When it comes to applying for a mortgage, the current debts you have affects the mortgage amount you can qualify for. I often see buyers who have worked hard to maintain a good credit score and saved up their down payment only to be told they don’t qualify at the price they want to buy at due to their car payment. It’s not really something any potential home buyer wants to hear. Keep reading for some important information I believe all future home buyers need to be aware of
When calculating a mortgage that is affordable for you, we use two formulas and apply them to your specific financial profile. These are the key terms you need to keep in mind when you start preparing for the mortgage approval process.
GDS Ratio- Gross Debt Service Ratio
These are the costs attributed to housing such as mortgage payments, property taxes, heat and condo fees if applicable and cannot take up more than 32 -39% of your gross annual income depending on your credit score, down payment amount and the lender. There are exceptions though they may only be available to you through an alternative lender which means you will pay a higher interest rate and may require a higher down payment.
TDS Ratio- Total Debt Service Ratio
The potential housing costs as mentioned above PLUS any existing debt payments you already have cannot total more than 40 -44% of your gross annual income, again, depending on your credit score, down payment amount and the lender. This is where a high car payment or any other debt obligation can reduce the mortgage amount you are able to qualify for. The more “room” those personal debt payments take up reduces the amount left to cover housing costs. When you have less to cover housing costs, your buying power is reduced to properties that fit within your mortgage and downpayment budget.
*** Important to note ALL lenders must qualify you at the higher of the benchmark rate or the rate that you will actually be charged for your new mortgage. Today, even though you may only pay 3.29% for a 5-year fixed rate term with 5% down payment, you will have to qualify at a 5.34% interest rate***
To put it into perspective, here are 2 examples of how a vehicle payment can affect your mortgage qualifying ratios;
- A potential mortgage borrower who earns $90,000 gross income per year, owes $5000 in credit card balances and has a $825 truck payment – Maximum purchase price is $320,000*
- This borrower who also earns $90,000 gross income per year, and also owes $5000 in credit card balances but only has a $480 car payment – Maximum purchase price is $378,000**
Simply, the best way to maximize your mortgage affordability is to reduce debt. There a few other tips I want to pass on to help you qualify for a mortgage solution that fits your needs.
Timing is key and if you’re trying to qualify for a mortgage now or in the near future, think twice before you take on any type of new debt. This includes credit card debt, vehicle loans, lines of credit or “don’t pay for a year”. If it is a necessary expenditure, try to delay it until after you’ve moved into your new home.
If you have existing debts that you’ve been paying down and you want to apply for a mortgage now, team up with an experienced mortgage professional who may be able to help you restructure your debt in a way that will help you maximize your mortgage affordability.
It’s kind of a double-edged sword because while you need debt to build credit and maintain a good credit rating, too much debt can affect you negatively. Be sure to keep a close eye on your debt levels to ensure they’re helping you improve your financing profile rather than to hinder it.
* Calculations based on 3.29% 5-year fixed rate, 25-year amortization, $3,200 per year property taxes, $125 per month heating costs, no condo fees and a credit score of over 680
** Calculations based on 3.29% 5-year fixed rate, 25-year amortization, $3,400 per year property taxes, $125 per month heating costs, no condo fees and a credit score of over 680
Do you have mortgage questions? Contact The Mortgagegirlca at 780-433-8412 or firstname.lastname@example.org. Follow the MortgageGirlca on Facebook (MortgageGirlca) Twitter (mortgagegirlca) or Instagram (MortgageGirl.ca).