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How Does One Qualify For Their First Mortgage
Qualifying For Your First Mortgage:
In Canada, for a first time home buyer, qualifying for a mortgage is based on 3 simple criterias:
- Your current employment income and status
- Your credit history
- Your current debts
- Current Employment Income
The bank isn’t going to give you a mortgage unless you have steady income that can support the mortgage. For employed first time Home Buyers, you need to be permanent and full time working for a minium of 3 months and not on probation. If your permanent part time then you must have proof of income by way of Notice of Assessment and T1 Generals for at least 2 years. If your self employed, then proof of employement by way of Business license or articles of incorporation (if in sales, then a letter from your employer), 2 years averages of income by way of Notice of Assessment and T1 Generals.
The banks usually require pristine credit or they won’t even consider you as a mortgage candidate. If you have spotty credit, then it’s probably best to head to a mortgage broker instead. Most institutions require a credit or beacon scores of above 640-680 to qualify for a mortgage with best rates and little down.
The banks typically look at the Total Debt Service Ratio (TDS) and Gross Debt Service Ratio (GDS).
GDS: The percentage of gross annual income required to cover payments associated with housing. Must be less than 32% (if your credit score is over 680+ you can have max GDS of 39%).
GDS = monthly housing expenses/gross monthly income
- Mortgage payment = $ 1800, taxes = $300, heat=$200, insurance=$80, monthly housing expenses = $2,380. Gross monthly income for all applicants = $8,000
GDS = $2,380/8000 = 29.75%
TDS: The percentage of gross annual income required to cover payments associated with housing AND other debt. Must be less than 40% (if your credit score is over 680+ you can have max TDS of 44%) .
TDS = (monthly housing expenses + other monthly debt servicing)/gross monthly income
- housing expenses = $2,380/mo, car loan = $500/mo, credit card payments = $200.
TDS = $2,380+$500 + $200/$8,000=38.5%
In the above scenario, this person just barely passed the debt servicing ratios.
As a general rule of thumb, providing that you don’t have much consumer debt with decent credit, your lenders will give you 2.5-3.5 times your gross annual income.
Another rule of thumb that I like to use is that you should try to keep your mortgage under 2.5 x annual income.
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