I see this question every single day in Facebook groups, Reddit threads, and my DMs:
“Here’s our income, our savings, and our debt. Are we ready to buy?”
And the answers they get are usually terrible. Either wildly optimistic (“Just go for it!”) or unnecessarily discouraging (“You need way more saved up”). Neither is helpful because neither person actually ran the numbers.
So let me walk you through exactly how I evaluate readiness when someone brings me their situation. Not theory. The actual framework.
There are five numbers that determine whether you’re ready to buy. Most people only think about two of them.
Number 1: Your Qualifying Income (It’s Not What You Think)
Here’s where most people get tripped up. Your qualifying income isn’t just your salary. And if you’re self-employed, it’s definitely not what you think.
For salaried employees, lenders use your gross annual income. Pretty straightforward. If you and your partner earn a combined $100,000 per year, that’s your number.
But things get complicated fast. Commission income? Lenders typically want a two-year average. Overtime or bonuses? Same thing – they want consistency, not your best month ever. Self-employed? Most lenders use a two-year average of your net business income from your tax returns (your T1 General, line 15000). That’s often significantly lower than what you actually earn, because your accountant has been (correctly) minimizing your taxable income.
This is the single biggest gap between what people think they qualify for and what they actually qualify for. I’ve had business owners earning $200,000 a year who only qualify based on $80,000 because of how their income is reported.
Before you start looking at homes, you need to know your qualifying income. Not your actual income. Your qualifying income.
Number 2: Your Debt Ratios (The Numbers the Bank Actually Cares About)
Lenders don’t care how much you make. They care how much of what you make is already spoken for.
Two ratios matter:
GDS (Gross Debt Service): This is your housing costs (mortgage payment, property taxes, heating, and condo fees if applicable) divided by your gross income. Lenders generally want this at or below 39%.
TDS (Total Debt Service): This is your housing costs PLUS all other debt payments (car loans, student loans, credit cards, lines of credit) divided by your gross income. Lenders generally want this at or below 44%.
Here’s the part nobody talks about: when lenders calculate your mortgage payment for these ratios, they don’t use the actual rate you’ll be paying. They use the stress test rate, which is the higher of your contract rate plus 2%, or 5.25%. So even if your actual rate will be 4.5%, the lender qualifies you as though you’re paying 6.5%.
This is why your debts matter so much. That $224/month car payment doesn’t just cost you $224/month in cash flow. It reduces your maximum purchase price by roughly $35,000 to $45,000. That $160/month student loan payment? Another $25,000 to $35,000 off your maximum.
Every dollar of monthly debt is working against your qualifying power. Which brings us to the question almost everyone asks…
“Should We Pay Off Debt Before Buying?
This is a common question I get, and the answer is: it depends entirely on the math.
Here’s how I think about it. If paying off a debt frees up enough qualifying room to hit your target purchase price, and you can do it without draining your down payment below the minimum, then yes, pay it off. But if you’re choosing between putting $10,000 toward debt versus keeping it for your down payment, the answer isn’t obvious.
Sometimes the smarter play is to keep the debt and put more down. Sometimes it’s to eliminate the debt entirely. Sometimes a lender can roll certain debts into the mortgage (through a refinance after purchase, or through specific programs). There’s no one-size-fits-all answer.
This is exactly the kind of analysis I do with every client before they start looking. We model multiple scenarios: What if you pay off the car? What if you keep the line of credit but pay off OSAP? What if you do nothing and just go with what you qualify for today? Each scenario produces a different maximum purchase price and a different monthly budget. Then you decide what makes sense for your life.
Number 3: Your Actual Down Payment (It’s More Than You Think You Need – And Less)
Most people know the minimum down payment rules in Canada: 5% on the first $500,000 and 10% on the portion between $500,000 and $1,500,000. For a $600,000 home, that’s $35,000.
What most people don’t know is where that money can come from. And this is where programs like the Home Buyers’ Plan (HBP) and the First Home Savings Account (FHSA) become powerful tools.
RRSP Home Buyers’ Plan: Each buyer can withdraw up to $60,000 from their RRSP tax-free for a home purchase. For a couple, that’s up to $120,000. You repay it over 15 years, starting the second year after your withdrawal.
FHSA (First Home Savings Account): This is the newer program. Contributions are tax-deductible (like an RRSP) and withdrawals for a home purchase are completely tax-free (like a TFSA). You don’t have to repay it. If you’ve been contributing, this money is purpose-built for your down payment.
