Lender Qualifying Criteria

The process of qualifying a borrower looks at two interrelated factors. They are:

* The borrower’s ability to make payments on the mortgage loan

* The borrower’s willingness to make the payments – will the borrower honour the mortgage loan’s contractual obligations?

These two factors are tied together. A borrower, for example, may have a great willingness to make payments, to “pay off my debts” but simply may not have the income to do so and visa verse.

*** Please remember the below guidelines are standard for insured mortgages and do not apply to all products I have access to. ***

Credit Score and Credit History

In determining a client’s overall credit risk with respect to obtaining mortgage financing, it is important that the client demonstrates a history of strength and stability with respect to the Five Cs of Credit.  This is done for your protection – to ensure that you don’t obtain financing that you will have difficulty repaying – as well as the protection of our lender partners.

Five C’s of Credit.

  1. Capacity: The ability of the borrowers to repay loans. This is the most critical of the five Cs of credit. Through the application of debt service ratios, as well as a careful review of payment history on existing credit, lenders can assess a borrower’s capacity, or ability, to repay a loan. (Debt service ratios will be defined below)
  2. Capital: the amount of money that borrowers have invested in the property. Lenders may want to see that borrowers have taken on a financial risk by putting their own capital into a real estate deal, before asking the lender to commit any funding.  A lender will also check any sources of capital (such as the assets listing in an asset/liability area of a mortgage application) in order to confirm their existence and worth.
  3. Character: is the general impression of how credible borrowers are to repay loans. The borrowers’ length of employment (as found in the mortgage application and as verified by the originator and lender), helps to determine job security, which is a key element of their borrowing character.
  4. Collateral: is the guarantee in the form of additional security that can be provided to the lender. For mortgage loans this is the property itself: the value, location and characteristics of the property. Collateral can also include outside parties who will guarantee the loan.
  5. Credit: what is the credit history of the borrowers, and more particularly, what has their repayment history been? The borrower’s credit history is essentially the only way the lender can predict the borrower’s ability to make future payments.

How Much Can You Afford?

Two simple rules can help you figure out how much you can realistically pay for a home. I will help you review your overall situation and guide you through the entire process. Below is a guide and lender TDS/GDS limits vary slightly.

Affordability Rule 1

The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.

If you are thinking of buying a condominium or leasehold tenure

For a condominium, PITH also includes half of the monthly condominium fees.
For leasehold tenure, PITH also includes the entire annual site lease.

Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS must be 32% or less of your gross household monthly income.

Example – GDS – Gross Debt Service Ratio

Monthly mortgage payment: 
(principal and interest)*
$1,200.0
Property taxes: (monthly) $200.00
Heating costs: (monthly) $100.00
Other:** NOT COUNTED $50.00
Total monthly payments: $1,500.00
Gross monthly household income: $6,000.00
GDS = Total monthly payments  (x 100)
Gross monthly income
GDS = $1,500.00  (x 100) = 25%
$6,000.00

Affordability Rule 2

The second rule is that your entire monthly debt load should not be more than 42% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.

Example – TDS – Total Debt Service Ratio

Total monthly housing payments:
(from GDS calculation):*
$1,500.00
Other debts:
(personal loans, car loans, credit cards, etc.):
$450.00
Total monthly debts: $1,950.00
Gross monthly household income: $6,000.00
TDS = Total monthly payments  (x 100)
Gross monthly income
TDS = $1,950.00  (x 100) = 32.5%
$6,000.00

 

If you have any questions about your credit worthiness, ability to qualify, or if you would like to go through the pre-approval process, contact me today .

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