Confused About Getting a Mortgage Today?
You’re not alone. Recently reports state that a majority of people (some 57%) are befuddled about qualifying for a mortgage. It has further been reported that the stress test causes some 47% of people additional confusion.
Mortgage Pre-Qualification Is More Important Than Ever
Why? Aside from the stress test, qualifying for a mortgage has become quite complicated. The website for Canada Mortgage and Housing (CMHC) includes an article called: How key inputs calculate a borrower’s debt service ratios. This can help to clarify some of the essential steps lenders have to look to today to qualify you or a mortgage. Here are the highlights of these key inputs.
What is GDS?
GDS or Gross Debt Service represents 32% of your gross income. So if you have a combined gross income of $100,000. Your GDS works out to $2,667 per month. This amount must cover the mortgage Principal and Interest, property Taxes and Heat. The acronym PITH is commonly used.
What is TDS and How Can It Reduce GDS?
TDS or Total Debt Service represents 40% of your gross income. At a gross income of $100,000 your TDS works out to $3,333 for all debts, or $667 more for Other Debt Obligations. Should other debt obligations be greater, they will reduce your GDS. So if your other debts are $1,133, this will reduce your GDS to $2,200 for mortgage, taxes and heat.
If applicable, 50% of condo fees must be included in the calculation.
What’s Included in Other Debt Obligations
These include credit cards, lines of credit, car and personal loans. For this type of debt, the lender must calculate and factor a monthly payment of 3% of the outstanding balance. A balance of $15,000 works out to $450 per month.
What’s Different About a Secured Line of Credit?
For a line of credit that is secured on your property the formula differs. Here the lender takes the outstanding balance and calculates a monthly payment based on a mortgage amortized over 25 years at the benchmark rate if the contract rate is unknown. The benchmark rate, currently at 5.34% represents a cross-section of posted bank rates and is set by the Bank of Canada.
For example, a $20,000 secured line of credit based on the above would have a monthly payment of $120.22 to factor into the qualifying mix.
Finally the Stress Test
For an insured mortgage, typically one with less than 20% down, the borrower must qualify at the benchmark rate of 5.34%, though the contract rate might be in the area of 3% for a five-year term mortgage.
For an uninsured mortgage, typically a mortgage with 20% or more down, the borrower must qualify for the greater of the benchmark qualifying rate or the contract rate plus 2 points.
What’s More,CMHC requires a recommended minimum credit score of 680. With all of these rules, knowing how much mortgage you qualify for requires the help of an expert before you decide to shop for a home.