First Time Home Buyer – Qualifying

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:

  1. Your current employment income/status
  2. Your credit history
  3. 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.

Credit History

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.

Current Debts

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.

Other Tips:

  • 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.

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Frugal Trader


FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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View all comments » Blog Archive » First Time Home Buyer
11 years ago

[…] 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. […]

Carolyn Deas
12 years ago

I seem to be having trouble finding anything that tells me about the 1st time home owners grant. As in how much it is. does it need to be repayed, ect. Any infomation would be appreciated. I live in Alberta if that helps. thanks in advance.

12 years ago


There just seems to be something that irks me with 3.5x ratio. For example, if you have an area with a high proportion of retirees, wouldn’t one expect their incomes to be quite low yet the house prices might still be high because these are bought and paid for?

I think there are too many factors to make me believe one could reasonably expect the 3.5x ratio to be usable everywhere.

To me, the simple test of how much homes are worth is based on how much they are selling for at that time.

12 years ago

I posted this on the ‘Real Estate Crash in Canada’ thread:

“I’ve read articles from different sources stating a “normal” or “natural” residential house value is around 3.5 times the median income of that given area. Is this something that holds true through real estate history? Or is it just another number someone made up?

If this were the case, and the median Canadian household income (2 people, no children) is around $55-60,000, that would mean a “natural” valuation for a Canadian house is around $200,000. According to CREA, the Sept/08 national value is almost $290,000 — 45% over-priced?

Since we all know wages increase at a dead man’s pace, do we have to look forward to loosing nearly half the value of our homes, or more if we live on the West coast?!”

As far as I can tell, with the amount of posters claiming “this will get me nothing in this city”, yes, Canadian house prices are over-priced, and it seems by a lot.

12 years ago

I believe by 2.5-3x he means the mortage payment, not the actual value of the home.

I’m looking at purchasing a home between 2.5mil – 3.0mil here in California. Our joint income is about 500k/yr. We’re looking at an lease option to purchase, with 24 month terms. Our growth in our salaries is about 30% a year. So I’m hoping I can qualify for a super jumbo fixed by then, we however have never purchased a home, so I’m still not confident we’ll qualifiy.

Reader Mail: 24 and Clueless (Rent vs. Buy) | Million Dollar Journey
12 years ago

[…] initial problem with purchasing is qualifying for the mortgage at her current salary.  Purchasing the condo would result in a month housing expenses of at least […]

12 years ago


I commend you on your blog, passion, and community service.

However, I take issue with the 2x income.

What would 2x annual income equal? Let’s see:

1) 35k x 2 = 70k mortgage buys nothing in Vancouver.

2) 70k x 2 = 140k maybe a mobile home.

3) 140k x 2 = 280k maybe a studio/1br.

If the 2x rule is for a severe housing depression in prices, I agree. Otherwise, doing an MLS search would indicate on average, to buy a condo would require more akin to a 6x – 9x. Most folks needing a place in the last half decade simply could not meet this ‘rule’.

Now, for those buying a house, ‘saving more’ would take another decade just to make the down payment. Looking at the Vancouver price graph over the last 30 years indicates prices over long term trends increase faster than income grows, or savings abilities for most.

Wish all the best. Hopefully relief is coming.

12 years ago

Once you obtain the home loan the best way to pay it off would be to collect all your spare change and at the end of the month add it to your home loan repayment to help reduce the amount of interest you have to pay.

To learn how to pay off your house quicker check out the following link:

30 Personal Finance Rules of Thumb | Million Dollar Journey
13 years ago

[…] Maximum mortgage payments should be no more than 28% of your gross monthly salary. [I think this is what the banks use.] […]