Qualifying For A Mortgage
Lenders basically look at three things when considering your mortgage
application. They include the applicant's character, their ability to repay the loan, and
the security pledged against the loan.
Regarding character, your lender will check with credit reporting agencies to ensure that
you have handled obligations responsibly in the past. How have you serviced loans that
have been granted you in the past? What about your credit cards? Do you make your payments
on time, or are you habitually late? Do you have a history of bouncing checks? Your past
performance in these areas will provide your lender with their best guess on how you'll
handle your mortgage obligation. If you are turned down for a mortgage based on credit
history, be sure to ask the lender to help you formulate a plan to recover a good credit
rating so that you can buy later.
As far as security is concerned, in most cases the property that you are borrowing money
to purchase will provide adequate security for the lender. If the lender feels that you
are a high risk, they may ask you to pledge other assets that you have or purchase
mortgage insurance to protect them against default, but this is rare.
When it comes to your ability to repay the loan, the lender will want to confirm that you
have enough income to service the debt. For most people that means they'll have full time
employment. You'll need to provide the lender with a verification of your income.
When a lender qualifies a mortgage applicant, they look at two key factors. The first is
known as your Gross Debt Service Ratio (GDSR) and the second is called your Total Debt
Service Ratio (TDSR).
Your GDSR is the percentage of your gross income required to pay your mortgage payment,
including principal and interest, your property taxes, and your heating bill. Most lenders
will not allow you to use more than 32% of your gross monthly income to meet these
expenses. So a borrower with a monthly income of $4,000.00 could spend up to $1,280.00 per
month to service the mortgage, heating costs and taxes. Beware! Many people are surprised
at how much the bank will let you spend. Make sure you buy in a range that you can service
Your TDSR is the percentage of your gross income that is required to service all of your
debt. Most lenders will not allow you to exceed 40% in this area. In other words, your
total monthly debt payments cannot consume more than 40% of your total gross income.
You'll need to factor in car loans, credit cards, student loans and any other payments
that would be considered debt service. The same buyer that we looked at before, with a
gross monthly income of $4,000.00 could spend up to $1,600.00 per month servicing all of
his debt. If this buyer had a car payment of $350.00 per month, and a credit card with a
minimum monthly payment of $100.00, he would only qualify to spend the remaining $1,150.00
per month to service his mortgage, taxes and heating bill.