Earning a steady income, living within our means, and owning a home are all important steps on the road to financial security. But being able to manage your debt is not just a sign of responsibility, it’s also one of the key methods used to determine whether or not you will qualify for a mortgage. A Calgary mortgage underwriter will look at several factors when assessing your ability to pay a loan, including: your credit score, income, employment history, and income to debt ratios.
What Are Debt Ratios?
Essentially, Calgary mortgage debt ratios are two ways of looking at your potential debt burden compared to your income. There are two different types of calculations that underwriters consider, and they are usually written in the form of a ratio, for example: 35/42. These numbers will vary depending on the lender you are talking to.
The “front” ratio (also known as Gross Debt Service Ratio or GDS) is the percentage of your monthly gross (before tax) income that will be used to pay for housing. This includes interest, principal, mortgage insurance (if required), taxes and any applicable homeowners association fees. The “back” ratio (also referred to as Total Debt Service Ratio or TDS) is similar, except it also includes your other debts. Credit card debt, vehicle payments, and other types of loans are all calculated as part of the “back” ratio. Recurring costs for items like life or auto insurance are not considered debts.
So, what are the “right” numbers”? These will vary from lender to lender, but the typical preferred percentage for your GDS (or front) is around 35% and for the TDS (or back) is 42% or less. Of course, these are just recommendations. With a lower credit rating or a smaller down payment, the guidelines can be stricter. Acceptable ratios will also vary with different loan programs.
At Mortgages by Candice we know what lenders like when they look at potential homebuyers’ debt ratios. They want to see that homeowners will be able to keep debt manageable. With some lenders, debt ratios can be less forgiving, but we work with more flexible lenders and can search through all the options to find you the best Calgary mortgage rates for your situation.
Are You Ready to Become a Homeowner?
Obviously, there is more to qualifying for a mortgage than debt ratios, but it is important to have a clear picture of your expenses. If you take the time to determine how much you are spending each month on living, you will have a better understanding of what you can afford to spend on housing and the factors that will impact your ability to qualify.
The easiest way to evaluate your current budget is with a household budget calculator like the one provided here by the Canada Mortgage and Housing Corporation. Simply input your gross monthly income, your expenses (housing, communication, household costs, entertainment, financial needs, insurance, medical essentials, and transportation), and your gross annual income, and the calculator will determine your income to debt ratios for you.
Once you’ve calculated your budget, you can determine the maximum home price you can genuinely afford with the CMHC Mortgage Affordability Calculator. Obviously, the key factors will be your gross monthly income, the mortgage interest rate, and the amount of the down payment. It is important to remember that these tools will give you approximate figures. They do not include all required fees, closing costs, or sales taxes.
For many first-time homebuyers the most difficult part of purchasing a home is coming up with an adequate down payment. But with today’s low rates, home ownership is still within reach even if you don’t have a large amount saved for a down payment. It just makes finding the best Calgary mortgage rates even more important. This is where Mortgages by Candice can help you turn your dream of home ownership into reality. By working with a knowledgeable broker, you can be sure to get the lowest rates possible regardless of your debt ratio.
Buying a home – especially your first – can feel like a complicated and intimidating process, but it doesn’t have to be. You can take the mystery out of it by using the tools available to determine what you really can afford and by keeping up to date on mortgage industry news by following the Mortgages by Candice blog where you will find regular articles specifically geared to our home mortgage market. If you have any questions about debt ratios or Calgary mortgage rates, contact us today. We are always happy to assist you!