Pre-approved Mortgage

Most home buyers get preapproved for a mortgage.  Preapprovals arm borrowers with information on how much money they can spend on home purchases; in most cases they will know the upper limit of their price range.

Getting a preapproved mortgage is relatively simple. Borrowers with the necessary documentation in hand can choose the mortgage lenders they want to deal with and negotiate suitable terms.

Individuals will need the following items to obtain a mortgage:

  • Personal identification accepted by the lender
  • Job details that include confirmation of employment and salary (pay stubs often suffice, but an employer letter is sometimes required)
  • Confirmation of all sources of income
  • A net worth statement
  • List of all debts and loans, if applicable
  • Proof of financial assets
  • Source and amount of down payment and deposit
  • Proof of source of funds to pay for additional house closing costs

Once borrowers have been preapproved for a mortgage, they are ready to launch the search for their home.

Lenders look at a wide array of financial information and criteria to determine how much a borrower can afford to spend on a home.  They look at not only mortgage payments, but also other expenses including property taxes, house insurance costs, condominium maintenance fees, utility costs and other associated costs and expenses.   Borrowers have to fall within guidelines for Gross Debt Service Ratios (GDS Ratios) and Total Debt Service Ratios (TDS Ratios). 

Gross Debt Service Ratio (GDSR)

The GDS or Gross Debt Service Ratio is called the “first affordability rule” and requires that no more than 32% of a borrower’s gross monthly income can be used to fund a home purchase. This amount includes monthly heating expenses, mortgage interest and principal payments, property taxes (P.I.T.H.), and 50% of condominium fees. 

Principal and interest for gross debt service ratio purpose calculations must be based on the total insured loan amount, including Canadian Mortgage and Housing Corporation (CMHC) insurance premium (if you choose to add the premium to your mortgage and not to pay the premium up front).

If an individual is purchasing a condominium, they must include 50% of the monthly condominium fees for Gross Debt |Service Ratio calculations. 

Total Debt Service Ratio (TDSR)

The TDS or Total Debt Service Ratio is known as the “second affordability rule” and means that the entire monthly debt load should not be more than 40% of the borrower’s gross monthly income. This includes all housing costs and other debts, such as car loans and credit card payments. Lenders total these debts to determine what percentage they are of a borrower’s gross household monthly income. 

Once these calculations are made, borrowers know their net worth, the amount of gross and net monthly income, the average monthly expenditures, the average amount of money available at the end of each month, and the amount of monthly debt payments. In addition, borrowers will have a very good sense of whether they meet the requirements under both the Gross Debt Service (GDSR) and Total Debt Service Ratios (TDSR).

Loan-To-Value (LTV Ratio)

Loan-to-Value Ratio (LTV Ratio) is the amount of a loan or mortgage when compared to the value of a property.  This financial ratio is a calculation made by a financial institution or lender prior to providing a mortgage to a borrower.  The LTV Ratio helps lenders determine whether a borrower qualifies for a mortgage or not.  The Loan-to-Value Ratio calculation also determines whether a mortgage will be deemed a conventional mortgage or non-conventional high ratio mortgage.

For many Canadians, the most difficult part in buying a home is saving up for the necessary down payment.  With a minimum down payment in Canada of 5% needed, representing a Loan-to-Value Ratio of 95%, mortgage default insurance is required for many borrowers.

High-ratio mortgages with Loan-to-Value Ratios in excess of 80% are considered risker loans for many financial institutions, and in some cases have slightly higher associated mortgage lending rates.  However, as a result of high Loan-to-Value mortgages having mortgage default insurance, which is paid for by the borrower, many lenders have eliminated the risk of holding these loans and offer slightly better mortgage interest rates. 

The maximum Loan-to-Value in Canada is 95%, with a minimum down payment of 5%.

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April 27, 2017

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