The Lender’s Equations: How Much Mortgage will you Qualify for?

GDS and TDS debt service ratios.

Knowing how much you can reasonably, comfortably and responsibly contribute to home ownership is paramount in your making a wise and sound investment on your Canadian property. The big four factors that generally contribute to this mortgage amount are:

  1. Monthly income generated
  2. The amount you can contribute to your down payment
  3. The mortgage interest rates and term you qualify for
  4. Other financial commitments or debts you are obliged to pay

Lenders basically use two rules to determine the mortgage you are eligible to be funded to receive, in addition to examining your credit history and FICO score:

  1. Gross Debt Service Ratio (GDS)
  2. Total Debt Service Ratio (TDS)

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Happy Home Hunting Tips for Canadians

Home hunting tips

Finding the right home for you and your loved ones really comes down to three chief factors:

  1. Affordability: Does the home fit into your budget? Have you determined the financing you can qualify for through a mortgage pre-approval? Have you factored in mortgage insurance, utilities and heating expenses, association fees and taxes?
  2. Lifestyle: Is the home located in an area within the proximity of the amenities you and your family require? Is the lot large enough for your pet(s)? Will owning this home impede you from doing the things you love doing? Are you close enough to work, family and friends?
  3. Future Needs: Are kids a possibility in the future? Is the home large enough for a family? Is the basement developed? Are there schools nearby? Or, if you are close to retirement, is the home too large? Are there too many stairs and floors in the home to negotiate?

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Saving for a Down Payment

down payment minimum

Mortgage Down Payment

Today’s mortgage market allows potential homeowners to purchase their dream property in Canada with as little as five per cent down.

Any down payment that totals less than 20 per cent of the property value will require mortgage default insurance, and is considered to be a high ratio loan.

A conventional mortgage is defined as a mortgage loan where 80 per cent or less of the property value is financed through a lender. The percentage of your home value that is financed, or not paid for by the down payment, is defined in a Loan to Value ratio (LTV) (loan amount divided by property value). The LTV has a large influence on the mortgage product you will be eligible to qualify for on the purchase of your new property.

The greater the down payment you can accumulate, the greater the contribution you are making toward the principal value of your home, and thus the less of the mortgage loan amount you will be paying interest on over time.
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Fitch Ratings highlights six default factors

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According to Fitch Ratings' Canadian Residential Mortgage Loan Loss Model, there are six primary factors that influence mortgage defaults. These include borrower equity, borrower credit score, total debt service ratio, loan purpose, occupancy and property type.

Equity
A mortgage borrower's equity is the difference between the value of a home and value of all mortgage secured against it. As a borrower pays off their home loan, they build equity. This can be a valuable asset to homeowners, as the more equity that's built up in a home, the more that can be accessed through home equity loans or home equity lines of credit. This essentially allows homeowners to turn the value of the home into cash for any number of purposes, including renovations, college tuition or medical costs. Continue reading

Preparing your credit for a mortgage application

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While it's easier than ever for Canadian homebuyers to lock in low mortgage rates, it's important for individuals to understand how their credit will influence the process. While current mortgage rates are currently at historically low levels, the best rates will only be made available to borrowers who can show exemplary credit on their mortgage applications. It's with this in mind that prospective homeowners should do all they can to prepare their credit for the mortgage application process.

Check your credit score
The first step for homebuyers should be to receive a copy of their credit report. Canadians are allowed to order as many free copies of their credit report as they require each year, as long as the request is made in writing for a printed copy delivered by mail. While these requests will be noted in an individual's report, they will not affect their credit score. Continue reading

If at first you don’t succeed, follow these tips and reapply for a mortgage

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After making the responsible decision that it's time to buy a place of your own – whether you have an affinity for home improvement or you're tired of spending so much to rent a place that isn't even yours – and taking the mortgage application plunge, a loan denial can feel like a kick in the gut. Ouch.

Before you swear off of ever owning your own home with a renovated kitchen, think long and hard about why you may have been denied. Perhaps a long-ago spending binge left you with more credit card debt than is desirable, or maybe you don't even use a credit card because you're extremely wary of creating personal debt.

To save yourself from endless questions or confusion post-denial, it may be best to consult with a financial professional or mortgage broker and find out exactly why you were denied. Depending on what risks you posed as a potential borrower, there are some tips to follow that may improve your chances in the next application. Continue reading

Preparing for your first mortgage

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Canadian mortgage rates are low and housing prices are softening from province to province. But before running off to see the mortgage broker, Canadians entering the housing market for the first time should ask themselves whether they can afford a new home.

There are a number of steps prospective first-time buyers should take to assess their financial readiness before committing to home ownership, and being aware of the different aspects involved in qualifying for a loan and financing mortgage payments can start consumers off on the right track, according to M&I, part of BMO Financial Group, parent company of the Bank of Montreal.

The first thing potential homeowners should consider is how much of their income will be spent on housing. Between mortgage payments – which include interest and insurance – and property taxes, the costs can add up. One good rule of thumb is to keep the ratio of mortgage debt to income under one-third.
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Should you Sacrifice Pre-Payment Options for a Lower Mortgage Rate?

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Taking a Look at the No Frills Mortgage

If you knew there was virtually no chance of your amassing a pre-payment, moving, or needing to refinance for the next five years, would you give up all of your mortgage options for the lowest rate possible? That is what the No Frills Mortgage offers to home purchasers: the lowest rate available, with no bells or whistles.

The No Frills Mortgage is only offered by select brokers in Canada. The product boasts a wholesale, rock bottom, five-year fixed rate, but very limited flexibility. The No Frills would not allow for large pre-payments without penalty, though it does allow for an annual payment increase option – usually up to 10 per cent per year – and is attainable with as little as five per cent down.

The No Frills can even be bumped up to an accelerated weekly or bi-weekly payment option, meaning you can pay down your mortgage faster with more payment contribution being applied toward principle.

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Single homebuyers in need of help

According to a recent article in the National Post, single homebuyers are need in of some help, as home prices have become higher and the rules for obtaining home loans stricter.

The article relays that, without the 35-year amortization in place anymore, part of new regulations effective since March, single home seekers now qualify for significantly less property than potential dual-income homebuyers.

Prospective single homebuyers need to lock in low interest rates with their lenders while they search, lest the price of their mortgages, in addition to other expenses, become too great.
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45 per cent of Canadians Purchasing Property Solo: TD Poll

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Rising Trend – First-Time Homebuyers Purchasing Based on Price over Amenities and shirking the Fundamentals

Results of the 2011 TD Canada Trust First Time Homebuyers Report showed that nearly half of first-time homebuyers will purchase their property alone. These figures, issued Wednesday, indicated that 57 per cent of men and 33 per cent of women will enter into home ownership sans a co-purchaser.

Interestingly, approximately one third of those surveyed also said they were looking for a property with a rental unit from which to generate revenue. The majority of these, 71 per cent, said they would use this income entirely toward paying off their mortgage as soon as possible. Only 14 per cent said they would apply the rental income toward their savings.

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