How Do Mortgage Approvals Work?
The majority of us are unable to purchase a house in a cash deal - Meaning can purchase without needing to get a mortgage. The average person will purchase a home with 5%, 10%, 15% or 20% down, with the rest of the purchase price coming from either a bank or private lender.
In order to know what kind of house we are able to afford is based on a number of different (& moving) factors. Examples include:
yearly salary or hourly wage
amount of saved cash available
monetary gifts from others
amount of debt owning
That is just keeping it simple, it can get complicated when looking into some of those factors. Such as, if you earn a commission based salary vs fixed salary.
If you are like most, and needing to get a mortgage in order to purchase a home it is important to talk to a mortgage broker first. Make this your very first step towards becoming a homeowner. The reason for this, is that you then will be knowledgeable and aware of what price range you should be looking in. The worst feeling for a buyer is when they find their dream place, only to find out afterwards that it is out of their budget and are unable to qualify for a mortgage... (sigh) It can be heartbreaking!
Two good measures to remember is the GDS ratio and TDS ratio. These are ratios put in place by the government to ensure that Canadians are not spending too much of their income on mortgage payments.
The Gross Debt Service ratio calculates how much of your household income is being used to pay your mortgage payment (Principal + interest), property taxes & heat. It cannot exceed 39%.
For example: if your monthly mortgage payment, property tax & heat = $2500/month, then you need to be making a minimum of $6,410 month. That is 39% of your monthly salary allocated to your GDS.
However, on top of that, if you have debt owning. Car payments, loan payments, student loans, credit card loans, ect. The Total Debt Service ratio cannot exceed 44%. TDS calculates how much of your household income is being used to pay your mortgage payment (Principal + interest), property taxes, heat & DEBT.
For example: If you monthly mortgage payment, property tax & heat = $2,500/month, and you have $500/monthly debt payments. Then your minimum monthly salary has to = $6,820. Which is 44% of your monthly salary allocated to your TDS.
A professional Mortgage Broker will go into further detail with you regarding what your loan amount could be and what price range of homes you should be looking at. I cannot stress enough how important it is to get pre-qualified so that you have an accurate picture of what you can afford. All to many times, homes fall through because they are unable to secure financing. It becomes a heartbreak for both the buyers who lose the house AND the sellers who now have to re-sell their home.
I could go into a whole lot more on mortgages and what factors determine your mortgage approval. Maybe I will save that for another blog or call me directly, I would be more than happy to sit down with you and go over some information. I am not a professional mortgage broker, but I can help with filling in some of the beginning details. If you are looking for a mortgage broker to help, let me know I can refer you to someone I trust!
If you are thinking of purchasing or selling your home, we would love to help in any way we can! Call me today at 647-327-3105