06 Mar The Lender’s Equations: How Much Mortgage Will You Qualify for?
As a Canadian homeowner, it’s relieving to know that you can make a sound decision on matters concerning homeownership, and that you can do so in a sensible, relaxed and reliable manner. Getting a mortgage, after all, is not a walk in the part. It requires preparation and a responsible mindset, because once you get it, you have to account for everything that goes with it.
The amount of mortgage you have to pay typically depends on the following factors: your gross monthly income, the mortgage interest rates stipulated in the contract and the conditions set under the term you qualified for, how much you paid for down payment, and your overall capacity to pay, taking into consideration all other financial obligations (i.e. utility bills, personal expenses, household size, etc.).
Besides conducting a background check on your credit information and FICO standing, lenders follow specific equations when they compute for your mortgage. These computations help them identify which type of mortgage is suitable to your background or whether you qualify for a mortgage at all: Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS).
The Difference Between GDS And TDS
What you can expect in a GDS computation:
– Principal and interest rates of your mortgage payment
– Property tax (otherwise known as PITH)
– Heating expenses
– Condominium fees (if applicable)
– Equivalent to 32 percent or less of your gross qualifying income.
The TDS computation follows a different set of principles:
– Overall debt every month, which may include credit card charges, alimony (child or spousal support), student loans, car loan, or any other debt
– Deduction of 40 percent from your gross qualifying income
The LTV Ratio
There is another type of computation that certain lenders use called the loan-to-value ratio. This equation is much easier to figure out than either TDS or GDS. Lenders compute for the size of the loan according to the value of the property. This means if the property you intend to purchase has a high value, you will qualify for a bigger mortgage. Lenders usually make use of this type of ratio, but that does not mean there are no attendant risks involved.
Be mindful that these ratio percentages are used by lenders, including banks, private lenders, non-depository lenders and other alternative lenders. These equations serve to guide the industry but they may vary from one lender to another. They may change depending on the lender’s standards. There are lenders who prioritize other factors to determine if a mortgage applicant qualifies for a contract.
There are indeed situations when the loan has a higher ratio. In such cases, because the down payment deposited by the borrower was less than 20 percent, the Canadian Mortgage and Housing Corporation (CMHC) had to take over and insure the loan. Private insurers like Canada Guaranty and Genworth may also insure high-ratio loans. Insured loans tend to have a high TDS or GDS percentage (a range of 39 to 44), in addition to a credit rating of 680.
If you do not want to consult a mortgage broker for advise, you have the option to compute your loan ratio. There are mortgage calculators online that can help you determine your expected mortgage payment under a given period.