What do lenders require?
|Assessing your present household income and your annual income helps to determine if you are eligible for a mortgage and how much you can comfortably afford. Mortgage lenders will use two calculations when determining your eligibility for a mortgage:|
1) Gross Debt Service (GDS) Ratio: GDS ratio is the percentage of your gross monthly income used for mortgage payments, taxes and heating costs, or if your buying a condominium half of the monthly maintenance fees. As a general rule your GDS ratio shouldn’t be more than 32% of your gross monthly income.
2) Total Debt Service (TDS) Ratio: TDS ratio is the percentage of your gross monthly income required to cover your monthly housing costs plus all of your other debt payments such as car loans or leases, credit card payments, lines of credit payments and any other debt. In general your TDS ratio should not be more than 40% of your gross monthly income.
Getting a mortgage pre-approval before looking at properties is highly recommended as it gives you a more realistic expectation of what you can afford. It’s good to remember that preapproval amounts can overestimate what you can actually afford. Being pre-approved is not a guarantee that you will be approved once you actually apply, especially if market conditions, interest rates, or your personal circumstances happen to change.
You can always check the mortgage affordability calculator at www.realtor.ca
A credit report is a summary of your financial history and an important tool used for deciding whether or not you’ll be approved for your mortgage. Lenders will always check your credit report so ordering a copy for yourself before meeting with them to make sure it does not contain any errors is always a good idea.
The Financial Consumer Agency of Canada (FCAC) offers tips for improving your credit rating and ordering your free credit report at www.itpaystoknow.gc.ca.