Kurt Woock
Athena Cocoves
Here’s one way to estimate how much mortgage you can get with a salary of $120,000:
- Start with your monthly income. $120,000 divided by 12 months is $10,000 per month.
- Find the top of your budget (if you don’t, your bank will). No more than 39% of your income can go toward your mortgage payment, including property taxes and utilities, according to a lending guideline called gross debt service ratio. In this case, a monthly salary of $10,000 multiplied by 0.39 is $3,900.
- Determine the price range of houses to look at. If you were approved for a 25-year mortgage with an interest rate of 5%, that $3,900 monthly payment translates into a home price of about $700,000 with a 20% down payment.
But these numbers may not apply to everyone who makes $120,000 per year.
Factors that affect how much you can afford
Your income is just one factor that affects the amount of mortgage you can get with a $120,000 salary.
Your credit score
Your income doesn’t have anything to do with your credit score. A person with a relatively high income could have bad credit, and a person with below-average income could have a strong credit record — it’s all about how reliably you’ve repaid borrowed funds in the past. Lenders typically offer their best mortgage interest rates to applicants with excellent credit scores — anything above 760, typically. Those with lower scores may not have a problem getting approved for a mortgage, but they may pay higher interest rates. Applicants with credit scores under 650 may have a harder time finding a traditional lender who will offer a loan at all.
Mortgage interest rates
One reason the example above doesn’t apply to everyone making $120,000 is that it assumes a mortgage interest rate of 5%. If the interest rate you’re offered is higher than that, the max offer you can place on a house drops. Although your maximum mortgage payment stays the same, a higher percentage will go toward interest payments. If you get a lower interest rate, however, your budget will rise.
» MORE: What makes a good credit score?
Taxes, insurance, maintenance and fees
The more you spend on taxes, maintenance and HOA fees, the less you have available to pay the mortgage itself. The estimate above includes property taxes of 0.5% per year and about $333 in monthly home insurance and other ongoing costs, like utilities. These expenses vary by location, even within the same market.
Banks cap on what you can spend
Traditional lenders in Canada follow guidelines that are meant to prevent you from borrowing more than you can repay. These guidelines are often referred to as debt ratios.
Gross debt service ratio. This first guideline states that no more than 39% of your monthly income can go toward your mortgage payment, taxes and utilities.
Total debt service ratio.The second guidelines says all of your monthly debt payments (student loans, credit card payments), should be under 40-44% of your income.
You
Forget about bank maximums: You’re the one that’s on the hook for the monthly payment. Toggling the variables above may prop up the amount of house you can afford a bit, but maybe you don’t want to stretch your budget as far as allowable. Life can throw curveballs, including unexpected rate changes when it’s time to renew your mortgage. Think about how to give your budget some breathing room.
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Estimating your home affordability
Convert your salary to the monthly payment limits lenders use using this calculator:
This monthly payment calculator is just a start. There are other factors to consider, including:
- You may not want to stretch your budget as far as lenders allow.
- The taxes or utilities where you live may eat a higher percentage of your overall monthly payment, reducing the amount left for the mortgage payment itself.
Sample housing budgets
To illustrate how variables beyond income can affect how much mortgage you can get, consider two people with identical $120,000 incomes:
| Person A | Person B | |
| Annual salary | $120,000 | $120,000 |
| Car payment | $0 | $500 |
| Credit card debt payment | $0 | $250 |
| GDS ratio limit | $3,900 | $3,900 |
| TDS ratio limit | $4,400 | $3,650 |
This example doesn’t even take into account differences in credit scores. The better your score, the lower the rate you’ll get. Even if two people can afford the same monthly payment, the person with the better (higher) credit score can potentially afford a more expensive home if less of that monthly payment is going toward interest.
What you can do next
To get an answer more closely aligned to your situation, you’ll want to use a mortgage affordability calculator. An affordability calculator lets you control more variables when estimating mortgage payments.
If your estimated price range doesn’t match your hopes, here’s what you can do:
- Improve your credit. Reducing or eliminating credit card debt is a good place to start.
- Reduce set monthly expenses. For example, if you have a large monthly car payment, would you consider swapping for something less expensive?
- Look elsewhere. Do you want a bigger budget to afford a certain neighborhood? Keep an open mind and expand your search. Tap the expertise of a real estate agent if you haven’t already.
- Keep saving. More money in the bank is a great way to increase your options in the future.
- Stay patient. Buying a home can be hard, and it doesn’t always happen right away. A drop in interest rates or a new job are just two examples of events that can change your prospects.
» NEXT: Learn how to apply for a mortgage
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