Before you go down the path of home hunting with a REALTOR®, the best place to start is to determine your financial readiness and how much you can actually afford. Here are some commonly asked questions and answers to get you started.
- What will lenders be looking for? Lenders will be looking for information on your income, expenses, loans, etc. They will be making two calculations: Gross Debt Service (GDS) ratio and Total Debt Service (TDS) ratio.
Your GDS ratio is the percentage of your gross monthly income used for mortgage payments, taxes and heating costs and – if you are buying a condominium – half of the monthly maintenance fees. As a general rule of thumb, your GDS ratio should not be more than 32% of your gross monthly income.
Your TDS ratio is the percentage of gross monthly income required to cover monthly housing costs, plus all your other debt payments, such as car loans or leases, credit card payments, lines of credit payments and any other debt. Generally, your TDS ratio should not be more than 40% of your gross monthly income. [Realtor.ca]
- Do you know your credit rating? you can obtain a credit rating from organizations like Equifax or TransUnion, and your bank can get it as well. Keep in mind that requests for your credit rating can affect your credit overall as well.
- Have you been pre-approved? It’s a good idea to start with getting a pre-approval from a lender, which will be helpful in understanding what you can afford. It does not guarantee a mortgage approval, but it definitely helps.
- What type of mortgage works best for you? It is not one size fits all when it comes to mortgages, so here is a rundown of the different types.
- Fixed rate mortgages: Your interest rate is locked in for a specified period called a term.
- Variable rate mortgages: Rate of interest you pay may change if rates go up or down.
- Conventional mortgages: Require a down payment of 20% or more of the property’s value. You are not required to get mortgage default insurance with a conventional mortgage.
- Closed mortgages: The mortgage cannot be paid off early without paying a prepayment charge.
- Open mortgages: A mortgage that can be paid off at any time during the term, without having to pay a charge.
- How often can you make mortgage payments? If you can pull of accelerated payments with weekly or bi-weekly, you can pay off your mortgage faster.
- How much will you need for a down payment? Your lender and REALTOR® can help you determine what is required for the home you want, but you should have a grasp on this number early on as well.
When you buy a home with less than a 20% down payment, the mortgage needs to be insured against default. This type of insurance protects the mortgage lender in case you are not able to make your mortgage payments. It does not protect you. [Realtor.ca]
Looking for more information? Please contact us, we are happy to help!
