Through the years that I have worked in the field of lending there are certain questions that seem to come up a lot. Here are the five most common questions I get when people call about mortgages:
1. What’s the maximum mortgage amount for which I can qualify?
To determine the amount for which you will qualify, there are two calculations you’ll need to complete. The first is your gross debt service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and 50 per cent of strata/condo fees, if applicable). Generally speaking, this amount should be no more than 32 per cent of your gross monthly income. For example, if your gross monthly income is $4,000, you should not be spending more than $1,280 in monthly housing expenses. Second, you will need to calculate your total debt service (TDS) ratio. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Your TDS ratio should be no more than 40 per cent of your gross monthly income.
Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to obtain a pre-approved mortgage. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.
2. How much money do I need for a down payment?
The minimum down payment required is five per cent of the purchase price of the home. And in order to avoid paying mortgage default insurance, you need to have at least a 20 per cent down payment. In addition to the down payment, it’s recommended that you put aside at least 1.5 per cent of the purchase price (in addition to the down payment) strictly to cover closing costs. Most lenders will require proof of the down payment and closing costs before approving a mortgage. This 1.5 per cent is just a general figure which is used to cover closing costs including: property transfer tax, lawyer/notary, appraisal fee (in certain cases), title insurance, property taxes, HST (on certain purchases) and a home inspection.
3. What happens if I don’t have the full down payment amount?
There are programs available that enable you to use other forms of down payment, such as from your RRSPs, a cash-back product or a gift.
4. What happens if my credit score isn’t great?
The following are five steps you can use to help attain a speedy credit score boost:
•Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they’re below 70 per cent of your limits. Revolving credit like credit cards seems to have a more significant impact on credit scores than car loans, lines of credit, and so on.
•Limit the use of credit cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score — credit formulas don’t take into account the fact that you may have paid the balance off the next month.
•Check credit limits. If your lender is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your file. Ensure everything’s up to date as old bills that have been paid can come back to haunt you. Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month — say $1,000 to $1,500 — it may appear to the credit-scoring agencies that you’re regularly maxing out your cards. The best bet is to pay your balances down or off before your statement periods close.
•Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. As such, the cards can lose their weight in the credit formula and, therefore, may not be as valuable — even though you have had the cards for a long time. Use these cards periodically and then pay them off.
•Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cellphone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.
5. How much will my mortgage payments be?
Monthly mortgage payments vary based on several factors, including the size of your mortgage, whether you’re paying mortgage default insurance, your mortgage amortization, your interest rate and your frequency of making mortgage payments. You can view some useful calculators to find out your specific mortgage payments at www.dominionlending.ca/mortgage-calculators.
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250 402-3903 or dean_bala@yahoo.com.