# What is Mortgage Affordability?

## Definition of 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 PITH is used to determine the monthly payments that can be made by the borrower.

### Principal Interest Taxes Heat (PITH)

PITH 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 PITH.

The Canadian Mortgage and Housing Corporation will typically not issue mortgage insurance if the proposed PITH. is more than 32% of the mortgage borrower’s gross income. This is called the Gross Debt Service Ratio or GDS

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#### Example

Mr. McGillicuddy earns \$48,000 in gross income per year. His PITH 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 PITH: \$1330.00

When Mr. McGillicuddy’s gross income is divided into the PITH., the ratio of PITH. 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 PITH., lenders will often consider other factors, such as the current debt load of the borrower. Many will use a Total Service Debt Ratio, or TDS. In this formula, the monthly debt payments of the proposed borrower, including credit card payments and auto loans, are added to PITH. 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, 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.