Determine if you Qualify for a Mortgage

Determine if you Qualify for a Mortgage - Ottawa House and Condo Hub

How does a prospective lender determine whether a borrower has the financial ability to meet a specific mortgage?

The two most widely-accepted guidelines used to estimate how much of a home buyer’s income can be allocated to housing costs are:

  • The Gross Debt Service ratio (GDS)

Simply put, the Gross Debt Service ration compares the total cost of your monthly mortgage payment taxes and heating to your gross monthly (pre-tax) income from all sources. The general rule is that these monthly payments should exceed 32% of your gross income.

  • The Total Debt Service ratio (TDS)

The second important calculation made by your financial institution is the Total Debt Service ratio, which examines the relationship between all monthly debts (i.e. mortgage payments, property taxes, car, credit cards, other loans or obligations, etc.) and your gross monthly income. The general rule is that these total monthly payments should not exceed 40% of your income.

Determining How Much You Can Afford

Potential purchasers can save valuable time and energy when searching for a home by knowing what they can afford well in advance. Generally, the rule of thumb when purchasing a home is to ensure that your monthly housing costs do not exceed 32 percent of your gross monthly income, but many factors come into effect when financing a home.

The most important considerations when buying a home are your gross household income, your credit rating, your down payment the current mortgage interest. Although the CMHC (Canada Mortgage and Housing Corporation) will insure mortgages with as little as five percent down, most buyers contribute a down payment of 25 percent of total purchase price. Most lending institutions finance up to 75% of the purchase price in a conventional mortgage.

After you have determined what you can afford, remember that your total monthly debt and monthly mortgage payment cannot exceed 40 percent of your gross monthly income. This includes mortgage payments, taxes, heating expenses, car payments, personal loans, and credit card debts.

A Mortgage Specialist is your best source to walk you through the basics in terms of determining what you can afford so we find a home that suits your needs in your price range.