When you apply for a mortgage through a bank or a traditional lender, there are certain details of your overall financial picture that these lenders will pay specific attention to. Having a stronger mortgage application opens up many doors for you in terms of your mortgage, including:
- Your choice of lender
- Lower interest rates
- Types of mortgage products available; and
- The amount you will be pre-approved for
There are five main details you can expect a lender to evaluate when you apply for a mortgage:
1. Income and Employment
Lenders will take a look at your gross household income (before taxes) as well as your employment type - whether you are full-time, part time, seasonal, etc.
Proving your income to a lender can be complex; for example, when an individual is self-employed or works a significant amount of overtime. In these situations, your Broker is equipped to negotiate on your behalf. They can help provide the documentation necessary for your lender to evaluate your income through means other than just your pay stub.
2. Debts and Expenses
Your debts include payments such as:
- Credit cards
- Auto loans
- Student loans
- Lines of credit
- Child support or spousal payments
Expenses, on the other hand, are the monthly costs associated with home ownership. They include:
- Mortgage payments
- Property taxes
- Condo or HOA fees (if applicable)
These monthly costs are significant because they affect your TDS and GDS ratios; two items that are extremely important when a lender is calculating the amount of mortgage funding you are eligible to receive.
3. GDS and TDS Ratios
Your gross debt service (GDS) ratio is the percentage of your monthly housing costs (listed under ‘Expenses’ above) against your total gross income. As a general rule, these expenses should not be more than 39 percent of your total monthly income. Your total debt service (TDS) ratio includes your monthly expenses PLUS the debts listed above. It should not be more than 44 percent of your total monthly income; however, there is some flexibility with these numbers if you have good credit.
These numbers are important because lenders factor in a potential mortgage payment to see what you can afford. If a mortgage payment pushes your ratios too high, you may have trouble receiving an approval through a traditional lender. There are three steps you can take to help with these ratios, including:
- Lowering your price range for your new home
- Reducing your debt load by paying down loans or lines of credit before applying for a mortgage; or
- Saving up for a larger down payment. A larger down payment will reduce your monthly mortgage payment and your ratios will take less of a hit.
4. Credit Report
While each lender has their own specific credit score threshold, you should aim for a score of at least 650-680 to obtain an approval; however there are additional options for you if you do not meet the minimum credit score for traditional lending. Alternative lenders have more lenient lending standards and evaluate applications on a case-by-case basis.
Looking to increase your score? Take a look at our recent blog post on how to improve your credit.
5. Down Payment
How much money you have available to make a down payment will also affect a lenders decision to offer you a mortgage approval. Down payment amounts are affected by factors such as your citizenship status and the type of property you are looking at, for example whether you are purchasing a home to live in or a rental property.
Currently, the minimum down payment on a property is generally 5 percent on homes under $500,000. After you hit that threshold, a minimum of 10 percent down is required on any amount over the $500,000.
If you would like one of our Mortgage Brokers to assess your financial situation and provide advice on how to submit a stronger mortgage application, contact us today for a free mortgage consultation!