Between these two programs, many first-time buyers have more down payment available than they realize. But here’s the critical part most people miss…
Number 4: Your Closing Costs (The Number Nobody Budgets For)
Down payment is not the only cash you need. Closing costs in Ontario typically run between $15,000 and $40,000 depending on your purchase price and location. And they’re due about a week before your closing date.
Here’s what’s included:
- Land Transfer Tax: In Ontario, this is a provincial tax based on your purchase price. If you’re buying in Toronto, there’s a municipal land transfer tax on top of that. On a $600,000 home in Toronto, you’re looking at roughly $16,000 to $17,000 in land transfer taxes. First-time buyers get rebates that can reduce this significantly, but they don’t eliminate it entirely on higher-priced homes.
- Legal Fees: Expect $2,000 to $2,500 plus HST for a real estate lawyer.
- Home Inspection: $500 to $700. Don’t skip this.
- Title Insurance: Usually $300 to $500.
- Mortgage Insurance Premium Tax: If you’re putting less than 20% down, your mortgage will have CMHC (or equivalent) insurance. The premium gets added to your mortgage, but the tax on that premium (Ontario charges PST on it) is due at closing. On a $600,000 purchase with minimum down, that’s roughly $1,300.
- Adjustments: Your lawyer will calculate adjustments for property taxes, utilities, and other items that the seller has prepaid. Budget $500 to $1,000.
Add it all up, and on a $600,000 purchase in Toronto, a first-time buyer is looking at roughly $20,000 to $25,000 in closing costs on top of their down payment.
So the real question isn’t “Do I have enough for a down payment?” It’s “Do I have enough for my down payment AND my closing costs, with a small emergency cushion left over?”
This is one of the most common surprises I see. Someone has $50,000 saved and assumes they’re ready for a $600,000 home because that covers the $35,000 down payment. But when we add $20,000 in closing costs, suddenly the math is very tight, and there’s nothing left for the unexpected.
I build a complete budget for every client that includes purchase price, closing costs, and monthly expenses. No surprises. That’s the whole point.
Number 5: Your Real Monthly Budget (Not Just the Mortgage Payment)
This is the number that actually determines your quality of life after you buy. And it’s the one most people spend the least time thinking about.
Your monthly housing costs aren’t just your mortgage payment. They include property taxes (monthly portion), condo fees (if applicable), utilities (heat, hydro, water), and home insurance. For a $600,000 condo in Toronto, your total monthly housing costs could easily be $3,200 to $3,800, depending on condo fees and your rate.
But your real monthly budget also needs to account for everything else: groceries, transportation, insurance, phone, subscriptions, debt payments, savings, and the things you enjoy doing. Just because you qualify for a certain mortgage doesn’t mean you’ll be comfortable carrying it.
I’ve had clients who qualified for $700,000 but chose to buy at $550,000 because they valued travel, dining out, and financial breathing room more than maximizing their purchase price. That’s a legitimate strategy. Others stretch to the max because they’re buying in an area where they expect strong appreciation. Also legitimate. The point is to make that decision with full information, not to discover your real budget three months after you’ve moved in.
The Framework: How to Know If You’re Ready
Here’s the honest answer. You’re likely ready to buy if:
Your qualifying income supports the purchase price you’re targeting (after the stress test). Your debt ratios fall within lender guidelines, or you have a clear plan to get them there. You have enough saved for your down payment, closing costs, and a modest emergency fund. And your real monthly budget leaves room for the life you want to live, not just the mortgage payment.
You’re not ready yet if you’re short on more than one of these. But “not ready yet” doesn’t mean “not ready ever.” It means you need a plan, and a timeline, and someone to run the actual numbers so you know exactly what needs to change and by when.
What I’d Tell the Couple in That Facebook Post
Without knowing their specific details, here’s what I’d say to anyone in a similar situation: stop asking strangers on the internet and get someone to run your actual numbers. Not a mortgage calculator. Not a Reddit thread. An actual analysis with real qualifying income, real stress test rates, real closing costs, and a real monthly budget.
That’s what I do. It takes about an hour. It costs nothing. And at the end of it, you’ll know exactly where you stand – whether that’s “you’re ready to go” or “here’s what needs to happen in the next 6 months to get you there.”
Either answer is valuable. Because clarity is the thing that makes the difference between confident buyers and anxious ones.
Want to know where you stand?
Schedule a call with me, we’ll go through it together.