How to find out your True Qualification Budget?
Finding your True Qualification Budget is not as Straightforward as Entering your Income and Debts into an Online Portal or filling out a Pre-Approval Application at your Lender.
The Amounts they give you are solely based on the Information that you Supply and are NOT verified and can be Misleading.
Many Factors Affect the True Budget Qualification Amounts and MUST BE VERIFIED to truly give you an Accurate Budget and expected Interest Rate and Payment. Here is a List of Factors and how they must be Verified.
Income – Lender Guidelines on Acceptable Income have Many factors that will determine the actual Amount of Income they will accept from each Applicant. This Includes:
1. Length of Employment – Overtime and Shift differentials may not be usable if less than 2 year Employment History.
2. Type of Employment – Full Time, Seasonal, Part Time, Casual all affect how the Lenders determine Acceptable Income
3. Self Employed Income – Lenders have different Rules for Self Employed Income, Rental Income, and Business Related Debts.
4. Alternate Sources of Income – Lenders all have varying rules how they Calculate how Much Child Support, Spousal Support, Child Care Benefit, and Foster Income can be Used in a Application ranging from 100% to 0% depending on the Lender.
FOR MORE DETAILED INCOME INFORMATION GO TO INCOME PAGE
Down Payment – The Source and Amount of your Down Payment also has an Affect on your Qualification Budget. It also determines if you need and Insured or Conventional Mortgage and Affects the Rates that will be Available.
FOR MORE DETAIL ON DOWN PAYMENT GO TO DOWN PAYMENT PAGE:
Why Are Debt Servicing Ratios Important
Whether you’re taking on another mortgage or refinancing, how do you know if you can afford to make the new mortgage payment? There’s a ratio for that—it weighs your financial obligations against your income. No lender wants to see you get into too much debt, so they look at your debt servicing ratios to see just how much you can afford to borrow.
How are debt servicing ratios calculated?
There are two ratios you need to worry about—gross debt servicing (GDS) and total debt servicing (TDS)
Gross debt servicing (GDS)
This is the maximum amount you can afford for shelter costs each month. It’s your monthly housing costs divided by your monthly income.
Total debt servicing (TDS)
This is the maximum amount you can afford for debt payments each month. It’s your monthly debt and housing costs divided by your monthly income.
If too much of your income is already going to housing costs and debt payments, according to your lender, you may not be able to afford to take on more debt.
What does debt service ratio mean and why is it important?
Lenders use ratios to assess risk and understand if you will be able to make your payments on a mortgage. Generally, lenders like to see a GDS ratio around 39% and a TDS ratio that is no greater than 44%. If the ratios are higher, that does not mean you won’t qualify for a mortgage, but you may end up paying a higher interest rate.
In general, the better your debt servicing ratios and credit score, the lower your interest rate will be. This is because lenders view you as more reliable and it shows that you manage your money well and make your payments on time. Even if you need to refinance now, at a slightly higher rate, you can look at getting into a lower rate in a couple of years, when you mortgage term is up for renewal.
Your debt servicing ratio also lets you know how well you’re managing your budget. If your TDS ratio is over 44%, you are spending too much of your income on debt already and you may be unable to borrow without a co-signer. A Co-signors Credit and income is factored in with yours. This gives the lender some reassurance that the payments will be made because the co-signer is as responsible for the mortgage as you are.
Calculating your personal debt servicing ratios
Start by adding up your monthly debt payments. Include those fixed costs that you must pay every month:
| Housing costs | Debt costs |
| ● Rent or mortgage payments ● Property taxes ● Heat Component ● 50% of condo fees | ● Loan payments, such as car, student, or personal loans ● Credit cards (3% of the outstanding balance) ● Outstanding bill payments not on a credit card (dental, medical, repairs) ● Interest charges for line of credit payments (3% of Balance) ● Spousal or child support payments |
Next add up your monthly income:
- Pay cheque (before taxes)
- Retirement or pension payments
- Benefits payments
- Spousal or child support
- Rental income
Tips for lowering your debt servicing ratios
There are two basic ways to improve your debt servicing ratios—increase your income or reduce your debt.
Increasing your income is not always possible, although it could include a raise at work, finding a new job with better pay, or taking a second job. If you do find yourself with a little extra cash—maybe you received a year-end bonus—consider using it to pay down your debt.
Paying down your debt and not adding to it is the best way to improve your debt servicing ratio. Here are a few ideas to get you started:
- Avoid making new purchases, especially if you need to use your credit card to make the purchase.
- Create a budget and see where you can cut expenses. Apply those savings to your debt.
- Call your credit card company and try renegotiating a lower interest rate. With a lower rate, more of your payment will be applied to what you owe
- If you have money sitting in an account that is not earning much interest, consider applying it toward your debt, which tends to have a higher interest rate.
- Explore options to refinance equity from your home to pay off debt (work with your mortgage broker to form a plan).
Debt servicing ratios and your credit score
Your debt servicing ratios do not directly affect your credit score but carrying a large amount of debt can negatively affect both. And lenders will look at both when assessing your mortgage application. The good news is that reducing your debt improves your credit score as well as your debt servicing ratios. Work with your mortgage broker to create a plan on how you will reduce your debt and improve your ratios.
Your debt servicing ratios give lenders information about your ability to repay the money you borrowed while your credit score provides information about the way you manage credit. Do you make payments on time? Do you have a history of borrowing and repaying money?
Now that you know how a lender is going to assess your mortgage application, you can take the necessary steps to lower your debt servicing ratios and get that mortgage approved!
FOR MORE INFORMATION ON CREDIT OPTIONS GO TO CREDIT OPTIONS PAGE