to be used towards shelter expenses and above the $1,993 required to buy the home. They have now been approved to buy their dream home and are looking forward to running water.
This is just one example of why the “What can I afford calculators” may give you false results which ultimately could result in disappointment.
Never trust the calculators and always place a subject to financing clause if you make an offer on a home. More importantly consult with a Dominion Lending Centres Mortgage Broker before you start your home search so you know your buying power.