The Basics of Mortgage Lending:
Many people have contacted me to ask questions on how lenders evaluate their ability to qualify for a mortgage. While there are a number of variables that lenders assess, what I am going to focus on here are the important ratios and numbers that they examine most closely.
The two most important numbers in the lending decision are the Gross Debt Service Ratio (GDS), and the Total Debt Service Ratio (TDS). The GDS is meant to measure the amount of your income that goes towards servicing your house related debt. The TDS is meant to measure the amount of your income that goes towards servicing your total debt.
In order to get your loan insured by CMHC or GE Capital (any loan above 80% of the purchased properties value is considered high ratio and requires insurance) your GDS must not be over 32%, and your TDS must not exceed 40%.
In order to calculate your GDS you can use this simple formula:
monthly mortgage payment + monthly property taxes + heating + (50% of your maintenance fee) = subtotal
(subtotal / gross monthly income) divided by 100 = GDS
Your monthly mortgage payment is determined by the monthly principal and interest payment. This is determined by how much you are borrowing, what rate you borrow at, and how long you choose to amortize the mortgage over. Dividing your annual property taxes by 12 can arrive at the monthly property taxes. Heating is generally calculated at a minimum rate of $50 per month. The maintenance fee component is generally only applicable for selected town homes and condominiums.
The TDS ratio takes a look at what you have in your GDS ratio, but then goes on to add the other monthly debt obligations that you have. This ratio does not include things like phone bills, water and car insurance. Lenders are only able to use the information available to them on your credit report. This information includes (but is not limited to) car loans, credit cards, lines of credit, departments store cards, and other loans. Believe it or not – past and current mortgage obligations are currently not captured on your credit report in Canada.
While these two ratios make up the cornerstone of lending in Canada, by no means do they represent the whole picture. Job and income stability, credit rating, and type of job all play a major role. Some lenders will not lend to people with negative net worth, others include credit available in the debt servicing etc. I work with over 30 different financial institutions – from the big banks to the trust companies, they all have their individual quirks.
So what happens if your ratios are not within these guidelines? Don’t give up on that account. If you are applying for a conventional loan (less than 75% loan to value) then the lenders have a lot more flexibility. You can often go a lot higher on the ratios if your relationship is valuable to the lender, or if there are other circumstances that warrant consideration. The mortgage market is getting increasingly competitive. I know lenders that don’t require income verification for clients with clean credit and 20% down, others will give great rate discounts for applicants with no income verification and 35% down.
Even freshly landed immigrants can get a mortgage easily with a 20%, or higher, down payment. Getting a mortgage today has never been easier. Making sure you get the one that best meets your needs is a whole different story. Do your homework, get good representation, and always demand the best!