Some of the most frequently asked questions I receive surround the process of qualifying for a mortgage. Questions range from, How much home can I buy? To, Have I worked for long enough? … The answers to these questions can be clarified by looking at three central lending criteria: 1.Your current employment and income position 2.Your current debts 3.Your credit history. It is important to recognize in looking at these criteria that there is a lot of flexibility from some lenders, and that mortgages can be had for a wide range of financial situations, at good rates. All lenders will also allow combined incomes and credit histories to help strengthen an application.
Current Employment
Most lenders require a steady income that is able to support the mortgage payments. Full time work is preferable but some lenders will consider part time or probationary workers. Moreover, lenders will look at your length of time (or stability) in an occupation as well as future income potential. A good mortgage broker will be able to frame your situation in the best possible way for the various lending adjudicators (persons who approve the mortgage).
Current Debts
All lenders look at your Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS). These ratios determine how much house you can potentially afford and what your maximum mortgage payment could be, given your other living expenses.
GDS: The percentage of gross annual income required to cover payments associated with housing only. It must be less than 32%.
- GDS = monthly housing expenses/gross monthly income
- For example: Mortgage payment = $ 1000, taxes = $200, heat/light=$200, insurance=$50. Therefore, monthly housing expenses = $1,450. Gross monthly income = $5,000
- GDS = $1,450/5000 = 29%
TDS: The percentage of gross annual income required to cover payments associated with housing AND other debt. It must be less than 42%.
- TDS = (monthly housing expenses + other monthly debt servicing)/gross monthly income
- For example: housing expenses = $1,450/mo, car loan = $500/month
- TDS = $1,450+$500/$5,000=39%
So in both cases the person passes comfortably.
Try this calculator to determine your GDS and TDS scores:
Click HERE
Some lenders will allow exceptions to th eGDS and TDS ratios, but the rates on these mortgages are usually a bit higher.
Credit History
The final major component that lenders review is the way you have handled your debts in the past. If your credit score is good (above 640), you will be placed with a top lender with the absolute lowest rates. If your credit is not in such good shape, you can be placed with an alternative lender that will carry a slightly higher interest rate. In many cases, an alternative mortgage can be reset after one year and placed with a top lender if the credit situation has improved. See my article on improving your credit score for more information. A good mortgage agent will help you establish good credit if needed.
It is usually good to get in to a mortgage as soon as possible because it helps provide structure for saving (because you build equity in your home), and it provides for a better lifestyle to own your own home.
Feel free to leave a comment, ask any questions below, or contact me to discuss the pre approval process.
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