Part of shopping for a new home is figuring out how much of a mortgage you would qualify for. Affordability is usually based on your household income, personal monthly expenses and the expenses associated with owning a home (property taxes, condo fees, and heating costs). The amount of mortgage you can qualify for is generally determined by five key factors.
- Your income
- Your credit history
- Your current debts
- Your down payment
- The value of the property you want to buy
Your gross annual income will need to be confirmed by your lender, whether you are employed or self-employed. Most mortgage lenders request a letter of employment confirmation as well as recent pay stubs and the last two years Notice of Assessment forms from Canada Revenue Agency (CRA). A history of steady employment, usually within the same job for several years, helps you to qualify.
Your current debts
Mortgage lenders typically look at your Total Debt Service Ratio (TDS) and Gross Debt Service Ratio (GDS).
GDS RATIO (Gross debt service ratio):
The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent. Must be less than 32%.
TDS RATIO (Total debt service ratio):
The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards. Generally, your TDS must be less than 40%. (Some CMHC Mortgage Loan Insurance products allow a TDS of up to 44%.)
Your credit history
Good credit is very important in qualifying for a loan and the lender will want to know that the house is worth the price you plan to pay. A credit history is always pulled by your mortgage broker when you apply for credit or seek pre-approval. A credit score of 680+ is most desirable by lenders.
Your down payment
A down payment of 20% or more will qualify you for a conventional mortgage. If it is less than 20%, the mortgage must be insured with default insurance. Homes can be purchased with as little as 5% down. Your down payment affects the amount of your monthly payments and how much you can afford.
The value of the property you want to buy
The mortgage lender will request a property appraisal to determine the condition and market value of the property to be mortgaged. They want to ensure that the property you are purchasing is in good condition in the event that you are unable to repay the mortgage and they have to market the property for sale.
How much can I afford?
Experiment with our Mortgage calculator by inputting different numbers to find out what you can do to improve your finances and buy a better home. Your mortgage broker will help you determine how much you can afford and help you determine what type of mortgage would be most suitable for your financial circumstances.
Qualifying for a mortgage
Why qualifying for a mortgage before you start house hunting is so important. This lets you know exactly how much home you can afford, so you don’t waste time looking at properties that are outside of your price range. Your mortgage broker will take you through the Pre-Approval process to secure the mortgage amount you need.