I got an email from a young graduate the other day regarding obtaining a mortgage for the first time home buyer. I thought that it was a great idea for a post. I guess that some of my posts come across as those for the financially literate, and I don't have much for those just starting out. Well lets dive into this one.
Qualifying for a mortgage:
In Canada, for the first time home buyer, qualifying for a mortgage is based on 3 criteria:
- Your current employment income/status
- Your credit history
- Your current debts
Current Employment Income
The bank isn't going to give you a mortgage unless you have steady income that can support the mortgage. They also look @ income "potential" and may lend you a higher amount based on this. The amount of income required depends on the price of the home/mortgage required and other debts that you may have. More on this below.
The banks usually require pristine credit or they won't even consider you as a mortgage candidate. If you have spotty credit, then it's probably best to head to a mortgage broker instead. According to my mortgage broker, most institutions require a credit/beacon score of above 650-680 to qualify for the best rates.
The banks typically look at the Total Debt Service Ratio (TDS) and Gross Debt Service Ratio (GDS).
GDS: The percentage of gross annual income required to cover payments associated with housing. Must be less than 32%.
- GDS = monthly housing expenses/gross monthly income
- ex. Mortgage payment = $ 1000, taxes = $200, heat/light=$200, insurance=$50, 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. Must be less than 40%.
- TDS = (monthly housing expenses + other monthly debt servicing)/gross monthly income
- ex. housing expenses = $1,450/mo, car loan = $500/mo.
- TDS = $1,450+$500/$5,000=39%
In the above scenario, this person just barely passed the debt servicing ratios.
- As a general rule of thumb, providing that you don't have much consumer debt with decent credit, the banks/brokers will give you 2.5-3 times your gross annual income.
- Another rule of thumb that I like to use is that you should try to keep your mortgage under 2 x annual income. Live in an expensive city? Then consider saving for a bigger down payment.