It Takes Much More Than an Online Mortgage Calculator
The Gross Debt Ratio
(1) When applying for a mortgage, lenders use what’s called a Gross Debt Service Ratio (GDS) to calculate how much mortgage you can afford. That ratio tends to be 32% of your income. So for example, if you make $85,000, at 32%, you can afford a mortgage payment of $2,267 per month. There is a catch to the GDS.
The Total Debt Ratio
(2) Lenders use a Total Debt Service Ratio (TDS) for all debts which can be 44% of your gross income. An income of $85,000 allows a total monthly debt of $3,117 per month. So the maximum payment for other debts is $850 ($3117 - $2,267). The 44% is not standard; the majority of lenders calculate the TDS at 40%.
What if Your Other Debts are more?
(3) A higher monthly payment on other debts interferes with and reduces your monthly mortgage affordability. With other debts of $1,000 per month, your mortgage affordability (would be affected as follows: $3,117 less $1,000 = $2,117, a reduction of $150 in the mortgage affordability.
What About Credit Card Limits?
(4) Credit card limits also affect mortgage affordability. If, for example, you have three credit cards with a total limit of $15,000, the lender must take 3% of that limit, $450, and deduct that from your mortgage affordability as well. You might have an actual monthly credit card payment of $225 but $450 will be the amount used in determining your mortgage qualification.
What about Lines of Credit?
(5) Unregistered: If you have an unregistered line of credit of say $20,000; again 3% equaling $600 affects affordability. This now drastically reduces affordability to $1,517 ($3,117 - $1,000 - $600).
Registered: In contrast, if the $20,000 is registered on your home’s title, most lenders assume a 5-year fixed rate mortgage, amortized over 25 years and apply the qualifying rate of 4.99%. In this example the payment is $116.21, quite a bit less than the unregistered version. The improved effect on your affordability is $2,000.80 ($3,117 - $1,000 - $116.20).
More on the Stress Test
(6) As of January 2018, the stress test will apply to all mortgage borrowers. With a downpayment of 20% or more, the lender has to apply a qualifying rate of 4.99% or 2% plus your contract rate whichever is higher to calculate how much mortgage you can afford, this is after taking the above into consideration. If your contract rate for a mortgage is 3.25%, adding 2% equals 5.25%. This is applied to your income to determine how much mortgage you qualify for.
What Else is Looked at?
(7) Credit Score: Lenders look seriously at credit score because it measures your financial health and past history of paying debts and bills. CMHC looks at a minimum credit score of 620.
(8) Employment History: Last but not least is employment history. Lenders require you to be employed within the same industry for the last two years, want confirmation of your income through your employer as well as a copy of your income tax assessment.
As you can see, qualifying for a mortgage can be quite complex. You would be well served to have a mortgage professional prequalify you. That way you can buy with confidence.