Demystifying the Mortgage Process

If you or anyone you know is a first time home buyer, have been thinking of buying a home or, simply, just don't know much at all about mortgages, then this is the  article for you! With talk about Bank of Canada interest rate announcements and a changing housing and lending landscape dominating the news, people really are confused and overwhelmed with the overall mortgage approval process.

I pride myself on bringing clarity to my clients and so I've decided to write an article for this September about demystifying or simplifying the mortgage approval process.

When speaking with clients I try to encourage them to think like a lender. For the most part, lenders just want to understand what your overall income is compared with your household costs, including your proposed mortgage payment. There is a standard ratio called Gross Debt Service Ratio (GDS) which I will get into momentarily and I promise, it is not as complicated as it sounds.

As with most things in life, there are always exceptions to the rules. Let's take a look at a couple of exceptions and then we can discuss Lender GDS ratios and what they mean for you.

Suppose your income easily supports the mortgage you wish to secure along with your household costs, but you have a poor credit score, or have a lot of other debt like car payments, back taxes, or credit cards. In this case banks may not be an option for you and you may have to explore a private or alternative lender.

The opposite may also be true. Suppose your income doesn't quite support the mortgage you wish to secure based on the bank's ratios but, when looking at your overall application, they see that you own other properties outright or have a very large RRSP and other investments like stocks/equities. Based on your overall net-worth the bank may allow you to borrow more than your income supports.

If, like many of us, the two scenarios do not apply to you; then it all comes down to your GDS ratio. Again this is a comparison of your overall gross monthly taxable income compared to your household costs. This of course begs the question - what exactly are my household costs?

All lenders will add the below things together to calculate your household costs:

1) Your mortgage payment based on an interest rate 2% higher than what they will offer you

2)$100 to represent your utilities at the property

3) The property taxes, and lastly if it's a condo

4) 50% of your condo fees.

Banks don't like these things to total more than 39% of your provable monthly gross taxable income. Alternative or "B" lenders will usually allow the total of these household costs to be 50% of your taxable income. Some even go as high as 60%. Private lenders, sometimes, even lend solely on the equity in the property and not based on income, but typically have a much higher interest rate.

To really simplify things, it usually plays out that you can borrow between 4 to 5 times your taxable income for the year. So if you have a job with a yearly salary of 100K then you can borrow somewhere between 400 and 500k depending on if you are using a bank or a "B" lender. And again this is provided you don't have a huge amount of other debt and a fairly good credit score.

The key with new home buyers is to not only know what you will reasonably get approved for but to find a home in which you can make up the difference with a down payment, knowing that you will have some significant closing costs like the land transfer and legal fees. Additionally you don't want to leave yourself house poor either and it's very advisable you keep some money or cash on hand for any other costs or emergencies that may arise.

I hope this article has provided some clarity on the process. To further discuss, or for any other mortgage related questions or a no obligation audit of your situation, give us a call. We love helping people, even if it's just advice for now!

ByleMortgages.com