Last week, we discussed some basics about shopping for a mortgage. After a lender pre-approves you for a mortgage, you must prove to the lender that you can repay the loan amount. The lender will calculate your total monthly housing costs and your total debt load. It will then calculate your gross debt service ratio and your total debt service ratio (more about these below). If these calculations show that you can pay your housing costs and your additional debts, you will probably get your mortgage.
This week, we’ll look at what factors are considered in the qualification process.
Total Monthly Housing Costs
Your total monthly housing costs must not exceed 32 per cent of your gross household income. They include:
- Mortgage payments
- Property taxes
- Heating and utilities
- Fifty per cent of condo fees (if applicable)
The ratio of your total housing costs to your gross household income is called the gross debt service ratio.
Total Debt Load
Your total debt load must not exceed 40 per cent of your gross income. The debt load includes your housing costs plus all of your other debts:
- Credit card payments
- Car payments
- Lines of credit
- Student loans
- Support payments
- Any other debts
The ratio of your total debts to your gross household income is called the total debt service ratio.
Qualifying Mortgage Interest Rates
You must know what interest rate to use to calculate the total cost of your mortgage and the amount of your mortgage payments. Some lenders, such as banks, require that you be able to make payments at an interest rate that is two per cent higher than the actual rate set in your mortgage before granting you a mortgage.
Calculating Your Gross Debt Service And Total Debt Service Ratios
Use a Mortgage Qualifier Tool, such as this one from Canada.ca, to compute these ratios for the house you are contemplating buying.
The lender will probably give you a mortgage if your gross debt ratio is not greater than 32 per cent of your income and your total debt service ratio is not greater than 40 per cent of your income.
A lender can still decide not to give you a mortgage, even if you qualify after these calculations, if it thinks you have a poor credit history or the property you want does not meet its standards (it is overvalued or decrepit).
Mortgage qualification is a challenging process. If you have any concerns about qualifying for a mortgage, you should consult an experienced real estate lawyer.