How To Prepare For Your Home Purchase
Recent mortgage rule changes have had a significant impact on a purchasers' buying power. More than ever, planning ahead for your purchase can impact your mortgage qualification. Knowing what mortgage lenders look for can help you to maximize your purchasing power.
Understanding Your Maximum Purchase Calculation (GDS/TDS)
All mortgage lenders and insurers look at affordability ratios when reviewing your mortgage application. There is some flexibility on conventional mortgages (20% or more down payment), but insured mortgages must meet specific maximum affordability ratios. First, your Gross Debt Service (GDS) or the amount of your gross monthly income spent on your monthly housing costs, must be less than 39%. Housing costs include your mortgage payment (calculated at Bank of Canada qualifying rate; currently 4.64%), heating cost (varies by lender but $100/month is common), property taxes, and 50% of condo fees.
Secondly, your Total Debt Service (TDS) must be less than 44%. Your TDS is the amount of your gross income or the amount of your gross monthly income spent on your monthly housing costs plus your debt and other financial commitments. This would include car payments, student loans, credit cards, lines of credit, and the carrying costs of other properties you own.
Preparing for Your Purchase
- Pay Down Debt - Not only is carrying debt into home ownership difficult for future pay off, but it can also reduce your buying power. If adding your debts to your monthly housing costs tips you over 44% of your income, it lowers how much house you can purchase.
- Buy Less Vehicle - Vehicle payments are often the biggest barrier to buying a home simply because they can eat up such a significant amount of your monthly income. These payments factor into your TDS, so the higher your vehicle loan payment, the more likely it is to drag down your maximum purchase price.
- Build and Maintain Healthy Credit - An underwriter once told me that they would rather see a spotty credit history than no history. When I asked why that was, he told me, "I don't like playing the lottery." With a good credit score and an established credit history, you qualify for the highest allowed GDS/TDS ratios and are most likely to get a lender on board when buying at your maximum.
- More Down Payment - Whether saved or gifted, increasing your down payment allows you to qualify for a higher purchase price. If you are able to hit 20% down payment, it has even more impact as lenders have more flexibility once they do not need to follow insurer requirements. You can qualify using your contract rate (the actual mortgage rate you get) instead of the Bank of Canada Qualifying Rate, as well as a 30-year versus 25-year amortization.
Michelle Lapierre, BComm
VERICO Mortgage Tailors Inc.