APPLYING FOR A MORTGAGE
HOW DO THEY CALCULATE HOW MUCH CAN YOU AFFORD?After completing a pre-approved mortgage application, your mortgage broker will calculate for you the maximum that you can afford as a purchase price. Mortgage brokers do this by using the information you have given them, together with some 'rules' set by the mortgage lenders.
The first 'rule' is your GROSS DEBT SERVICE (GDS).
Housing costs include - your monthly mortgage payment, and an amount for property taxes and heating. If you are buying a strata property then it will also include 1/2 of your strata fees.
What about the other 60% of your income?? This is considered to be used up by 'normal' monthly expenses, such as Income tax, phone bills, hydro bills, vehicle or house insurance, entertainment etc.
If you have had some credit problems: for example, you have occasionally been a bit late in making a payment (for example twice per year) don't worry, this will not effect your credit rating TOO much - but please get your act together. It takes seven years for any 'bad' information to disappear!
However, if you are usually 'sloppy' about your payments - for example, if you make payments when you get around to it, you will have seriously hurt your credit rating.
Your credit bureau is important because it shows how well (or not) you handle credit. If you do not handle credit well, you will either be charged a higher rate or your application will be declined.
If you have previously declared bankruptcy this will show on your credit bureau for seven years after your discharge.
THE MORTGAGE APPLICATIONAt some point during the purchasing process your mortgage broker will need to complete a mortgage application on your behalf.
The following information will be needed for each applicant and any guarantors.
THE FOLLOWING ARE DEFINITIONS FOR THE ABOVE INFORMATION
GROSS MONTHLY INCOME
Gross annual income is the total income that you are paid by a company before any deductions are subtracted. Divide by 12 for gross monthly income.
For employment verification your mortgage broker will usually request that you obtain an employment letter from your payroll department confirming your information. A few lenders will allow you to prove income by showing two years of income tax returns and some current pay stubs.
The letter should be on company letterhead and include:If you received a bonus last year, then you can only use that bonus if you can show that you have received a similar amount for the past few years. Overtime income is treated the same way.
SELF EMPLOYED INCOME / COMMISSION INCOME
When income can change from year to year, the mortgage lenders require different information.
Most require either two or three years of tax returns. Most will accept a tax return prepared by an accountant.
The lender will then take your average NET income. Some lenders will permit you to 'add back' some deductions to your net income. An office expense write off in your current residence is such an example.
For example if you received a bonus last year, then you can only use that bonus if you can show that you receive a similar amount every year.
The total income is then used to calculate the 32% TDS and 40% GDS.
These are items that you own.
These are your outstanding debts.
Liabilities include:Your mortgage broker will need to know your current balances, your current payments and the dollar limit of credit cards and credit lines.
The total value of all your assets, minus the total of all your debts equals your net worth. If your debts are more than the total of your assets, you are said to have 'a negative net worth'.
The amount of money that you are paying towards the purchase of your home is called the downpayment. This is also known as the 'equity' that you will have in the property. You should have a good idea of how much you have before talking to your mortgage broker.
You will have to show lenders proof of your downpayment - for example: if it is in a savings or investment account, or an RRSP, most lenders will require proof that you have had the funds for three months. This can be done by taking current statements with you.
If it is a gift from a family member, you will eventually have to get them to sign a letter saying that the money is a gift and not to be repaid. You will also need to show proof that they have the funds and the funds must be transferred into your account prior to closing date. One way to avoid all of this is to receive the gift, and deposit the funds into your account at least 3 months prior to you even looking for a mortgage or house.
Normally the minimum downpayment allowed is 5% of the accepted purchase price (or appraised value, whichever is lower). However, the less money that you need to borrow, the less you will have to repay!
These include payments on your credit cards, credit lines, loans and other mortgages. However, it also includes other payments that you must make each month - such as child support, spousal payments and lease payments for a vehicle. Also included are any loans or mortgages that you have guaranteed for other people.
Other 'normal' payments such as Income tax, phone bills, hydro bills, vehicle or house insurance etc. are not included as they fall into the 60% of your gross income.
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