Qualifying For A Mortgage
While your credit score does matter, it is less important than your actual credit history. If for example, you only have one credit trade (a small loan or credit card with a small limit) then it’s likely your credit score will be good - however, this would be considered too “thin” of credit to qualify without a cosigner.
There are two ratios called the “Gross Debt Service Ratio” and your “Total Debt Service Ratio” that are used when determining how much of a mortgage you can afford and qualify for.
The equations look like this:
Your Gross debt service ratio must be below 39 and your total debt service ratio must be below 44. Different lenders will have different guidelines but this is a typical example.
When calculating the ratios shown above, the mortgage payment used in the equation is based on a qualifying rate instead of the actual rate your payments will be based on.
The qualifying rate can change. As of now it’s the greater of either the payment rate + 2% or what ever the qualifying rate is at the time.
In the past the qualifying rate was only used with variable rate mortgages. Rules changed in 2017 to also require the use of the qualifying rate with insured mortgages. As of the beginning of 2018, the qualifying rate to be used when calculating ratios with all mortgages.
The higher your income the more mortgage you can afford.
Your income can come from a variety of sources.
- Employment income
- Self employed income
- Rental income
- Pension income
- Support income
Different income types can be used in different ways.
For example, if you are a salaried employee, in most cases the amount shown on your letter of employment will be used.
If you’re a part-time hourly employee a 2 year average of your past two years of T4’s will be needed to use that income.
For full-time hourly employees sometimes the 2-year average method is used. And sometimes the income used can be based on your current letter of employment that states your guaranteed hours and hourly wage.
Your employment must be considered a permanent position. If it is considered temporary, we cannot use this income
For self-employed individuals, there are also a number of ways to use the income to maximize how much you qualify for. Different lenders allow different methods of using self-employed income. For self-employed individuals, we will need 2 years of T1 Generals. Your accountant can send these to us.
Other income like rental income, spousal support/child support, child tax benefits etc. can be used as well in different ways depending on the lender.
Rest assured that we can get you an approval for as much as is possible.
The more liabilities (credit card balances, loan payment obligations etc.) that you have, the higher your total debt service (TDS) ratio will be, as this ratio takes into account your debts and their monthly payments.
There is room to have some liabilities without it affecting your mortgage affordability. After a certain point, however, the more debt you have the less mortgage you will qualify for.
When refinancing, if the TDS is too high, we can mark off some of your debts as to be paid off using the proceeds of the new mortgage to bring it down.
The same goes for when you're selling your current home and buying another. We can mark off some of the debts you’re carrying to be paid off from the sale proceeds to bring down the TDS if it is too high.
A co-signer strengthens your application. They can be used either when you don't have enough credit or if you don’t have enough income to qualify for as high of a mortgage as you would like.
When adding a co-signer, both their liabilities and income are added into the equation. Your co-signer does create a financial obligation for themselves to make that mortgage payment if you fail to pay it yourself.
If you need a cosigner, keep in mind that they can be removed from the mortgage later once you qualify on your own. This is done as a refinance. It’s usually best to wait until your first renewal to remove your co-signer from the mortgage.