Mortgage Affordability
What is Mortgage Affordability?
Mortgage affordability is the amount of money a mortgage borrower can make on a monthly basis towards a mortgage, based upon their income, expenses, and the proposed monthly payment. Mortgage affordability has a direct relationship with the maximum purchase price you can qualify for when buying a home.
Mortgage affordability is important for buyers as it helps to protect them from entering into legally binding agreements that may end up in default. Lenders also have an interest in ensuring mortgage affordability in order to minimize the default rate among their borrowers. Therefore, a type of monthly budget calculation called P.I.T.H is used to determine the monthly payments that can be made by the borrower.
P.I.T.H.
P.I.T.H. is an acronym used in the mortgage industry. It stands for Principal, Interest, Taxes, and Heating. The proposed monthly payment (principal and interest), along with proposed real estate taxes, and an estimate of heating costs are added together to determine P.I.T.H.
The Canadian Mortgage and Housing Corporation will typically not issue mortgage insurance if the proposed P.I.T.H. is more than 32% of the mortgage borrower’s gross income.
Example
Buyer A earns $48,000 in gross income per year. Buyer’s P.I.T.H. is as follows:
Proposed mortgage payment (principal and interest): $930.00
(Based upon a 5% mortgage rate and a 30 year
Amortization period)
Proposed monthly tax payment: $250.00
Proposed heating costs: $150.00
Total P.I.T.H.: $1330.00
When Buyer A’s gross income is divided into the P.I.T.H., the ratio of P.I.T.H. to gross income is .3325, or a little over the rule set forth by the CMHC. Buyer A could borrow up to $174,258 based on these figures.
In addition to P.I.T.H., lenders will often consider other factors, such as the current debt load of the borrower. Many will use a Gross Service Debt Ratio, or GDS. In this formula, the monthly debt payments of the proposed borrower, including credit card payments and auto loans, are added to P.I.T.H. and a ratio is determined against the gross income of the borrower. Lenders will often call this an affordability index.
At First Foundation, obtaining a mortgage within your means is a core value of our business. We have a handy online application process, at http://www.firstfoundation.ca/mortgage-application/, or you may apply by phone, or even print out a paper copy of the application for your convenience. Once we receive your mortgage application we will carefully review it with you to ensure the mortgage we arrange fits with your short and long term financial goals.
Related Terms:
Mortgage Application, Mortgage Principal
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If you are interested in learning more about Mortgage Affordability, please feel free to contact us today!