Now that you’ve decided that purchasing a home is in your future, you need to put a plan of action in place. The first step to that plan? A trip to your bank to determine how much house you can afford. This is commonly called getting pre-qualified for a mortgage.
The amount of mortgage one can qualify for is found from what are known as qualification ratios. These are your Gross Debt Ratio and Total Debt Service Ratio, or ‘GDS’ and ‘TDS’. Your lender will take a look at your monthly income as well as your monthly debt obligation to come up with an appropriate amount you can safely spend on your new home. Generally, an acceptable GDS ratio ranges is no higher then 35%*. This means that 35% of the household income can safely be set aside to put a roof over your head. Your TDS ratio is higher at 42%* and is earmarked to service your entire monthly debt.
Keeping in mind, as of January 2018 our buyers are now faced with a Mortgage ‘Stress Test‘. For more on that aspect of being pre-qualified, read Could You Pass the Test?
You may wish to spend less than the figure your lender extends so that you can avoid becoming house poor. If you’re accustomed to eating out frequently, you may be in for a rude awakening, discovering very quickly that you can no longer afford the three times weekly outings. Some advice? Start scaling down your entertainment needs at least six months before you move. This way, you can add back when you feel comfortable.
Finally, buyers are starting to see the benefit of utilizing a mortgage broker’s services to explore their finance options when choosing a mortgage. A mortgage broker will be your unbiased resource to assist in sourcing out your best rate, term and option for savings. Because they have no ‘attachment’ to any one bank, they can and will access the entire mortgage market to help you make the wisest choice whether searching for your first mortgage or renewing an existing one. Don’t stress over pre-qualification, what is important is dealing with a mortgage agent who possesses the experience and access to solutions for you before being told “No” by the banks! Let us help you find someone who will help see you through the process, check out our Business Directory and search ‘Mortgage’.
* Acceptable percentages based on CMHC Mar 31, 2018 https://www.cmhc-schl.gc.ca/en/finance-and-investing/mortgage-loan-insurance/calculating-gds-tds