One of the most important things any buyer must do before getting excited about house or condo shopping is to find out how large a mortgage they could be approved for. If you don’t you might find out you're interested in homes that are out of your price range OR the opposite - you could actually afford a larger property or buy in a different neighbourhood.
There are two calculations that every lender takes into consideration… the Gross Debt Service ratio (GDS) and the Total Debt Service ratio (TDS). These permissible numbers will vary depending on your credit score.
The GDS calculation adds up the total annual payment for mortgage principal & interest for a specific loan amount plus annual realty taxes and an estimate for 50% of the heating cost and divides that total number by the gross annual income of the borrower.
The TDS calculation takes the same numbers as for the GDS PLUS they add in annual loan payments for any lines of credit, car loans and credit cards that you may have.
If your credit score is less than 680, the ratios used are 35% and 42% respectively.
With a credit score higher than 680, the GDS and TDS qualifying ratios are 39% and 44%.
If you’re putting more than 20% of the purchase price as a down payment, most lenders will allow some flexibility in these ratios.
In your consultation with your lender or mortgage broker, he or she will ask you what your gross annual income is (before deductions for taxes etc). Typically they don’t take part-time income into consideration. Additionally if you’re self employed your financial advisor will need to see tax returns for the last three years in order to get a good handle on what income number to use in this calculation.
Then they’ll want a list of your debts, the size of your down payment and the approximate purchase price that you hope to pay for your new home. The lender will then run these numbers to work out your GDS/TDS ratios.
Then you’ll find out if you qualify to get a mortgage for the amount you requested above.
I usually suggest to clients that they ask the lender/broker to tell them the absolute maximum size of mortgage that they qualify for. The number may be a scary high number that you’d never want to go to but it’s better to know up front rather than lose out on getting the home of your dreams later on in a tight negotiation because you didn’t realize you could go a couple of thousand dollars higher with your offer.
I’ve developed an Excel spreadsheet that will run these numbers for you. To get a copy of this spreadsheet OR if you’d like to review your numbers over a coffee or on a brief phone call, email me here.
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