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MORTGAGE TIPS AND FREQUENTLY ASKED QUESTIONS.
Pre-approved mortgage loans
Before you start looking for a home it is a good idea to equip yourself with a Pre-approved Mortgage Loan. It is an indispensable financial tool which determines in advance the maximum mortgage a financial institution will grant you. It also protects you against possible interest rate increases. Once your application has been approved, you will be guaranteed a rate of interest for a certain period of time (e.g., 60 days). If when you sign the loan agreement the current interest rate is lower than when you obtained your pre-authorization, you will automatically benefit from the lower rate of interest.
There are no fees associated with applying for a Pre-Approved Mortgage Loan. We can arrange an appointment at your convenience with our mortgage department. Our experts will determine for you the maximum amount you can borrow, based on your ability to repay.
How do they calculate my maximum borrowing capacity?
When applying for a mortgage or a pre-approval, lenders evaluate your borrowing capacity and your ability to repay based on two calculations - the GDS and TDS ratios. These ratios are based on the ratios currently used by the Canada Mortgage & Housing Corporation for first time home buyers.
GDS (Gross Debt Service) Ratio
The GDS Ratio is the allowable debt sum of mortgage principal, interest, property tax, heat and 1/2 of monthly maintenance fees (if any). Your GDS ratio must not exceed 32% of your gross annual house hold income before deductions.
For example: 32% of 40,000 (salary/year) = $12,800 / year, or 1,066.67 per month. Therefore, if you made 40,000 per year, and had no other debts or loans, you could afford to pay $1066.67 / month. From there, they plug that number into the current interest rate factor to determine your borrowing power. Interest rate factors can be found in any mortgage rate book, or any local financial institution.
The factor for an interest rate of 6.75% amortized over 25 years is .006850496. Therefore, $1066.67 divided by .006850496 equals $155,709.15. Your total mortgage amount is $155,709.15 plus whatever down payment you have. You must have at least 5% of the purchase price of the home available, as you can only borrow up to 95% of the value of the home, subject to certain restrictions.
Confused yet? It gets worse.
TDS (Total Debt Service) Ratio
The TDS Ratio is the allowable debt sum of mortgage principal, interest, property tax, heat AND ALL OTHER LIABILITIES such as credit loans (including car loans), credit lines, and credit cards. Your TDS must not exceed 40% of your gross annual income before deductions.
For example: 40% of $40,000 (salary/year) = $16,000 per annum, or $1,333.33 / month. Take all your monthly loan payments, and subtract them from the $1,333.33 per month. What's left is how much per month you can afford to repay a mortgage. So if you only had a car payment of $200/month and no other loans, your monthly payment potential is $1133.33 / month. Calculate the rest the same as TDS. $1133.67 divided by .006850496 equals $165,489.60.
Now you may be wondering why a person who makes $40k per year with a car payment can afford to borrow more money than someone who doesn't have a car payment! The truth is, you can't. You have to plug both of these ratios into your scenario, and the lower amount of your two answers is the maximum amount you can borrow.
If you are confused by all this, don't fret, this isn't something you need to do on your own, it's just an FYI. It's a Realtor's job to determine what you can afford to spend, and what you are willing to spend!
By: Haroon Jahed
HomeLife/Bayview Realty Inc.
For more information please refer to: www.canadamortgage.com
Copyright 2003 © Haroon JahedAll rights reserved. Do not duplicate or redistribute in any form Best viewed at 800 x 600 screen resolution or higher and 16 bit
