Debt Ratios Explained By Your Mortgage Broker in Calgary
Buying a home is an important step in the lives of many Calgarians and a major factor on the pathway to financial security. Having a steady job that provides a stable income and living within a budget based on that income are also important. This means having good debt management skills and keeping a watchful eye on credit scores. When it comes time to make a home purchase these are things a Calgary mortgage broker will be using in determining one's ability to qualify for a home mortgage loan. Specifically, mortgage loan applicants are rated according to:
1. Current credit scores
2. Income
3. Employment history
4. Income/debt ratios
Income to Debt Ratios Explained
There are two types of debt ratios considered when figuring an individual's loan qualifications: the "front" ratio and the "back" ratio." The front ratio, also referred to as the GDS (Gross Debt Service Ratio), is the percentage of one's total gross monthly income, before taxes, that will be allocated toward paying for housing costs. The calculation of GDS includes:
1. Principal
2. Interest
3. Mortgage insurance
4. Taxes
5. Homeowner's association fees (if applicable)
The back ratio, or TDS (Total Debt Service Ratio), is a combination of the GDS plus all other debts such as loans, credit card payments, car payments, etc. Life insurance or car insurance payments are exempt since they're not considered "debts." Once calculated, GDS and TDS are commonly expressed as the ratio GDS/TDS.
Although different lenders have different requirements for debt ratios that are acceptable to qualify for their particular loans, preferred percentages are often about 35 percent (or less) for the front ratio and 42 percent (or less) for the back ratio. This would be expressed as 35/42. These, however, are mere guidelines and may change from one lender to the next, especially if the borrower has a lower credit rating or small down payment amount.
Other Factors Considered by a Calgary Mortgage Broker
While debt to income ratios are certainly important factors in determining loan eligibility, other matters also come into play. Having a clear understanding of total ongoing monthly living expenditures, which includes all non-debt expenses such as food, clothing, utilities, transportation, etc., will provide a realistic idea of how much one can afford to allocate toward housing costs.
One of the simplest ways to determine an accurate monthly budget is to use an online budget calculator such as the one offered here by the Canada Mortgage and Housing Corporation.
Once a realistic budget has been calculated, determining the maximum affordable home price can be accomplished with the use of the Mortgage Affordability Calculator found here, also provided by the CMHC. Key factors here will include monthly gross income, current interest rates and the size of the down payment. The figures returned will not reflect closing costs, any required fees or sales tax.
Buying a home, especially a first home, can seem a daunting, complicated process. Mortgages by Candice, a local, well-established mortgage broker, has helped many realize their dream of home ownership. Contact us for any advice or assistance. We can help you too.
1. Current credit scores
2. Income
3. Employment history
4. Income/debt ratios
Income to Debt Ratios Explained
There are two types of debt ratios considered when figuring an individual's loan qualifications: the "front" ratio and the "back" ratio." The front ratio, also referred to as the GDS (Gross Debt Service Ratio), is the percentage of one's total gross monthly income, before taxes, that will be allocated toward paying for housing costs. The calculation of GDS includes:
1. Principal
2. Interest
3. Mortgage insurance
4. Taxes
5. Homeowner's association fees (if applicable)
The back ratio, or TDS (Total Debt Service Ratio), is a combination of the GDS plus all other debts such as loans, credit card payments, car payments, etc. Life insurance or car insurance payments are exempt since they're not considered "debts." Once calculated, GDS and TDS are commonly expressed as the ratio GDS/TDS.
Although different lenders have different requirements for debt ratios that are acceptable to qualify for their particular loans, preferred percentages are often about 35 percent (or less) for the front ratio and 42 percent (or less) for the back ratio. This would be expressed as 35/42. These, however, are mere guidelines and may change from one lender to the next, especially if the borrower has a lower credit rating or small down payment amount.
Other Factors Considered by a Calgary Mortgage Broker
While debt to income ratios are certainly important factors in determining loan eligibility, other matters also come into play. Having a clear understanding of total ongoing monthly living expenditures, which includes all non-debt expenses such as food, clothing, utilities, transportation, etc., will provide a realistic idea of how much one can afford to allocate toward housing costs.
One of the simplest ways to determine an accurate monthly budget is to use an online budget calculator such as the one offered here by the Canada Mortgage and Housing Corporation.
Once a realistic budget has been calculated, determining the maximum affordable home price can be accomplished with the use of the Mortgage Affordability Calculator found here, also provided by the CMHC. Key factors here will include monthly gross income, current interest rates and the size of the down payment. The figures returned will not reflect closing costs, any required fees or sales tax.
Buying a home, especially a first home, can seem a daunting, complicated process. Mortgages by Candice, a local, well-established mortgage broker, has helped many realize their dream of home ownership. Contact us for any advice or assistance. We can help you too.