With new rules and regulations that have been introduced, qualifying for a mortgage can be a challenge.
We don’t like to turn many down, and in fact we don’t. We may not be able to assist right away if you don’t qualify, but rest assured, we will coach you and assist you so that obtaining the mortgage and home of your dream can become a reality.
However, when a client does get turned down, the typical reasons involve multiple factors such as poor credit scores, inadequate documented income and little or no savings for a down payment.
What may be surprising to most is which of the above factors is most often the cause of a turn down. It’s not credit scores and not even down payment. It’s your Lending Ratios – GDS – Gross Debt Service Ratio and TDS – Total Debt Service Ratio. This is the number one concern factor that is viewed when underwriting your mortgage application.
In spite of this, most borrowers only have a vague idea of what their own debt service ratios are or what they should look like. More importantly, how lenders view them and what their limits will be.
Debt service ratios for mortgages are the most crucial indicators about whether you are going to be able to afford to repay the mortgage loan.
In essence, debt service ratios for mortgages have two components: The first measures your gross income from all sources before taxes against your proposed monthly housing expenses including the principal, interest, taxes and heating/utilities on the proposed mortgage.
As a general rule, lenders like to see your housing expense ratio no higher than 35 percent of gross monthly income, though there is flexibility to go higher if other elements of your application are strong.
The second debt service ratio component, is referred to as Total Debt Service Ratio. It measures your income against all your recurring monthly debts. These include housing expenses as defined above, credit cards, student loans, personal loan payments and others. Most lenders like to see this figure at 42 percent or below. Again, there is some flexibility here depending on other elements of your application.
Bottom line: Make attempts to stay within your affordability guidelines and try to keep revolving, recurring debt levels to a minimum.
Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.
VERICO The Financial Forum Ltd.
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