Chapter 8 – Qualifying
Several factors come in to play when a lender is deciding how much you qualify for.
Lenders want to see that you have a good history of paying your bills.
Gross Debt Service Ratio (GDS)
Gross debt service ratio is the percentage of your income that is going towards your home payments (mortgage, property tax, condo fees).
The percentage allowed varies among lenders. The major banks usually allow up to 35% whereas other lenders will go up to 44%.
For example, if you make $10,000/month, then TD would not want your monthly payment to exceed $3500.
Total Debt Service Ratio (TDS)
Total debt service ratio is the percentage of your income that is going towards ALL of your payments (mortgage, property tax, condo fees, credit cards, prior mortgages, car loans). Major banks usually allow for a TDS up to 45%. Some lenders have no TDS limit.
Down Payment Amount
If you have more than 20% for a down payment, some lenders will allow you to increase your amortization to 35 years, reducing your monthly payment which in turn allows you to qualify for a larger mortgage based on GDS/TDS restrictions.
Recently, the government introduced some new lending guidelines to combat the housing inflation that has been accelerating in recent years.
Now all Federally regulated lending institutions such as Chartered Banks and National Broker-Only lenders mush qualify all mortgage, regardless of down payment under the same regulations as an insured mortgage. All mortgages now must Qualify at the contract rate + 2% or the 5 Year Bank of Canada Benchmark Rate (Typically about 2% higher than the lowest 5 year fixed rates). Fortunately here in BC, we have local credit unions that are not Federally Regulated and thus may qualify mortgages at lower rates. Some credit unions have voluntarily adopted stress test regulations but there are still some that lend under the “old rules”
As you can see, it’s never a one size fits all to see how much you qualify for. That’s why I don’t provide mortgage affordability calculators on my site, because they don’t paint the full picture.
Don’t worry if this seems complicated, that’s why you get help from a mortgage specialist.