If you’re looking at buying your first home in Canada, a major exercise used to calculate how much house you can afford is estimating affordability. However, this is not just looking at your present position, but it is also looking ahead into your prospective future financial position as well.
This article delves into the importance of estimating affordability, along with a focus on both your income and your debts too. When you are being considered for a mortgage, the banks and lenders that you will apply to will use some specific deciding factors, taking an overall view and subsequently making their offer; deciding to approve or to decline your application.
There are certain things which should be at the forefront of your mind when you are going through this process and making your applications to the banks.
How Important Is the Debt Service Ratio?
When lenders are considering you for a mortgage, there are two main deciding factors they will look at. These are called ratio’s. The Total Debt Service ratio being the first, and the Gross Debt Service Raton is the second. These are commonly referred to as TDSR and GDSR. Between the both of these, they look at housing costs, income and debt.
The Canada Mortgage and Housing Corporation have set out that your debts, which include the cost of housing, should not exceed 42% of your overall income, and your housing costs should not be any more than 35% of your income. Within that 42% figure, you must include things such as credit cards, loans or car payments. For your housing costs, this does not just refer to your principal mortgage payment; it encompasses any property taxes along with heating expenses too.
These two factors are crucial to a lender when they are determining the outcome of your application, and looking specifically at the affordability aspect. If they deem the affordability to be a risk, then you may get declined for the amount you are looking to borrow based on these two points. The process of estimating affordability can grind to a halt.
Debt Service Ratio is crucial. It is definitely worthwhile doing these calculations yourself to ensure the affordability is in-line with the specifications above; there’s absolutely no point going ahead with your application if it works out that your housing costs and current debts are not within these figures. Sure, a few percent either way should be ok.
What If You Do Not Meet The Requirements?
If you are too far away from the 35% and the 42% mark, it may well be worth taking action beforehand, to ensure a smooth and successful application. The options which are available to you would be to either save up more of a down payment, meaning you need to borrow less, or you can work at paying off some of your debts before purchasing a home.
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It is important to note that the above are merely guidelines, If you have assets, or a great credit score, you may find that you still qualify for a mortgage despite being slightly above the recommended guidelines.
By looking at the above information and doing a few simple calculations based on your debts, your income, and your prospective housing costs, you will quickly be able to estimate your affordability before buying your first home in Canada.