How to Qualify for a Mortgage
Buying a home is not a small task by itself. Figuring out how much mortgage you qualify for could end up being a more difficult quest for the average home buyer.
I always recommend that it's best to leave these kinds of calculations up to the experts to complete. But if you want to get a head start, this information below will give you a general idea of what the banks are going to be checking once you submit your mortgage application.
The banks are not only going to evaluate your mortgage request based on the value of the home you are looking at purchasing, but they will consider all expenses associated with the upkeep of the home and any debt that you may have. Like rising property taxes, condominium fees and upcoming special assessment. Then they will want to factor in the cost of your utilities to heat the home and so on...
Any outstanding debt or regular financial obligations that you may have is also going to be taken into consideration during the mortgage approval process.
Quick Rule of Thumb to Calculate Your Budget
The banks will look at something that's called the Gross Debt Service Ration (aka GDSR). All this means is that your total housing expense cannot exceed 32% of your gross income.
As an example: Let's say in your household you earn a total of $80,000 before paying any taxes, then the bank is going to approve you for a maximum monthly payment of $2,133.
There is a second formula that the banks use to qualify all mortgage application by. It is called the Total Debt Service Ratio (aka TDSR). Here the banks add up every financial commitment that you currently have. Including your credit cards, car leases, child care support, etc... This amount cannot exceed 40% of your gross income to qualify for a non-conventional mortgage where you are putting down less than 20% down payment.
Some of these ratios may change if you are able to put down a larger down payment to avoid paying for mortgage insurance. Mortgage insurance is mandatory for all mortgages in Canada when a buyer has less than 20% down payment. In this case, you need to adhere to their qualification rules in addition to the bank's policy.
Some Expenses to Keep in Mind When Buying a Home
- Must have the downpayment available.
- Legal fees to complete the sale
- Home Inspection is very much encouraged
- Condominium Document Review is a must to avoid big surprises when buying a condo.
- And of course, property taxes are going to be there.
What Do I Need to Cover Every Month When I Own Real Estate?
- Your mortgage payment of course.
- Utilities such as heat, power, water, cable, telephone, etc...
- Home Insurance. This is a must if you have a mortgage.
- Property taxes to pay for many unknown things.
- Condo fee, this is only applicable if you're buying a condo obviously.
- Community fee, if you live in a nice area then someone has to plant those beautiful flowers in the summer and shovel the snow.
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